Drug Overdose: The Strategy Behind Pharmacy Chain Expansion | When chains compete, there's one in every neighborhood
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Michael Jacobs, principal with Glickman Kovago & Co. in Worcester.
It’s easy to see all the CVS pharmacy stores around Central Massachusetts and think the Woonsocket, R.I.-based company has oversaturated the market.
But contrary to that thought, CVS doesn’t just open stores willy-nilly. In fact, CVS store openings are the subject of intense study of financial data, demographics and the shopping and commuting patterns of neighborhood residents.
And increasingly, the opening of a new CVS store is also likely the result of a win in the chain’s ongoing battle with that other chain — Deerfield, Ill.-based Walgreen Co.
“It’s very competitive,” said Michael DeAngelis, a CVS spokesman. “It’s certainly a trend that we’ve seen in the last couple of years. They (Walgreens) enter our market and we enter their market. We’re both looking for similar attributes in a real estate site.”
CVS has 56 locations in Central Massachusetts. Walgreens has 16 and Pennsylvania-based Rite Aid adds another 29.
And reading CVS’s and Walgreen’s annual reports, it seems as if they’re in a race to see who can open the most stores more quickly.
The competition is fierce. Walgreen’s aggressive expansion strategy is very similar to CVS’s. The two companies even grew by acquisition in 2007, with CVS acquiring Caremark Rx Inc. and Walgreen acquiring Opticare Inc. And the competition heated up earlier this year when CVS had to fend off a rival offer from Walgreen in its deal to acquire West Coast pharmacy chain Longs Drug.
Both retail pharmacies seem to sprout up at or very near “signalized” intersections. Such was the case with the CVS pharmacy that opened in June at 44 West Boylston St. in Worcester, according to Michael Jacobs, a principal at Worcester commercial real estate firm Glickman Kovago & Co. who has worked with CVS on a number of real estate transactions in Central Massachusetts.
“Ideally, they’d like to own property,” Jacobs said of CVS. “Unfortunately, it doesn’t always work out that way. That’s the challenge.
When landowners find out you’re going to build a CVS, they tend to hold onto the land” in the hope of earning some lease income.
But CVS is “very pragmatic,” Jacobs said. “If they can’t buy, they’re not just going to walk away.” In fact, CVS owns only about 4 percent of its retail locations, according to U.S. Securities and Exchange Commission filings. Walgreen Co., by contrast, owns 19 percent of its properties.
CVS owns its building at 44 West Boylston St., but signed a 25-year lease for the land with owner EJR Real Estate Trust, which is run by Charles K. Ribakoff II, according to city land records.
The store there is part of CVS’s effort to get its stores out of strip malls and shopping centers and into free-standing, 24-hour locations with drive-through pharmacy windows.
That effort is especially concentrated on Southern New England, where CVS already has “a lot of stores,” DeAngelis said.
In the second quarter, CVS opened 49 new retail pharmacy stores, closed eight retail pharmacy stores, and relocated 39 others. As of June 28, the company operated 6,308 retail pharmacy stores, 316 in Massachusetts.
Ten of them are in Worcester: In addition to the new West Boylston Street store, there’s one on Front Street downtown, two on Lincoln Street and stores on Stafford Street, Park Avenue, Grafton Street, Newport Street, Chandler Street and the Southwest Cutoff.
The company has more than 2,100 employees in Central Massachusetts, more than 12,000 in the state and brought in more than $76 billion in revenue in 2007.
By the end of this year, the company expects to have opened between 300 and 325 new or relocated stores. In 2007, CVS opened 139 new stores, relocated 136 others and closed 44.
Driving Competition
In 2007, Walgreen opened or acquired 563 stores for a net increase of 478 stores after relocations and closings, not including 58 locations acquired from Option Care. As of Aug. 31, 2007, Walgreen had 5,997 stores in 48 states and Puerto Rico. According to an SEC filing, “aggressive growth will continue as the company anticipates operating more than 7,000 locations in 2010.”
Walgreen ended 2007 with 126 stores in Massachusetts, up from 111 the previous year.
But CVS says it isn’t over-saturating the market and it has the numbers to prove it. In fact, it has those numbers for each location far in advance of opening.
“It would amaze you how precise they are,” Jacobs said of CVS’s store-by-store revenue and customer traffic predictions.
DeAngelis explained that CVS knows 50 percent of its customers in any given market live within two miles of a CVS store.
They know how frequently they’ll shop there and how much they’ll spend per visit.
So, company planners are looking for a certain population density. They’re also studying the commute patterns of those residents to make sure a prospective location is a convenient stop on the way to or from work.
“Shopping patterns and habits have changed over the years,” DeAngelis said. And if anything, those patterns and habits have come to rely more heavily on the automobile.
Whenever possible, CVS wants a drive-through at new stores and it wants those stores open 24 hours a day, or at least until 11 p.m. or midnight.
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