CVS Web Strategy

Over the last two decades, the drugstore industry in the United States has evolved slowly. With a majority of drugs being sold at retail, it was only a matter of time before drugstore chains started establishing regional dominance. After a few rounds of mergers and acquisitions along with organic expansion, there remained four large drugstore chains in the country – Walgreens, CVS, Rite Aid and Eckerd. None content with regional dominance, these four big players soon started establishing nationwide presence and continued their expansion into competitor territories.

The late nineties saw the introduction of drugstore websites that soon became a hot topic in the industry. The race to sell drugs online had begun and CVS entered the online space by acquiring a startup called Soma.com. However, this new sales channel introduced unique and previously unknown challenges. Despite aggressive pricing and advertising, industry wide online sales have been slow.

CVS also faces pressure from their largest PBM, Merck-Medco, who believes that they should fulfill all mail order prescriptions regardless of the sales channel. Consequently, Merk-Medco took action by not reimbursing CVS for less-than-30-day prescriptions sold through CVS.com. Lastly, CVS has faced scrutiny in recent times regarding usage of customer data. Opportunity

In the competitive drugstore market, CVS is positioned well but must create a three-pronged strategy to addresses three specific opportunities. First, online sales need to improve. CVS should to stock and list a greater number of SKU’s on CVS.com; this will offer more variety and thus convenience to customers through this newly emerging sales channel. CVS should also invest in direct advertising to create consumer awareness about CVS.com. This advertising will in turn drive both already-loyal and new customers to the CVS web store. Second, CVS can focus on building a stronger relationship with customers and physicians.

Closer relationships with physicians will lead to more online prescription orders, and potentially the secondary sales that go along with them, as customers move to the new platform. Stronger customer relationships will build customer trust in CVS using consumers’ data and help them feel comfortable in furnishing CVS with their private information. Finally, CVS needs to resolve a current conflict with Merck-Medco. CVS has two options.

One, provide Merck-Medco with a margin share of certain CVS.com prescription orders or two, allow Merk-Medco to benefit from CVS’s brand strength by opening a CVS.com subsidiary store in Merck-Medco’s online dispensary. Recommendation

We suggest that CVS remains tough with Merck-Medco. Acute prescription orders, of less than 30 days, have never been a source of revenue for Merck-Medco to begin with. The introduction of a new sales channel should not change that. Acute-prescription online customers are not necessarily new, but rather existing customers that have switched their channel of purchase away from walking into brick-and-mortar CVS stores.

Giving up the ability to fill acute prescriptions for these customers would represent a loss in revenue for CVS. CVS should however, offer a value based proposition to Merck-Medco to open a CVS.com subsidiary storefront within their online dispensary only if Merck-Medco offers CVS the right to sell secondary products to its chronic patients. In doing so, CVS can use its brand awareness to pull in business for Merck-Medco, and in return, gain additional sales for themselves. CVS should also invest in improving the customer experience online and making it easier for customers to realize the benefits of online shopping.

As such, we suggest investing in advertising and expanding the portfolio of products offered on the web. Lastly, CVS can benefit greatly if it succeeds in building strong physician and customer relationships at this stage. We suggest a physician outreach program to educate physicians on the benefits of prescribing through the channel as well as a marketing campaign directed to customers that educates them on the measures of data security undertaken by CVS to protect their privacy.

We strongly believe the online drugstore industry is here to stay and that the above recommendations will allow CVS to forge ahead and establish competitive advantage over the long run. Execution

The most important issue facing CVS is the situation with Merck-Medco. CVS needs to reach a compromise with Merck-Medco regarding online acute prescription reimbursement. Online prescriptions represent a completely new sales channel and PBM’s will likely continue to fight for their piece.

CVS should streamline online sales and mail order prescription delivery into a single business, one of Merck-Medco’s core competencies, by implementing a CVS.com storefront on Merck-Medco’s online dispensary. By allowing Merck to enter the Acute Prescription market, CVS will enable Merck to capture new revenue. Similarly, CVS will lower is operating costs by offloading mail-order prescriptions to Merck.