Furthermore, the potential exists for the front end business to sink to 5% or less over time as sales of commodity products industry-wide are projected to migrate to online replenishment while demographically advantaged businesses such as pharmacy and health care related services grow more quickly. Meanwhile, from a branded manufacturers’ perspective, CVS Health has placed an emphasis on its own brands. Its stores now stock 7,000 items that account for nearly 24% of front-end sales.
“There are significant opportunities to expand our share of store brands by launching new products that build upon our core equities in health and beauty, while seeking opportunistic growth in other areas, where we can provide customers a good value. And as a result of our strength in store brands, along with the success of our promotional strategies, front store gross margin, once again, improved in the quarter versus a year ago,” said CEO Merlo after the company reported fourth quarter results.
STORES STILL MATTER
Clearly there are opportunities for CVS Health to increase the productivity of its front-end selling space, a business challenge for all chain drug operators. CVS Health’s stores and other physical locations remain an incredibly valuable component of the company’s CVS Health delivery ecosystem, especially in post Aetna acquisition world. For example, CVS Health today consists of numerous businesses beyond or integrated into retail stores.
The most obvious of these are the Minute Clinics. There are currently 1,100 locations, but the company has alluded to continued future growth and the potential exists to incent those covered by Aetna plans to seek treatment at clinics.
Other less visible but hugely important health care services include the Coram Specialty pharmacy business that provides infusion services to roughly 140,000 patients and the Ominicare pharmacy that provides services to long term care facilities. Then there are administrative services such as medical claims editing provided by the Novologix platform.
In almost every respect, the combination of CVS Health and Aetna is seen enabling it to further enhance and improve its health care programs. The other benefit of executing the largest health insurance deal on record is that it enables the company to better compete with United Healthcare and pharmacy benefits manager Optum as well as offset any potential threat of Amazon entering the pharmacy business.
“This is the next step in our journey, positioning the combined company to dramatically further empower consumers. Together with CVS Health, we will better understand our members’ health goals, guide them through the health care system and help them achieve their best health,” said Mark Bertolini, Aetna chairman and CEO.
Added Merlo, “These types of interventions are things that the traditional health care system could be doing, but the traditional health care system lacks the key elements of convenience and coordination that help to engage consumers in their health. That’s what the combination of CVS Health and Aetna will deliver.”
While the pendulum has shifted from what once was a major dependence on retail front-end sales to a diverse portfolio of health care products, innovation has been the cornerstone that is transforming the company, creating a new health care entity, and preparing CVS Health for the decade of the 2020s and beyond.