Analysis of The Pharmacy Services Industry - Case Study Example

Analysis of The Pharmacy Services Industry Industry Overview The pharmacy services industry has historically been viewed as a safe haven for investors seeking steady growth and preservation of capital. However, things have changed a bit in recent times, owing to the aging American population and altered industry landscape. These stocks now have more of a growth profile than they had in the past. There is much opportunity for expansion, with billions of dollars in the business up for grabs! Besides, there is greater competition coming from every direction, as non-traditional channels are looking to get in on the act. Below, we discuss an evolving industry and provide a guide as to what to consider before committing funds here. Traditionally, this industry has been divided into two main categories: pharmacy services, which consist of Pharmacy Benefits Managers, or ‘PBMs’, as well as Clinical Services Providers and large drug chains. Although both groups distribute prescription drugs to consumers, they differ in that ‘PBM’s are mail-order operations while ‘chains’ sell from storefronts. The numerical arrays on the Value Line pages of companies in these groups are largely similar. However, the pages of PBMs, which are somewhat more capital intensive, list capital spending per share and depreciation; whereas, the pages of drug chains include the number of stores and gross margin. Within the business description on the Value Line page, investors find a company's mix of pharmacy and general merchandise sales. A heavy weighting of wide-margined pharmacy business is vital to a company's wellbeing. Pharmacy business is less sensitive to economic cycles and a sales slowdown here could indicate a serious problem. The prescription growth rate is another noteworthy figure in measuring the health of a company, and it is gaining prominence. Demographics point to a rise in the number of Americans aged 65 and older, over the next two decades. Increasingly, Baby Boomers will require medical care and pharmaceuticals, auguring well for the industry's sales and earnings prospects. The largest pharmacy services providers are best positioned to reap the coming rewards of the industry (Walgreens Co., 2013 www.walgreens.com/ and CVS Pharmacy, 2013 www.cvs.com/). BACKGROUND/HISTORY CVS CVS Caremark Corporation, together with its associates, provides unified pharmacy health care services in the United States. The company’s Pharmacy Services division offers pharmacy benefit management services, including plan design and administration, formulary management, discounted drug purchase provisions, Medicare Part D services, mail order and specialty pharmacy services, retail pharmacy network management amenities, prescription management systems, quantifiable services and disease controlling services (Yahoo finance, 2013). This division sells its products through retail drugstores; the ‘online retail pharmacy website’, CVS.com; onsite pharmacy stores and retail health care clinics. As on December 31, 2012, the company operated 7,458 retail drugstores, 640 Minute Clinic locations, 31 retail specialty pharmacy stores, 12 specialty mail order pharmacies and 5 mail order pharmacies. CVS Caremark Corporation was founded in 1892 and is based in Woonsocket, Rhode Island (Yahoo Finance, 2013). Walgreens Walgreen is an innovated and intuitive organization that takes ‘the shopping experience’ to another level. The organization has devoted it’s time to being helpful to the consumers and ensures that shopping is made as convenient as possible. With its many divisions, it operates a network of drugstores in the United States. It provides consumer goods and services; it also provides pharmacy, health and wellness services through drugstores along with novel methods such as mail, telephone and online modes. The company sells prescription and non-prescription drugs and general merchandise, including household products, convenience and fresh foods, personal care and beauty care products, photofinishing and candy products, as well as home medical equipment, contact lenses, vitamins and supplements, and other health and wellness solutions (Yahoo finance, 2013). Walgreens was founded by Charles R Walgreens in 1901 in Dixon (Illinois). Walgreens is one of the largest drugstore chains with fiscal 2012 sales of $72 billion; Walgreens envisioned becoming one of America’s best first choices for health and daily living (Yahoo Finance, 2013). Walgreens has seen tremendous evolvement through the times since its inception and today, provides more than 6 million customers the most convenient, trustworthy, multichannel access to consumer goods and services ably offering a cost-effective pharmacy, health and wellness services and advice to communities across America (Yahoo Finance, 2013) Walgreens endows its customers with highly dedicated services, giving them a sense of trust and security to shop with a free mind at Americas finest store for personal use, household and everyday necessities. SWOT ANALYSIS CVS Strengths CVS has developed an attractive Loyalty Card program, namely, ‘Extra Care’. It boasts of a very loyal shopper base, innovative stores and an inviting, convenient shopping experience. CVS’ major strength lies in its diversification in to retail as well as healthcare portfolios (Caremark, MinuteClinic. It generates strong brand equity and is able to satisfy the customer’s need of lower product prices. Owing to its specialized services, CVS has