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CVS: becoming the 'easiest' pharmacy - 2003 Annual Report

Rob Eder

For CVS, the future comes down to two key words: customer-easy.

Every major program the chain has focused on in the last few years; every initiative it is working on today; everything it is planning for tomorrow is aimed at making its stores the easiest pharmacies in America for customers to shop.

"The easiest and everything that means, Tom Ryan, CVS chairman, president and chief executive officer told Drug Store News in the months p receding the company's 40th anniversary. "It can be as simple as no lines at the checkout, being in stock, clean signing, to something as complex as the health care issues around third party with prior approvals, formularies and eligibility requirements. It's everything we do. It's the parking lot, the drive-throughs, store hours, the location of products, shopability of the aisles ... it's your refund policy."

And these are not the words of some hollow corporate mission statement. Customer-easy is an integral thread woven into the fabric of every one of CVS' most important strategic programs, revolving around two relate a themes: making it easy for its customers and making it easier for its associates to make it easier for its customers.

Customer-easy strikes right at the heart of the ExtraCare card, particularly a recent tweak the chain made to its customer loyalty program that changes the way its cardholders are rewarded for accumulated purchases. Instead of mailing cardholders ExtraBucks coupons good toward future purchases, now ExtraCare members receive 2 percent off every purchase right at the register, including pharmacy--in most states in which the chain operates--another important new wrinkle in the rewards system. In addition to satisfying its cardholders' need to know instantly the rewards of their ExtraCare membership, the move saves CVS the cost of mailing out the ExtraBucks, driving that much more efficiency into the program.

Of course, for everything CVS' gives ExtraCare cardholders, it gets something much more valuable in return--information, mountains of extremely rich information about how its customers shop, what the buy, when they buy it, what else they buy when they buy that particular item and who they are. Every time an ExtraCare card is scanned through its registers, CVS comes away with that much better an understanding of how to reach those customers in the future--what types of offers will drive them to the store and how to grow that marketbasket the next time.

Importantly, this kind of information enables CVS to tailor its promotions, rewarding its better customers, rather than making a blanket offer to every consumer who can get his or her hands on a circular. Because it as a sense of what types of offers each of its cardholders generally respond to, CVS tends to have a pretty high rate of redemption on the special coupons it mails to its customers.

The card now is in the hands of nearly 34 million people--41 percent of all households in the markets where CVS operates--with half of all of CVS' front-end sales tracking through the program. ExtraBucks now are earned on an everyday basis, rather than only during specific periods as the program originally was constructed, and the company is adding a clipless coupon system to the program.

Gaining an edge in tough times

Taken separately, each of these improvements to the ExtraCare program may seem like little things. But CVS executives believe the cumulative effects will leave a lasting effect on the consumer and will be a major point of difference in a competitive environment in which so many other drug chains are counting on convenience alone to drive market share. CVS is banking on "easy." There is a difference.

Analysts have speculated that the program was contributing about 1.5 percent of CVS' same-store sales in 2002. Certainly that would be a measurable effect of the edge ExtraCare has given the chain in a flat economy. CVS grew front-end same-store sales 2.3 percent during a tough year for retailers. And again, because it was able to better target its promotional efforts, CVS was able to get a bigger bang for its buck. The company improved gross margins 167 basis points during fourth quarter 2002. One major factor the company cited was an improved sales mix in the front end--more everyday and less promotional.

Given the continuing economic malaise and the obvious effect it has had on consumer spending, not to mention the tough comparisons CVS comes up against to the first half of 2002, its same-store sales will be pressured slightly in 2003. Already, the company has seen some deceleration in comparable-sales growth, a factor not only of the fragile economy, but largely a result of a drop in pharmacy comps--the combined effect of a slow flu season, increased generic utilization, a falloff in hormone replacement prescriptions and the switch of Claritin.

