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4 Takeaways: What CVS Health-Target Deal Means for Retail Health


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Actionable Insight

"Pharmacy players must differentiate to drive traffic based not only on convenience, cost #OWHealth #retailhealth"

Last month, CVS Health completed its acquisition of Target’s pharmacy and clinic businesses for approximately $1.9 billion. With the completion of the transaction, CVS Health acquired Target’s 1,672 pharmacies across 47 states and will operate them through a store-within-a-store format, branded as CVS/pharmacy. In addition, a CVS/pharmacy will be included in all new Target stores that offer pharmacy services. Seventy-nine Target clinic locations will be rebranded as MinuteClinic, and CVS Health will open up to 20 new clinics in Target stores within three years of the close of the transaction. Oliver Wyman Principal Graegar Smith, with Senior Consultant Chris Tanner, explains why it’s telling that a company of Target’s size and overall retail sophistication chose to exit its pharmacy business:

1) Retail pharmacy is an increasingly difficult and competitive market
  • Labor cost increases, drug cost increases, insurance reimbursement changes and reductions, regulatory requirement increases, and risk management requirement increases (and risk tolerance decreases) are all significant challenges in the retail pharmacy market today.
  • These challenges have been voiced across the industry. Walmart executive Greg Foran noted in an August earnings call that a major contributing factor to the company’s underperformance was lower than expected pharmacy reimbursements. “Reflecting industrywide trends, we are seeing reduced reimbursement rates from Pharmacy Benefit Managers, which is negatively impacting gross margin. We are also seeing a lower mix of higher-margin cash transactions, reflecting a marketplace shift in which more customers are now benefiting from greater drug insurance coverage. While we are taking a number of actions to lessen the impact, we expect to have pressure on pharmacy for the rest of the fiscal year.”
  • While divestures can occur for a variety of reasons, Target’s move is likely a reaction to these mounting pressures, plus a need for cash/dollars to reinvigorate its brand.
2) Scale and buyer power remains an effective healthcare industry strategy
  • For CVS, this could be a significant growth opportunity, expanding its footprint in both pharmacy and care delivery through retail clinics, and accessing perhaps a new and different consumer base.
  • The pharmaceutical value chain has seen significant consolidation across drug manufacturers and PBMs, and pharmacies continue to be part of that movement. This of course is old hat for many who have watched the steady increase in consolidation across the healthcare spectrum, from hospitals to payers and pharma companies. This also indicates that other players in the pharmacy business might be struggling and looking for scale to offset higher operating costs or greater buyer power.
3) Scale plays may be harder to run as a result, creating friction for other consolidators
  • As the FTC considers approval for the potential Walgreens-Rite Aid merger, CVS’s move consolidates the pharmacy industry even further. Given Target’s exit, Walgreens might see further resistance from regulators who will find it hard to believe that cost efficiencies outweigh the effects of duopoly pricing.
4) Future of retail health is still bright
  • Finally, as headlines have focused on the acquisition, this deal could also represent a new partnership between Target and CVS that will continue to define the future of retail healthcare. While nothing has been announced, this deal presents an opportunity to drive benefits for both players. In the words of CVS’s president, “This strategic relationship supports the highly complementary customer base, brand, and culture we share.”
  • As two major pharmacy players are quickly emerging (CVS + Target vs. Walgreens + RiteAid), both driven to reduce costs as quickly as possible, they have to differentiate to win in the eyes of consumers, as well as providers and payers. Similar to Coca-Cola and Pepsi, pharmacy players will need to define what makes them special if they eventually hope to drive customer traffic based not only on convenience and cost.

About the Author

Graegar Smith portrait
Graegar Smith Principal, Oliver Wyman

Graegar is a Principal in Oliver Wyman's Health & Life Sciences practice. Based in Chicago, he is an accomplished management consultant with 13 years of experience in business & operations strategy development for global institutions and market-leading private enterprises.


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Graegar Smith
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