carved a niche with limited competition. Weaknesses CVS has leveraged through acquisitions but has faced integration issues. Store experiences have been rather inconsistent. CVS’ sales mix focuses on lower margin (pharmacy vs. front end) which poses a challenge. There has been a high turn around in employment rates while turnover of receivables has been low. CVS has witnessed Real estate issues (especially compared to Walgreens). Opportunities There are potentially viable opportunities in ‘private label expansion’ as well as in turning around acquired stores (Eckerd, Osco, Savon). CVS may consider expanding to Universal Healthcare and focus on the aging U.S. population in future projects. Threats CVS faces threats from traditional competitors (eg. Walgreens) and non-traditional competitors (eg. Wal-Mart, supermarkets, specialty centers, beauty centers, etc.). Other challenges include the integration of acquired operations, coping with shortages of pharmacists, ‘Mail Order pharmacies’ and online counterfeiting. A major threat may be through Government Intervention or drug imports from Canada. Generic products have become more common and accessible, posing a threat to CVS. Walgreens Strengths The company is being run at a very good pace, incorporating technology to the maximum level, both in - store and along its supply chains. Successful implementation of Radio Frequency Identification (RFID) which monitors display, is an added advantage in its store chains. The digital lab facility has been implemented in eighty percent of the company’s stores. The management team of the company along with their towering employees’ strength of 237,000 promises to hold the company’s position in high esteem. The drugstores of the company have huge presence in 50 states, with 8,169 stores providing excellence of services. The company assets are very productive and account for $25.1 billion. The merger of convenience and technology through alliance with Hewlett Packard using Snapfish technology has considerably changed the pace of the company succeeding at faster rates. Walgreens store designs are focused on single points, providing the well-executed services of convenience. Customer convenience is followed up well by receiving the prescriptions in multiple languages and providing ‘specific’ and ‘general drugs’ under one head, which promotes the company’s widespread sales. The in - store medical clinics ensure the provision of best health care facilities to its customers. Weaknesses The number of Walgreens acquisitions is not so high and it depends more upon the organic expansion, especially at a time when CVS is acquiring a good number of ‘Eckered’, ‘Osco’ and ‘Save on’ stores. Further, the in-store implementation of the store formats and services is not consistent at every location. The parking lots of the company are often found inconvenient and crammed, disturbing the store’s layout plan. There is an general inability of the company to keep pace with the growing private labeled brands popularity Opportunities There is an opportunity to provide convenient and accessible services at the outlets for the aging population of United States. Furthermore, Walgreens can focus well on integrating its healthcare division. Threats There is threat of medical lines cutting off, especially for generic and organic drugs. Certain cases have been reported against the company, wherein the company was found liable for disclosing the privacy of prescriptions. Increased competition is expected with not only pharmacy chains, but also supermarkets such as Wal-Mart that have incorporated a ‘pharmacy section’ to its stores. There is a threat of the workers’ union, which could considerably harm the performance of the company. Threat also looms from negative promotional activities by competitors, which may damage the brand name of Walgreens. (Retrieved on April 17, 2013 from http://www.mba-tutorials.com/marketing/swot-analysis-marketing/1341-walgreens-swot-analysis.html) In conclusion, each company is progressing with high standards of competitiveness. The financial performances are observed to transition in the marketplace between CVS Pharmacy and Walgreens. These retail pharmacy firms have battled for supremacy in the industry. However, the result of inconsistency in their leadership has translated to a lower return on investment. Walgreens has higher liquidity, but they have shown three years of decreasing net income. As a result, they are getting weaker as an organization. However, CVS Pharmacy has shown consistent growth over the last three years. Their increasing strength has been represented by their purchases of Long's Pharmacy and Caremark. It is my belief that this trend will continue in the near future and beyond. ANALYSIS VIA PORTER’S FIVE FORCES MODEL Force Strength Threat of new entrants Barriers to entry are relatively low. As a company in the drug industry, they are subjected to federal and state laws, as well as other regulations that govern the purchase of prescription drugs and other services in relation to the industry. Moderate Bargaining power of buyers In this industry, there are a large number of potential buyers and the drug retail sector is experiencing increasing consolidation, which is boosting rivalry. Government - assisted plans also contribute 10% of a player’s total revenue; however buyers face negligible switching costs. Moderate Bargaining power of suppliers Suppliers are under increasing pressure as brand loyalty is weakened and companies in the industry are displaying