But these numbers obscure the fact that CVS is getting what many would call higher quality sales. Of all the factors impacting its comp sales, CVS is making the most of the one thing it has any control of--generic substitution, which Merrill Lynch retail securities analyst Mark Husson described as the "pig in the python," in an April 10 report on the company. "Each basis point hit to comp-store sales [resulting from increased generic utilization] is solid gold to the bottom line," he wrote in a Feb. 5 report on the company.

In 2002, the rise in generic usage shaved 280 basis points off CVS' pharmacy comps, a trend that has continued into the first few months of 2003. Generics depressed pharmacy comps by 150 basis points in March. "This is an important driver of gross margin sales because we estimate gross profit dollars per script to be $11-plus for a generic, but only around $8.50 per branded drug," Husson noted, numbers supported by research conducted by the National Association of Chain Drug Stores. "In that context, the greater hit to pharma comps the better."

Even if the rise in generics does drive down top-line growth, clearly much more falls to the bottom line--a key reason why CVS was able to beat analysts' earnings estimates in the fourth quarter. It also is a major reason why the company, despite the tough times all drug retailers will face in 2003 because of the soft economy, is confident that it will drive double-digit earnings-per-share growth this year, even if its front-end comps stay flat.

Customer-easy also is an inseparable part of the technology investments it has made in its proprietary pharmacy workflow and inventory management systems.

CVS has begun to see real benefits from the investment CVS made in its Excellence in Pharmacy Innovation and Care system in the form of reduced wait times and increased pharmacist-patient interaction by redirecting and automating work flow in the pharmacy and training technicians to pick up as much of the slack as state laws allow.

It is a prime example of CVS making it easy for its people to make it easier for its customers. "We are going to do everything possible to allow our pharmacists and technicians to interact and provide the best service possible to our customers," Jim Smith, CVS senior vice president of health care services, told Drug Store News. "If we do our job right at the back end, our pharmacists should have one concern: their professional responsibility to their customers and making life easier for those customers."

In its own way, CVS' Assisted Inventory Management system also strikes right at the heart of the chain's customer-easy mission. CVS is using AIM to make its stores more productive not only by ensuring that it has the right products in the right stores, 'but also by making sure it has enough of that product in those stores. "Sure, AIM improves turns and return on capital," Ryan explained. "The real win and the reason we are doing it is our in-stock position has improved dramatically. It makes it easier for our customers. What is the biggest inconvenience for any customer? It's to go into any retailer and not find the product they are looking for.'

CVS now has ATM up and running in all stores or almost all of its front-end categories. The company also has expanded a test of AIM in pharmacy, which it began I ate in 2002, to 130 stores. By the end of the year, it expects to have converted its pharmacy inventory systems over to AIM completely and expects to do the same for its seasonal categories.

Another example of how CVS has used technology to make the shopping experience easier for its customers comes in the way of its Line Busters program. In select stores, particularly, downtown locations that tend to get extremely busy during the lunchtime hours, CV S store associates use handheld scanning devices to prering customer merchandise to keep the lines moving and to reduce checkout times. By the time customers get to the register, their purchases already have been rung up. The customer merely hands the cashier the Line Busters-generated receipt, which is scanned into the register, pays and leaves.

Coming off a year in which CVS closed 229 underper-forming stores-not to mention the 50 or so business-as-usual store closings CVS would have in any given year as a part of its ongoing real estate development program--CVS is positioned again to add to its store base in 2003, projecting total growth in the neighborhood a 4 percent rise in total square footage. CVS finished 2002 with 4,087 stores, which included 174 new stores opened that year, 78 of them in its new markets of Chicago, Las Vegas and Phoenix, as well as several markets in Florida and Texas. In all, CVS plans to open 250 to 275 stores, roughly 100 to 125 of which would constitute net new stores with the normal number of store closings. Of these, 80 to 100 are slated for its new markets.

And the investments it has made in being the easiest pharmacy chain for its customers to shop position the chain to make the most out of what will be a tough year for all retailers.