CVS Health Corp (NYSE:CVS) is embarking on its largest expansion in years. The drugstore operator has opened some of the first pharmacies it is acquiring from Target Corporation (NYSE:TGT). Last year, the two organizations declared that Target would sell 1,672 pharmacies for $1.9 billion as part of a deal, which concluded in December. CVS’s “store-in-a-store” pharmacies, starting with a few locations in North Carolina yesterday, will be rebranded as CVS pharmacy and MinuteClinic locations.
The conversions will happen over a six-to-eight month timeframe, increasing CVS’s pharmacy business by 20% with over 9,000 locations taking it past Walgreens Boots Alliance Inc (NASDAQ:WBA). Walgreens is attempting to purchase the No.3 American drugstore chain, Rite Aid Corporation (NYSE:RAD) for $9 billion but may have to shut down thousands of stores to comply with regulations. The CVS deal wtih Target will give CVS its first pharmacies in important markets such as Portland, Denver and Seattle.
Target CEO Brian Cornell said that more peple will have access to CVS’s pharmacy care and clinical programs while shopping at Target. He added that by giving the pharmacy business to CVS, Target can concentrate on its key goals such as enhancing its offering of health oriented items letting CVS provide services which it is more qualified to offer.
The move will help CVS ramp up its pharmacy business which comprises 70% of its sales. By allying with Target, CVS may be deprived of incremental sales of general merchandise items such as toothpaste that people buy when they come to obtain their prescription. However there appears to be a larger benefit: giving business to Caremark that is presently a larger source of revenue than the drugstores for CVS.
When CVS declared its $1.9 billion takeover of Target’s pharmacy venture in June, several were concerned it would trigger a series of similar alliances as cost pressures adversely affect profits at grocery-store pharmacies. In October, Rite Aid and Walgreens – the second and third biggest pharmacy chains in America after CVS declared a$9.4 billion merger.