instances of backward integration. Low Threat of substitute products and services Threat of substitute products for the industry comes from general merchandise stores, supermarkets and hypermarkets. For example, Wal-Mart & Target. These retailers offer the convenience of selling the product in one location which may seem appealing to consumers. Generic products, which are an imitation of the branded products (but come at a significantly discounted price) have become more common and accessible. Another threat is that counterfeit products are easily available. High Intensity of rivalry among competitors The competition stems from rival drug chains, independent drug stores, mail order prescription providers, retailers such as supermarkets, convenience stores and mass merchants. Competitors have tried to diversify into selling other products, in an attempt to ease up rivalry in the sector. Moderate STRATEGY USED The Walgreen Company was founded in 1901 and has grown to become America’s top drug seller, ahead of close competitors such as Rite Aid and CVS, serving over four million customers on a daily basis (Walgreens Co, 2013). CVS, under Caremark Corporation, is among the primary retail drugstores in the US, operating over 6200 retail shops and specialty pharmacies. On the basis of competitive advantage, the companies have the following similarities: both have taken technology as a means to gain competitive edge in the market. As a market leader, Walgreens has shown great drive through innovation, by being the first to develop prescription containers which are child resistant. It was also among the initial drugstores to employ the use of satellite-based technology in connecting pharmacy related systems. Brand equity has been enabled by the use of technology and currently it is among the finest drugstore chains in terms of convenience and quality to its customers. Innovation practices of Walgreen Company have had an impact on its sales over the past few years and it has remained to be the leader in the drugs and food industries. Convenience is the most sought attribute by many customers and this has been portrayed by the company as compared to their close rivals CVS. As a result, it has proved to be the leader in the drugs business based on its growth in earnings, sales and market share among others. This has been achieved largely as a result of technological innovation, allowing customers to order drugs online and offering them the convenience of collecting them from convenient stores in the countries that they operate (Dietz, 2012). CVS too has also utilized Information technology in its attainment of the competitive advantage among its rivals. Venturing in to a market where Walgreen Company is the market leader in the provisions of quality and convenient drugs, it had to invent ways and techniques to stay in the market. In all its 6200 outlets, the company improved its customer relationships that were achieved through technology innovation. A survey was carried out in 2002 and it was realized that customer’s prescription refills were being delayed as a result of delays in insurance processing. The management then employed information technology that enabled the customer’s concerns to be sorted there and then, before the customer left. After a few years, there was recorded an improved customer satisfaction! This was achieved through the Customer Relationship Management system, by use of cloud computing since all the locations and outlets shared the patient’s data and such information could be assessed from any outlet (NetStandard, 2012). One of the reasons why Walgreen Company is at the top of its competitors is due to its choice of ‘locality’. Walgreens is known for its superior locations due to the organic strategy adopted. This has given the company the opportunity to choose good locations to initiate more stores. Walgreen stores stand in certain locations alone and this has enabled the drug store to expand into a 24-hr operated company in the recent financial years. The locations are beneficial to the drug store because more profits have been realized through profits as compared to the traditional strip centers. It is more advantageous to Walgreens, since, while it is easy to copy competitive strategies from other companies, ‘location’ is one aspect that cannot be easily imitated by competitors (Walgreens Co, 2013). On its part, CVS also has its competitive advantages, through the ability to serve and offer additional services to their customers. CVS provides a Maintenance Choice Program that enables its customers to save some cash and receive a 90-day supply of drugs that they use for their maintenance at all the CVS retail outlets, other than from The Care Mail service pharmacy. This has enabled most of the customers to reduce the lead time for receiving the drugs that they want. CVS also offers benefits to its customers through the ‘Extra Care loyalty card program’ wherein customers receive discounts and other offers which are usually printed on the consumer’s store receipts throughout the year. This has enabled many customers to keep up their loyalty to CVS and it has increased their sales significantly (Eldring, 2009). The Cost leadership strategy has certainly been executed successfully by both companies, to reach the position that they are in, in business today. Competition has been on the rise, which has made many businesses in the industry devise ways so that they can get ahead of the rest. A strategy for ‘cost leadership’ depends on management