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8/3/2019 CVS Web Strategy - Write Up
http://slidepdf.com/reader/full/cvs-web-strategy-write-up 1/3
CVS: The Web-Strategy – Case Analysis
Executive Summary
In June 1999, CVS the second largest drugstore chain in the US, in terms of sales ($ 15.3 billion), has
acquired healthcare focused web start-up Soma.com for $30 million in stock. Helena Foulkes, VP of
Marketing at CVS was working with Soma’s founder Pigott, now President and CEO of CVS.com to make
CVS’s online drugstore a success. They have a few questions ahead of them like what merchandiseproducts to offer through online store and what Pricing Model would make this channel an attractive to
customers yet profitable to CVS. Above all, they faced a threat from Merck-Medco Managed Care the
second largest PBM, in terms of coverage (51 million lives). Merck-Medco was ready to only pay for 30-
day prescriptions being picked up from store and refused to pay for all prescriptions delivered by mail.
For this purpose, they wanted CVS.com to be hosted within their online dispensary.
Players in Prescription Drug Business
Patients are the consumers in this business. They can be divided into two kinds of segments, one on the
basis of age group and other on the kind of treatment (acute or chronic). It is mentioned clearly that
usage of both chronic and acute prescription drugs was concentrated among older Americans.Employers bore the medical expenses for most population of the United States, to a large extent.
Managed Care Organizations (MCOs) were contracted by Employers to manage the health expenses.
Pharmacy Benefit Managers (PBMs) were involved by MCOs to help manage aggregate health costs.
PBMs managed drug prescribing and dispensing by establishing Formularies, which were lists of
approved drugs for which they had negotiated favorably with manufacturers. By 2000, PBMs were likely
to handle 89% of all prescriptions in the United States. If a patient or a physician wanted to use a drug
not prescribed by PBMs, the cost would not be reimbursed. Owing to PBMs efforts to rationalize the
prescription drug supply chain, they were a potent force in the pharmaceutical industry. As a result
several manufacturers acquired PBMs for the sake of favorable rationalization. While only Merck-Medco
was successful amongst manufacturer-PBM mergers, large drug chain companies managed to own
PBMs. However, most PBMs were owned by MCOs or health insurance companies. While PBMs acted asinfluencers in the industry and hence wielded significant control, retail chains established their
significance by providing convenience to the consumer by means of nearer outlets and easy reach. Thus
it is a tug of war between the two most powerful players - PBMs and drug retail chains: a case of
regulatory control versus consumer convenience.
Internet was the newest channel in the prescription drug industry. With the advent of pure-play
drugstore web sites like drugstore.com, Soma.com and PlanetRx, the retail chain biggies were not going
to lag behind. With an eye on getting a hold on online drugstore market, each one of them had an
acquisition of a pure-play company or build of their own launching the coming months (Walgreens’
www.walgreens.com and Eckerd’s www.e-pharmacy.com). PBMs also entered the fray with Merck-
Medco and ExpressScripts accepting prescriptions online. While CVS bought Soma.com, RiteAid acquired
21% stake in drugstore.com diluting Amazon’s stake to 27%. Even though the sales from these ventures
were not even comparable to that of a single drug store in early days, Investor enthusiasm kept this
channel alive. This is quite understandable given the benefits the end consumer stands to gain. As is the
case with most technology enabled services convenience to consumer was an important factor as the
market was touted to become more driven by consumer demand. Thus the tug of war between PBMs
and drugstore chain biggies had a new stage in the form of Internet. The control of this new channel was
going to be a fight of reimbursement muscle versus consumer brand awareness.
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CVS: The Web-Strategy – Case Analysis
Potential Market for Online Drug Chain
Acute treatment drug market and chronic treatment drug market are equally valued at $50 billion. Since
there are issues with PBM reimbursed chronic drugs, let us assume that this is not a viable market in
the near term. Therefore the universal set to be considered as market opportunity for online drug chain
in the near term is reduced to that of acute drugs and chronic drugs paid for by consumer. It is safe toassume that working class population is more likely to use online drug store option. Assuming the
working class population of America to be roughly equal to its population in the 25-54 age group,
percentage of new prescriptions to be equal to percentage of all prescriptions and amount spent per
prescription to be same, 30% of $50 billion i.e. $15 billion market rests with an employed population.
