Bitter pills in fight for drugstore dominance
By Jonathan Birchall
Published: August 16 2008 03:00 | Last updated: August 16 2008 03:00
In Elk Grove, a suburb of Sacramento in northern California, a quarter of a mile separates the local branch of Longs Drugs stores from a rival branch of Walgreens, the national drugstore chain.
But later this year the Longs store is expected to change hands. It will be taken over - along with 520 other Longs stores - by Walgreens' main rival, CVS Caremark.
For CVS, which has no stores in northern California at present, the proposed $2.9bn deal for Longs is the latest stage in a national battle being waged neighbourhood by neighbourhood with Walgreens.
"Both are working very hard to drive nationwide market share through a series of local market share moves," says Michael Collins, a retail consultant at Bain & Company.
CVS, based in Rhode Island, and Walgreens, from the Midwest, are now running neck and neck in the push to achieve national leadership through local dominance, with about 6,800 drugstores each. Pennsylvania-based Rite Aid, the third largest national chain, has about 5,800 stores.
For CVS, the move on Longs is an important part of a drive to build its presence in California, one of the country's largest retail markets. Walgreens has been in northern California for decades, and Rite Aid has been a market leader in southern California since the mid-1990s.
CVS made its first big push into California two years ago, when it acquired about 300 Savon and Osco drugstores in southern California as part of the break-up of the Albertsons grocery business in 2006.
The planned $2.9bn addition of Longs, which is the market leader in northern California, will give it a total of about 800 stores in the state, as well as additional stores in Hawaii, Nevada and Arizona.
Deborah Weinswig, a retail analyst at Citigroup, says that the acquisition of Longs "is excellent and is one that would take a decade or more for CVS to replicate through organic growth".
CVS is confident about its ability to integrate the Longs stores, pointing to the successful integration of the Savon-Osco stores it acquired two years ago and the 1,800 Eckerd stores in Texas and the south that it acquired from JC Penney in 2004.
Walgreens, in contrast, continues to focus on expanding organically by opening its own new stores.
Rite Aid, running third in a majority of markets, has been less successful in its efforts to keep pace, struggling to integrate 1,800 Brooks and Eckerd brand stores that it acquired in 2006 in an attempt to build scale.
As they have grown, all three chains have used their scale to reduce overheads and to market higher-margin private label products such as over-the-counter medications.
They have also sought to reinforce their retail business by expanding into new areas, such as "walk-in" in-store clinics operated by nurses that dispense basic medical treatment, and by developing their speciality pharmacy businesses, which offer enhanced management services for patients with chronic conditions.
CVS also significantly expanded its presence in the drug benefit business with its $21bn acquisition of Caremark, one of the leading prescription benefit management companies that bulk buys discounted drugs on behalf of insurance companies, large employers and other organisations.
But as they seize territory, Walgreens and CVS also have their eye on the rear-view mirror.
Wal-Mart, the largest US retailer, already operates more than 4,000 pharmacies at its superstores and warehouse clubs across the US. There is growing evidence that its two-year-old drive to reduce the costs of generic drugs has lured business away from the traditional stores - leading Walgreens to launch a cost-cutting programme of its own this summer.
More significantly, Wal-Mart has also indicated that it is interested in exploring the creation of smaller format stores focused on health and wellness, potentially joining the drugstores in their neighbourhood-by-neighbourhood battle for the high street.
Copyright The Financial Times Limited 2008