us drugstore chains research report june 09

Analysis of US Drug store chains

Knowledge Foundry Business Solutions

May 2009

Authors: Raj Bhatt ([email protected]), Vivek Bothra

This document is not intended to provide tax, legal, insurance or investment advice, and nothing in it should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Knowledge Foundry Business Solutions.

Contents

• Comparison of metrics

• Company-specific details

Source: NACDS, Credit Suisse

Drug retailing is a mature and competitive business

Store chains and mail order have been gaining strength over independent stores in dispensing prescriptions

Source : NACDS, Credit Suisse

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005 2006 2007 2008

Chains IndependentsFood Stores Mass MerchandisersMail Order

Market Share of Prescription Rx Sales

Drugstore chains are perceived to be convenient and trustworthy for dispensing prescriptions

CVS, Rite Aid and Walgreen are the major US chain drug store chains

Sales ($Mn)

87472

26,289

59,034

0

20000

40000

60000

80000

100000

Cvs Corp. Rite Aid Walgreen

Stores

7483

4901

6,934

0

2000

4000

6000

8000


Employees

215,000

113,000

237,000

0

50,000

100,000

150,000

200,000

250,000


Comparison of the major drugstore chains (2008)

Source: Annual Reports, Yahoo Finance, Wikipedia.org

*

* Wal-Mart has 4100 pharmacies, Kroger has 1972; Target has 1400; Kmart has 1000; Supervalu has 920 pharmacies whereas Winn-Dixie has 400

Prescription drugs usually account for more than 65% of drugstore chain sales

Walgreens Sales Break Up 2008 (%)

65%10%

25%

Prescription Drugs Non prescription drugs General Merchandise

Rite Aid Sales break up 2008(%)

66.5%

33.1%

0.4%

Pharmacy Front end Other

CVS is the largest US provider of prescriptions

# Rx's dispensed in 2008 (MM)

617

316 300246

149

729

0

100

200

300

400

500

600

700

800

CVS Walgreens Medco RiteAid Walmart Express/NextRx

CVS leads in the West and the South-East, Walgreens in strong in the Mid-West and South-East, whereas RiteAid leads in the North-East

Source: Credit Suisse

Regional Market Share % (2008)

2831

13

34

1821

24

15

23

19 18

26

0

5

10

15

20

25

30

35

NorthEast West Coast SouthEast MidWest

CVS RiteAid Walgreens

%

While CVS and Rite-Aid have acquired stores, Walgreens has primarily opened new stores

Sources: 10k filling, annual reports, press releases

Drug Stores Acquired

701

0

529

95 120

423

2 9

1,862

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2006 2007 2008CVS Walgreen Rit e Aid

New Store openings

147 140188

475 501

608

40 47 33

0

100

200

300

400

500

600

700

2006 2007 2008CVS Walgreen Rite Aid

Stores Closed

117

47 43

94 85 94

32

183200

0

50

100

150

200

250

2006 2007 2008

CVS Walgreen Rite Aid

Stores Relocated

118136 130

66 6556

020406080

100120140160

2006 2007 2008

CVS Rite Aid

*

* Data for Walgreens is not available

Comparing organic growth, Rite-Aid has grown the slowest in the past few years

Source: Annual reports, Investor Presentations

Same-store Sales growth

0%

2%

4%

6%

8%

10%

2006 2007 2008

Years

CVS

Rite-Aid

Walgreens

Same-store Prescription sales growth

0%

2%

4%

6%

8%

10%

2006 2007 2008

Years

CVS

Rite-Aid

Walgreens

Same-store Front-end sales growth

0%

2%

4%

6%

8%

2006 2007 2008

Years

CVS

Rite-Aid

Walgreens

CVS has the best operating ratios -- but higher assets due to recent acquisitions

Operating profit/Assets

Operating Margin %Inventory Days of Sales Inventory/ Total Assets

Sales/Sq feet Sales/ EmployeeContribution Margin %

407

233 249

100

200

300

400

500


6.9%

-8.0%

5.8%

-10%

-5%

0%

5%

10%


21

27 28

0

10

20

30

CVS Rite Aid Walgeen

48

6680

0

20

40

60

80

100


10%

-25%

15%

-30%

-20%

-10%

0%

10%

20%


15%

42%

32%

0%

20%

40%

60%


843

388

813

0

200

400

600

800

1000


CVS has lower contribution margin but higher sales per sq ft and sales per

employee

CVS’ high inventory turnover may be due to the Caremark PBM

business

Rite-Aid has negative operating margins

driven by low sales/ sq ft and low productivity

843

429

813

0

300

600

900


Operating Margin

-10%

-5%

0%

5%

10%

2006 2007 2008

Years

Perc

enta

ge Cvs Corp.Rite Aid

Walgreen

Operating Margin

-30%-25%-20%-15%-10%

-5%0%5%

10%

Q1 Q2 Q3 Q4

2008

Perc

enta

ge Cvs Corp.Rite Aid

Walgreen

CVS has had a consistently higher operating margin–Rite-Aid had negative margins in 2008

CVS carries less than 45 days of inventory whereas RAD and WAG carry more than 60 days

Although CVS has faster inventory

turnover, the competition is catching up

Inventory (Days of Sales)

0

25

50

75

100

2006 2007 2008

Years

Cvs Corp.Rite AidWalgreen

Inventory (Days of Sales)

0

25

50

75

100

Q1 Q2 Q3 Q4

2008

Cvs Corp.Rite AidWalgreen

CVs turnover may be driven by the PBM

business

CVS has had consistently higher employee productivity than Rite-Aid and Walgreen

Sales/Employee

0

100000

200000

300000

400000

500000

600000

2006 2007 2008

Years

Dol

lars Cvs Corp.

