In the high-stakes world of healthcare retail, CVS Health finds itself at a crossroads, navigating turbulent waters amid investor pressures and a stock price that seems to be on a downward spiral.
As the pharmacy giant embarks on a strategic review, including possibly splitting its insurance and retail arms, CEO Karen S. Lynch faces the daunting task of reversing fortunes while trimming nearly 2,900 employees. With rising medical costs threatening to overshadow its insurance segment and retail sales stalling in an uncertain economy, CVS needs to find ways to attract budget-conscious shoppers and reassure investors.
Will a breakup be the lifeline CVS needs or merely a Band-Aid for deeper wounds?
CVS Health’s board has hired advisers to conduct a strategic review as the company faces investor pressure and a significant drop in its stock price. Options under consideration include a potential breakup of its insurance and retail divisions. Lynch recently met with major shareholder Glenview Capital to discuss improving the company’s performance.
CVS announced it will lay off approximately 2,900 employees, representing less than 1% of its workforce, as part of a broader strategy to cut $2 billion in expenses. Last month CVS saw its revenue rise 2.6% in the second quarter due, in part, to more digital customers, offering biosimilar prescriptions, and closure of underperforming stores.
In an interview with PYMNTS, Greg Zakowicz, Senior Ecommerce Expert at Omnisend, said CVS is in a “difficult situation” because the traditional drug store model has changed due to increased competition from both brick-and-mortar and online retailers regarding prescription medication and retail goods.
“And while they’ve been looking at their private labels to increase sales,” Zakowicz explained, “the store model itself isn’t necessarily a go-to for consumers. I think their in-store retail sales will continue to be more convenient for those already in-store, which isn’t great for sustainable long-term growth. Layer on constantly increasing insurance costs and downgraded star rating from Medicare Advantage, and it’s difficult to see a clear way forward.”
What does CVS need to do to right its ship?
“CVS needs to find a competitive differentiator to generate in-store traffic and increase healthcare utilization, both for prescription fulfillment and insurance plan coverage,” Zakowicz explained. “From a retail perspective, I don’t know what this looks like, but maybe it’s becoming a fulfillment or distribution partner for brands like Amazon Pharmacy or Cost Plus Drugs to increase foot traffic? Or would it be to follow the same model and drastically reduce the cost of prescriptions, available with in-store pickup only? They have to come up with something that is going to make consumers shop with them.”
Meanwhile, Neil Saunders, managing director of retail at research firm GlobalData, told PYMNTS CVS has “neglected its core retail business” for years, which is “in a very weak state. They’ve lost massive amounts of share in beauty to specialists like Ulta and Sephora and to generalists. They’ve also lost share in general merchandise to Walmart, Target, Dollar stores and many others.”
Saunders noted that CVS officials thought the solution was to diversify into healthcare and all manner of other areas, “with acquisitions that cost $88 billion in the past six years alone. The problem is that healthcare is incredibly difficult to disrupt and success has been patchy. The result is a bloated company that is unfocused and has too much on its plate.”
While a split of the company “may unlock some temporary value for shareholders,” Saunders added, “I am not sure it will solve much. What the business really needs is a better operating structure and stronger management that enhances retail as well as developing the other business units. A lot of the solution, especially in retail, is to start being much more customer-centric and finding ways to differentiate and compete more effectively. This is very easy to say, but it’s far harder to execute.”
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