CVS: The Web Strategy CVS CVS is one of the largest drugstore chains in the United States, which primarily sells prescription drugs and a wide range of general merchandize including cosmetics, beauty products, greeting cards and photo finishing, as well. It began its operations in Rhode Island during the late 1960s and now it is ranked second only to Walgreens, by sales, making $15.2 billion last year. Headquartered in Woonsocket, Rhode Island, it has 4122 stores in the whole of United States. As a growing business they are facing a few challenges and they have to tackle them quickly but smartly to retain their growth. Challenges faced by pharmacies When begun, pharmacies concentrated on establishing regional dominance in their business. However, things started to change in late 1990s when they started acquiring pharmacies in other territories than their base. It triggered the beginning of a contest for national presence and building bicoastal organizations. Similarly, the launching of websites by pharmacies and integrating third party players like Pharmacy Benefit Managers (PBMs) into their chain of business contributed in increasing the competition. Pure-play drugstores, with and without prescription-filling capabilities, came into existence because of the benefits of internet. There were also debates if pharmacies should give importance to selling of general merchandize because selling prescription drugs were their core competencies. CVS and Porter’s 5 force model CVS faced most of these issues and with the assistance of Helena Foulkes, vice president of marketing, at CVS they hoped to solve them efficiently. To understand where they stand and what forces influence them now, we could look into the Porter’s 5 force model:     

Suppliers: Customers: New Entrants: Rivals: Substitutes:

Pharmaceutical manufacturers and wholesalers. Patients, Physicians, PBMs (recently). Pure play drugstores, PBM owned drugstores. Big Pharmacy chains (Walgreens, Rite Aid, Eckerd, etc.). CAM (Complementary and alternative medicine), Integrative Medicine

Analyzing the 5 forces, it is clear that the existing strong relationship with the suppliers would continue, even if there are changes in formulary. Alternative Medicine would act as substitutes to all the rivals. So, they are not the problem to be tackled until they become rivals or competitors themselves. However, the Pharmacy Benefit Managers and Pure Play drugstores are the important players to be looked at currently. Pharmacy Benefit Managers (PBMs) PBMs, who act as an intermediary between payor and others in the health-care system, are anticipated to handle nearly 89% of all prescriptions in the United States by the end of 2000. They were viewed with concern by pharmacies and drug manufacturers because they were very successful in establishing a base with the help of Managed Care Organizations (MCOs). However, employers valued them with concerns. The figure-A (next page) shows PBMs as having control over movement of drugs between most of the pharmacies and patients, constantly controlling drug costs and improving quality of patient care. Even the plan sponsors need them to bring benefits for their employers. Internet supported PBMs when Pure-play and ‘Click and Mortar’ offered a wide range of options. Pharmacies had websites to do e-business. Not to lag behind, PBMs had their web presence too. We could clearly say that PBMs are the most powerful players in the prescription pharmaceutical distribution process.

CVS.com CVS’ operating income rose to $772 million in 1998 from $262 million in 1997 and it’s constantly growing. Like leading pharmacies, CVS realized that it had to establish a strong web presence to support its growth and be in the competition. Around 50% of the US population who used New Prescriptions was either below the age of 5 or above the age of 55. It is obvious that pharmacies online would offer convenience to these people. CVS had two options of either building a website themselves or acquiring a health-care website. The former wouldn’t have been difficult but to integrate it with a $17 billion chain of 4000 locations would have been. They decided to go with the latter, acquiring Soma.com citing speed, good talent with Soma.com, their employee backgrounds and a 100% ownership as benefits. Soma.com, which started as a website offering prescription drug fulfillment and refills, found collaboration with CVS to be beneficial for them, as well. CVS would not dominate Soma.com entirely after acquisition and it had ties with all major PBMs. Therefore on June 1999, Soma.com was sold to CVS.com for $50 million in stock. Figure B: Potential market for CVS online drug chain Category

Percent of Revenue

Amount of Revenue because of online presence

Prescriptions

48%

75% (50% of all chronic + 25% of acute conditions) of 48% of $15.2 billion = $5.472 billion

Over-the-counter medication, Toiletries, Cosmetics and Other merchandizes.

52%

10% of 52% of 15.2billion = $0.7904 billion approx.

TOTAL

100%

$6.3 billion (approx.)

CVS would have a potential market of $6.3 billion for an online drug chain (Figure-B). This is taking into account that all the prescriptions drugs for chronic conditions are ordered online and half of the prescriptions drugs for acute conditions are ordered online. Of course, this does not mean that CVS’s offline business is without any threats due to new entrants. We could see that the new ‘Click and Mortar’ model is a major threat to offline business. This is

because there are independent pharmacies and PBM owned pharmacies that operate having a physical presence integrated efficiently with their online operations. Now, having CVS.com and around 4000 stores in the United States, there is no reason why CVS shouldn’t follow the same strategy. CVS and CVS.com integration CVS should look at integrating closely with CVS.com into its business to an extent where CVS.com would act as an internet front-end to the mail order back-end. CVS.com should not try to run operations for CVS. CVS has had experience in doing that for more than 35 years without any problems but they needed assistance only in the web. However, Pigott did make a point when he said all the products that were offered in the store would not necessarily be big sellers online but Internet is a powerful tool for personalization. In 1998, CVS introduced Xtra!, a ‘frequent shopper’ program to let CVS identify, retain and reward its registered customers. I would recommend they extend this program to more people including online users, reward them but also track their usage. Creating a profile for each user would help personalize webpages. Pricing should be done based on the mode of order. If it is ordered online alone, they could price the item at lower price. However, when a customer orders online and yet picks up the order from the store it should be no different than over-the-counter pricing. CVS should concentrate more on prescription drugs sales more. That is their core competency. If they still want to continue selling their merchandize products, they could later have a separate business unit to handle that. It would help because they already have an established brand name. Since each merchandise product is already handled exclusively by a product category manager, it shouldn’t be a difficult task. Figure C: CVS Retail Pharmacy and their PBMs[1]

CVS Merck-Medco Collaboration CVS should form an alliance with Merck-Medco which covers 51 million lives in the United States. They are both equally big players and definitely need to synergize. CVS can allow Merck-Medco to fill all prescriptions by mail, irrespective of the prescription duration. Merck-Medco has proved to be good at it and have also invested heavily in automating the process. However, CVS should leverage their strengths and see they could benefit from MerckMedco. CVS should try to increase their customer base including those customers of other pharmacies but have collaborated with Merck-Medco. Merck-Medco would have contacts with many physicians and collaborations with many of the pharmaceutical manufacturers and CVS should look to gain from those. This is going to help them stay in the business, if not improve to become the number one company.

*References: Wikipedia; [1] http://info.cvscaremark.com/feed-item?page=72