FINANCE

Commentary: CVS needs to do better at retailing

As good as CVS’s [second quarter] overall numbers are, the headline from a retail perspective is the 1% decline in front-of-store comparable sales. This reverses last quarter’s uplift which was aided by a shift in the timing of Easter and a particularly bad cold and flu season. In essence, it underlines the point we made last period — namely that when it comes to retail, CVS is a long way from maximizing its potential.

It is particularly notable that many of the categories CVS sells as part of its retail offer saw strong positive growth during the period. Across the U.S., beauty sales were boosted by consumers with more money to spend; snacks and food treats saw good uplifts. And things like greetings cards and stationery witnessed some growth. That CVS did not capitalize on these opportunities says a lot about the state of its retail offer.

Our consumer data show a number of reasons for this and, in our view, the figures are worrying for CVS.

Firstly, CVS is increasingly used out of necessity rather than out of desire, with people coming into the store to buy things that they need to top-up on or have run out of. While there is nothing wrong with trading on convenience, not drawing in customers who want to shop for different reasons means that CVS is missing out on a large slice of trade. Such a position also means CVS Is vulnerable to rivals—both physical stores that open in close proximity and the rise of certain categories online.

Secondly, those shoppers who do visit a CVS store are becoming less likely to browse and shop categories outside of those they came in to buy. This deterioration in cross-shopping is another lost opportunity for CVS and makes it difficult for the company to boost sales of impulse-driven segments like beauty. In our view, it also signals an increasing challenge in getting pharmacy customers to make retail purchases while in store.

Thirdly, the proportion of customers who use CVS for special purchases like small gifts or greetings cards and gift wrap continues to decline. Given that many of the products in this category are high margin and boost basket sizes, this is a worrying trend that has the potential to erode the bottom as well as the top line of the retail operation.

Finally, there are some categories, such as laundry detergent for example, where a shift to online shopping and automatic ordering is starting to impact the number of customers to come in to top-up shop. Relative to other dynamics, this trend is relatively minor, but we still see it as having the potential to erode revenue over the medium to longer term.

If all or any of these things were the result of deep-seated and complex challenges, we would have some sympathy. However, the root cause of most of the trends is because CVS is poor at retailing. Store environments are dingy, inspiration is lacking, merchandising and shop-keeping standards are generally sloppy, and the offer is bitty and fragmented. With a little care and attention, CVS could turn these things around, but the company never seems to bother.

As much as the healthcare and pharmacy side of the business will allow CVS to succeed, we lament the fact it is missing out on a lucrative slice of retail growth.

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G.M says:
Aug-13-2018 01:56 pm

In the Mesa, AZ market, Walgreens is my drug store of choice. It's simple... much better service (more help available) and Walgreens stores are neater, cleaner and exceptional in stock. (and it's not even close). The fix... CVS needs superior out of store hands on support (smaller districts) and give stores additional hours for operations. Good luck!!

K.Kelley says:
Aug-09-2018 09:35 am

If CVS prices weren't so high maybe people would shop there on purpose, not for convenience. I'll pay a little more for convenience, but, their prices are way too high.

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