Chronic drugs paid for by consumer and delivered by mail order from PBMs is valued at $2 billion. Other
chronic drugs, paid for by consumer are of $10 billion value. Therefore, size of opportunity is $27 billion
(15+2+10). Assuming 25% penetration among the target consumers, there is at least $6.75 billion at
stake through prescription drug sales alone via online drug chains.
CVS.com
Keeping with their strengths CVS.com focused on customer relationships and reached out to customersby means of hybrid order-and-delivery options .They ensured 24*7 pharmacist support through phone
and email. Also they developed Xtra! – A frequent shopper program to identify, reward and retain
valuable customers. Also information gathered this way could help in personalizing the CVS.com
experience to customers. They also laid good emphasis on dealing with privacy concerns of customers.
One point of argument was whether all the products sold in store should be made available online.
While Pigott was against including merchandise items for sale through web site, Foulkes was for it as she
thought this would provide a good opportunity to learn customer preferences. While they agreed that
greeting cards would not be on sale through the site, merchandising strategy was a continuing debate.
Store pricing for non-prescription products was to be done as per what they called zone pricing, wherein the price was decided based on the region’s demographics and competitive intensity. A transaction on
CVS.com was likely to fetch them more returns than a store transaction due to absence of store
overheads. A product marked up 35% in store was likely to yield the same returns as a product marked
up 25% online. But advertising to generate traffic was extremely high at low volumes prevailing. While
they set prices on CVS.com to be lesser than that of store to remain competitive in this channel they
debated continually on different pricing models including ones that depended on mode of delivery.
Other factors considered to influence price based on regional competitive intensity.
Merck-Medco Managed Care
Merck-Medco refused to pay for prescriptions that were to be delivered via mail by CVS.com. They
argued that their core competency was filling prescriptions at a low cost – a process into which they had
invested heavily and needed large volumes to justify investment. They wanted any customer requiring
the convenience of online dispensing to use their site and if CVS waned to facilitate this they would have
to redirect to or host inside Merck-Medco’s online dispensary.
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CVS: The Web-Strategy – Case Analysis
Decisions to be made
A month had passed since the launch of CVS.com. The results were modest, not even in comparison
with a conventional drugstore. The competition was faring no differently but they were investing heavily
in advertising. This would work for a pure-play startup, not for an established firm like CVS. They could
give up prescription filling via mail enabled by Internet to Merck-Medco they could likely drive thetraffic. But it remained to be seen if this would be profitable for CVS.
Options
The top 10 drugstore chains together account for 69% of the $100 billion industry. Of this 69%, CVS
accounts for 22%. The estimate for the near term valuation of the online drug industry is $6.75 billion
which excludes drug sales reimbursed by PBMs. Front store sales of CVS.com are roughly $6.3 billion.
Total front store sales market is $41 billion.
1. Expand merchandise on sale via CVS.com
By expanding front store sales, they have an additional $35 billion market to target.
2. Yield to Merck-Medco’s demand By yielding to Merck-Medco’s demand, they have a potential $6.75 billion market in reach in
near term and could go up to $27 billion in the long term.
Note: Since Merck-Medco stands to benefit from this alliance, for every prescription item which
Merck-Medco gets to fill, a transaction fee could be charged by CVS. Also there is a $12 billion
chronic treatment drug market, paid for by consumer which has been factored in while
projecting the valuation for the online drug market
3. Maintain Status-Quo
Breaking ties with Merck-Medco could mean loss of 51 million potential consumers which is a
huge blow.
Recommendation
After consideration of options at hand, the recommendation that CVS could adopt as its web strategy is
to yield to Merck-Medco’s demand and expand merchandise on sale via CVS.com. Thus they stand to
gain a good portion of online drugstore business which also includes per transaction charges applied
towards prescriptions filled by Merck-Medco and expand their front store sales by using Merck-Medco’s
influencer status. Maintaining status-quo is not an option as it is a stale-mate situation with Merck-
Medco refusing to reimburse and also a huge loss of consumer base.