and organization of a business thereby incurring the least amount of costs in its production within the industries. This has been evidently demonstrated by both the companies as they expand their businesses and increase their profits while reducing their costs through the successful implementation of innovation advantages and economies of scale. This results in the increased loyalty of customers to their brands and creates an entry barrier for other businesses to penetrate the industry (Porter, 2008). Visibly, all companies cannot be in a position to utilize the strategy explained above, due to the heavy demands on the management. The company must be financially stable in order to fulfill the conditions of the strategies. This is a domain in which many companies lack. Location and technological advancements are the most identifiable attributes to this strategy (Thompson & Martin, 2010). Strategy tends to be affected by the life cycle in the industry more so during the growth stage where companies are not able to expand and attain their goals due to the fear of other competitors. They thus invest most of their funds in trying to manufacture more quality products so that they can stay in the market (Thompson & Martin, 2010). This is how the strategy of CVS and Walgreens has developed over the years, to create and successfully sustain their competitive advantage. CROSS CASE ANALYSIS Success: Walgreens Failures: CVS-pharmacy Critical Success Factors Similarities: Product line: Walgreens has extensive product lines (same with CVS–pharmacy); they engage in a variety of goods and services and pharmacy services, in addition to health and wellness products. Business dealings: Walgreens was involved in a business deal which allowed it to sell prescription drugs from CVS-Pharmarcy drug plans.   Controversies: Walgreens has experienced controversies; at one time it was accused of was of switching forms of dosages on medications normally prescribed for Medicaid patients without any approval of doctors, as a mechanism of raising its profits. Product line: CVS-pharmacy also has an extensive product line (similar product lines with Walgreens); mostly trading in the same products. Business dealings: CVS and Walgreens were involved in the same business dealings having Walgreen sell prescription drugs from CVS’ drug plans Controversies: Just like Walgreens, CVS experienced controversy challenges, where they were accused of using deceptive business practices. Extended product line   Both have a huge asset - base to expand the business further (each have more than 7000 retail stores all over the country and at Puerto Rico).   Differences: Has the largest distribution channel of more than 7,500 stores all over the country, and in the District of Columbia and Puerto Rico Utilizes the a much conservative strategy to their operations by expanding organically Has the second largest pharmaceutical distribution channels with more than 7,000 stores all over the country and in Puerto Rico Uses a riskier approach of expanding its business by acquiring competitors CVS-pharmacy offers a full fledged prescription service while Walgreens just offers the retail drug service. Walgreen drives its expansion program with an organic strategy as compared to the aggressive but riskier approach of CVS-pharmacy *Retrieved from Recomparison, 2013. THE ISSUES AND CHALLENGES FACING THIS COMPANY Walgreens Walgreens has over 8000 stores nationwide and historically has relied on the strategy of expanding by opening new stores to increase foot traffic, giving them a competitive advantage. But they have already opened various locations nationwide and have reached a saturation point. Their focus should now be less on new stores and more on making productive the existing stores (Tahir, 2011). Analysts state that Walgreens needs to start improving its store fronts, reduce expenses and tackle competitive pressures from mail order prescription. Importantly, Walgreens needs to ensure timely reimbursements in order to make a successful transition from a growth strategy to a productivity-enhancing strategy. These are the major issues and challenges that Walgreens is facing at the moment. Other challenges Walgreens is facing are reimbursements and on-going pressures with regard to private and government health plans where they need to get paid a certain amount per prescription. In order to do so more efficiently, Walgreens would need to have a better relationship with Government Drug Plan Administrators. They also need to ensure their customers buy their medications through Walgreens, instead of using online or mail in medications by rival companies (Sweeney, 2011). CVS CVS is facing new issues regarding its new Health Insurance Wellness Policy. This controversial insurance will cost its employees more money if they don’t participate in the company’s wellness program; which requires that each employee submits to a health screen. This may give employees the right to file employee litigations against the company. At the federal level, the policy could be subject to discrimination claims and on the state level, there are potential privacy concerns about who can access this information. It is a legal matter which may affect the company. Most companies make every effort to avoid legal complications. Although plans like these are common, attorneys theorized that the pharmacy's program has drawn heightened scrutiny because of the consequences of refusing to participate which were framed as a ‘penalty’ rather than an ‘incentive’ (Grande, 2013). CVS also faces issues with public authorities over illegal practices with refilling prescriptions. CVS was earlier sanctioned by Medicare and cannot enroll new persons in SilverScript until it cleans up its act. CVS blamed its SilverScript troubles on "an enrollment system conversion" that "brought about an increase in call volume and issues related to claims processing." As a result, many seniors found themselves facing inexplicably large bills that CVS refused to negotiate. Medicare received 2,340 complaints about SilverScript in just the first two weeks of January 2013; a rate four times greater than for all other Medicare-approved drug programs combined. CVS is blaming these incidents on overzealous pharmacy managers but internal emails and documents suggest that these incidents were more common than what they really want the public to perceive. The U.S. Justice Department also is looking into whether CVS violated a $17.5-million settlement. The company is now being investigated by federal and state authorities for having refilled prescriptions and billed insurers without the patients' approval (Lazarus, 2013). COURSE OF ACTION RECOMMENDED Both CVS and Walgreens have substantial issues that are being addressed; these issues have created challenges that have greatly affected how each entity operates and functions as well as how each organization is viewed by their respected stakeholders and the state and federal authorities. Our recommendation is that both companies should quickly redeem themselves respectively, by adhering to state and federal regulations on proper business practices. Furthermore, it is imperative that both CVS and Walgreen continue to push forward with respect to ensuring consumer satisfaction and upgrading their stores. Consumers seek an organization that is operated with integrity and willingness to always place the consumers’ needs first. The main direction of these organizations should be to excel in providing good services; while attaining a positive reputation. This would ensure the continued support and patronage from their loyal consumer base. OPINION This case study is highly informative and an ideal subject to critically analyze from the business perspective. I believe that a SWOT analysis must be done for every company at regular intervals, in order to recognize and understand changing situations in today’s dynamic market. A market leader too, must analyze the competition and work hard to sustain at the top. The strategy adopted by the company must keep in mind the goals of the company, focus on the value addition that they can provide in order to be the preferred brand. The location of the outlets and availability of funds play a major role in the success of a company. At any point in time, it is vital to maintain a customer – centric model, wherein the consumer is given preference for his needs, which translates to market demand. Quality and price are two most precious requirements for the consumer and the company must ensure ‘the best quality at the lowest price’ in order to maximize profits and retain its customers. Above all, the integrity and reputation of the company go a long way in keeping up the name of the institution and maintaining customer loyalty!! REFERENCES 1. Walgreens Co. (2013) Walgreens. Retrieved on March 28, 2013 from http://www.walgreens.com/ 2. CVS Pharmacy (2013) CVS. Retrieved on April 17, 2013 from http://www.cvs.com/ 3. (2013) Yahoo Finance, Business Summary. Retrieved from http://finance.yahoo.com/q/pr?s=CVS 4. http://www.mba-tutorials.com/marketing/swot-analysis-marketing/1341-walgreens-swot-analysis.html. Retrieved on April 17, 2013. 5. (2013) Yahoo Finance, Walgreens Balance® Rewards Program Expands Opportunities to Earn Points for Healthy Behavior, Press Release: Walgreens, Retrieved from, http://finance.yahoo.com/news/walgreens-balance-rewards-program-expands-163400694.html 6. Dietz, S. (2012) CVS Caremark Competitive Advantage. Retrieved March 28, 2013, from Storify: http://storify.com/seandietz17/cvs-caremark-competitive-advantage 7. NetStandard. (2012) Investing in IT for Competitive Advantage. Retrieved March 28, 2013, from NetStandard, Inc: http://www.netstandard.com/it-competitive-advantage/ 8. Eldring, J. (2009) Porter ́s (1980) Generic Strategies, Performance and Risk. Harbug: DiplomicaVerlag. 9. Porter, M. E. (2008) Competitive Advantage: Creating and Sustaining Superior Performance. New York: Simon and Schuster 10. Thompson, J., & Martin, F. (2010) Strategic Management: Awareness & Change. New York: Cengage Learning EMEA. 11. Recomparison (2013). Walgreens vs. CVS Pharmacy. Retrieved on April 17, 2013, from Recomparison:http://recomparison.com/comparisons/101120/walgreens-vs-cvs-pharmacy/ 12. Tahir, N. (2011). Biggest challenge facing Walgreen. Retrieved from Medill Reports - Chicago: http://news.medill.northwestern.edu/chicago/news.aspx?id=177771. 13. Sweeney, B. (2011). Drugstore drama: The old ways no longer work for Walgreen. Retrieved from Crain's Chicago Business: http://www.chicagobusiness.com/article/20110716/ISSUE01/307169974/drugstore-drama-the-old-ways-no-longer-work-for-walgreen. 14. Grande, A. (2013) CVS Worker Weigh-Ins Should Survive Lawsuits. Retrieved from Law360: http://www.law360.com/articles/426207/cvs-worker-weigh-ins-should-survive-lawsuits. 15. Lazarus, D. (2013) CVS' Medicare drug program causing headaches for enrollees. Retrieved from Los Angeles Times: http://articles.latimes.com/2013/feb/05/business/la-fi-lazarus-20130205. Read More