Pandemic Tests Differing Strategies of Rival Drugstore Giants

(Bloomberg) -- In the first few weeks of March, as the seriousness of the coronavirus began to sink in across America, people rushed to drugstores to buy as much toilet paper, hand sanitizer, Tylenol and cough medicine as they could find.

For the nation’s largest pharmacy chains, it was like a shot in the arm. 

“Frankly, there was that feeling of euphoria across the business,” Walgreens Boots Alliance Inc. Chief Financial Officer James Kehoe told analysts during an earnings call on April 2. Sales in its stores, not including prescription medicines, had surged 26% during the first three weeks of March. At rival CVS Health Corp., such sales jumped about 19% in March.

But as quickly as the tide came in, it went out. Business slowed sharply at Walgreens toward the end of March, with sales declining in the final week at a rate in the “mid-teens,” Kehoe said. At CVS, which reported its most recent results on Wednesday, sales in the front of the store in April sank nearly 11% year-over-year.  

Before the pandemic, Walgreens and CVS had taken divergent approaches to refashioning their businesses for a future in which more consumers shop online and have their prescriptions delivered. The companies now find themselves again having to figure out how to stay relevant to the modern consumer, after a shock that could permanently reshape how people shop and get their medicine.

Both CVS and Walgreens are rooted in retail. Both were trying to re-imagine their stores before the coronavirus hit. CVS has plunged deeper into health care, while Walgreens made smaller changes that bank on its retail firepower. The companies will need to refine their respective strategies in one of the most disruptive and chaotic business environments in nearly a century.

“Each of the companies do need to continue thinking about what their business model really looks like over the next several years,” said J.P. Morgan health-care analyst Lisa Gill.

Drugstores were under threat before the crisis. Consumers were increasingly buying toothpaste, ibuprofen and other personal products online. They kept picking up prescriptions in stores, though the looming threat of Amazon Inc. entering the pharmacy business stoked fears that the online giant would soon disrupt the industry in the same way it had other retailers.

To make itself less vulnerable to retail trends, CVS, which also runs one of the largest U.S. pharmacy-benefit managers, bought health insurer Aetna for $68 billion in 2018, outlining a vision to integrate health services into its nearly 9,900 stores.

Walgreens has stuck closer to its core. It forged health partnerships with diagnostics company LabCorp and insurers Humana Inc. and UnitedHealth Group Inc., and signed deals with Kroger Co., Sprint Corp. and FedEx Corp. to give shoppers more reasons to come to its stores.  

Retail, including sales at the pharmacy counter, accounted for 29% of CVS’ total $256.8 billion in revenue in 2019. At Walgreens, U.S. retail represented 75% of the company’s $136.9 billion of sales in fiscal year 2019, which ended Aug. 31.

As the coronavirus started to spread in the U.S., both companies were forced to focus on their retail businesses. Online stores quickly ran out of toilet paper and hand sanitizer. Shipping services couldn’t deliver products fast enough. Consumers turned back to nearby pharmacies.

Once people stocked up, they stayed home, and it’s not clear when they’ll come back. While some states are beginning to re-open, social-distancing measures to slow the spread of Covid-19 are still being widely encouraged by public-health authorities. Consumers are settling into a new normal where they order groceries and prescriptions from their couch.

“As people get comfortable, it becomes more and more of an option,” said Moody’s retail analyst Mickey Chadha.

Walgreens’ digital efforts before the pandemic had primarily been focused on getting customers to go into its stores and taking advantage of its store footprint, said Stefanie Kruse, Walgreens’ vice president of digital commerce. Watching traffic surge in March, “we knew we would need to be able to meet customer demand online in radically new ways,” Kruse said.

Within weeks, Walgreens gave customers the option to order online and pick up at the drive-through at more than 7,300 stores. A project that complex would typically take months, if not years, to roll out nationwide, Kruse said. Walgreens’ app had been downloaded 62 million times, up 12% year-to-date, Co-Chief Operating Officer Alex Gourlay said April 2 as the company reported its earnings.

Store Transformation

CVS has spent more than a year focused on transforming some of its stores into what it calls HealthHubs. These locations offer more health screenings and care for people with chronic diseases. The company plans to open 1,500 HealthHubs by the end of 2021.

Chief Executive Officer Larry Merlo said in an interview that the pandemic validates CVS’s strategy of trying to make health-care local and accessible in the community, the home or in the palm of your hand.

“There’s not a single answer where everything can be accomplished in one of those three care dimensions,” Merlo said, adding that combining a broad set of assets allows customers to decide which makes the most sense for them.

Investors worry that CVS still must rely on getting people into stores, said Gill, the J.P. Morgan analyst. But the company has shown some positive momentum in its digital efforts. In the first quarter, prescription delivery rose more than 1,000% from the year-ago quarter, while virtual visits through its MinuteClinic climbed about 600%.

©2020 Bloomberg L.P.