Rite AidWalgreen

Sales/Employee

0

20000

40000

60000

80000

100000

120000

Q1 Q2 Q3 Q4

2008

Dol

lars Cvs Corp.

Rite AidWalgreen

Rite-Aid has much lower sales per square foot than its rivals

Pls. note that the 2008 CVS number does not include Longs’ Drug store which have a much lower average of $598 per sq. ft

Sales/Square foot

0100200300400500600700800900

2006 2007 2008

years

dolla

rs

Cvs Corp.Rite AidWalgreens

These numbers are for the retail segment

… and smaller, right-staffed stores

Avg Store Sq Foot

1386612500

10472

0

5000

10000

15000

CVS Rite aid Walgreens

Employee/Store

2923

34

0

10

20

30

40

CVS Rite aid Walgreens

Company-specific details

CVS Caremark is positioning itself as an integrated healthcare company

CVS covers most states except the North-West

CVS was primarily an east coast

retailer till 2003

Minute Clinics are staffed by nurse practitioners and currently focus on acute conditions

(e.g., Flu)

Its store-brand sales have increased 47% over the past four years

• Completed acquisition of Longs Drugs and Rx America – to gain strength on the West Coast

• Successfully launched Proactive Pharmacy Care – a Pharmacy Benefits Management program– to compete against traditional PBM programs as well as drug retailers• Proven to improve adherence to prescriptions• Uses plan design based on a ‘Customer Engagement Engine’ that uses customer

behavior, evidence-based medicine• already $8.9 BN in sales• More than 8 MM ExtraCare Health cards• 250 Maintenance Choice enterprise customers

• Focusing on specialty pharmacy -- 30 conditions including hemophilia, MS, RA • 20 mail order pharmacies and 52 specialty retail pharmacies • generating revenue of $ 10+ BN

• Pharmacy service initiative (PSI) and IT initiative (RxConnect ) to improve the prescription filling process

• Launched call center to free up pharmacists time – and improve customer service

Key strategic initiatives at CVS Caremark

Walgreens has a rich history of innovation

• 1950 – self service stores

• 1968 – Child-proof containers

• 1981 – Satellite-linked stores

• 1991– POS scanners

• 1992 – Drive-through pharmacies

• 1999- online prescription history

• 2002 – multi-language prescription labels

• 2005 – online digital photo printing

Walgreens has a wide spread store network

Key strategic initiatives at Walgreens

• Slowing store growth

• Re-inventing the customer experience • ‘Affordable Essentials’ program• Prescription Savings program has 1.7 MM+ members –offers discounts on more

than 5000 generics; and 90-day supplies at a dollar a week• Optimizing assortment at a store level – to sell more front-end items• Optimizing pricing and promotions• Rolling out new ‘Customer-Centric Retailing (CCR)’ format• Enhance shopping experience by improving sightlines, layout and signage• Collaborating with vendors to leverage insights e.g., Baby care layout

• Transforming community pharmacy by the POWER program (centralizing data entry, data review and clinical review of prescriptions)• Allows pharmacists to strengthen their role as trusted clinicians• Reduces overall pharmacy costs• Rolled out in all Florida stores and now launching in Arizona

Key strategic initiatives at Walgreens (contd.)

• Expanding health & wellness and specialty pharmacy• 273 Take Care clinics and 364 Worksite Health Centers catering to 180+

enterprise clients and millions of consumers• Specialty/ Infusion centers

• Rewiring for growth – driving major cost reduction and productivity gain• Strategic sourcing of indirect spend• Reduce corporate overhead and store labor• Balance workload to free up pharmacists’ time

Rite-Aid has a strong presence on the east coast and in select west coast markets

Source: Rite Aid presentation

Key strategic initiatives at Rite-Aid

• Focused store growth program

– Growth focused on key strategic markets

– Segmented stores using sales and profitability performance (High EBITDA margin stores; High volume, lower EBITDA margin stores; Good volume; Low volume)

– Emphasis on relocations

– “Customer World” pharmacy centric store format prototype

• Strengthen pharmacy operations

– Improve customer service using

• ‘Ready when promised’ program

• grow ‘Automated Courtesy Refill’ program

• Use new ‘Nexgen’ KPIs

• Focus on service at under-performing stores

– Differentiated loyalty programs – senior “Living More”, Rx Savings Card

– Focus on health and wellness programs

Key strategic initiatives at Rite-Aid (contd.)

• Improve front-end operations

– Continue to grow private brand penetration (currently 13% of front store)

– Differentiating with GNC within-a-store

– “Living More” senior loyalty program

– Maximize prescription switches to OTC

– Optimize front-end assortment and use new pricing model and ad zones to drive sales

• Continue operational improvements

– Improve store productivity through implementation of best practices across stores

– Inventory reduction initiatives without sacrificing customer satisfaction

– Expenses aligned with sales level with continued focus on SG&A reduction initiatives

– Reduction in supply chain costs