Execution, leadership propel chain to top

Drug Store News,  Oct 10, 2005  

• E-mail
• Print
• Link

Cue the "Flight of the Bumble Bee" music. No doubt over the last 12 months or so, the pace for CVS executives has been a bit reminiscent of that old plate-spinning act from "The Ed Sullivan Show." Because the feat of retail acrobatics that has been the Eckerd-to-CVS integration process has rewritten the book on how to manage a large-scale retail acquisition. By August, CVS had completed the last of its grand reopening celebrations in the Southern-based Eckerd stores it purchased from J.C. Penney Co. a year ago.

Those grand reopening festivities, which included major advertising blitzes throughout the Florida and Texas markets that encompass the greatest piece of the Eckerd dynasty CVS acquired, capped a nine-point integration process that also included:

* converting all IT systems.

* adding labor to the stores.

* reducing prices on some 5,000 front-end items.

* reducing out-of-stocks.

* introducing its ExtraCare loyalty card program.

* closing underperforming stores.

* completely remodeling and remerchandising the stores.

"It was the fastest integration in retail history," CVS chairman, president and chief executive officer Tom Ryan told investors last month at the Goldman Sachs Global Retail Conference in New York. "I have been with this company for 30 years--as many of you know, our company has grown by acquisition--and I have never seen our people perform as well or fast as they did in [driving this integration]. Our people did an outstanding job.

And, while considering the challenges and undoubtedly numerous accomplishments that lie ahead for the company, it is difficult to imagine that this has been its finest hour, certainly it has been a particularly notable period in what has been a rich history. Because through it all, CVS executives stood up to a challenge much larger than just the Eckerd integration--they never took their collective eye off the ball as they say in common sports parlance. The company has continued to grow, remaining focused the entire time on building the core business that gave CVS the wherewithal to make the Eckerd deal in the first place.

"The concern anyone would have is how this affects your core business--have we lost sight of the 'mother ship,' through all of this because we have had to take some of our best people away [from the core business], for this project? Ryan posited. That did not happen--we continue to take share."

The results have been most impressive, indeed. Sales through the first half of 2005 have increased 33 percent to more than $18 billion and are expected to reach more than $37 billion by the end of the year. Same-store sales rose 6.9 percent in the first half--up 8.1 percent in pharmacy and 4.2 percent in the front of the store. And that does not include results in the Eckerd stores, which only began to show up in the company's same-store sales in August, when those stores had a full year in the CVS system.

The organization has continued to open new stores. Even as it managed the heaviest lifting of the Eckerd integration, the company still opened 129 new stores in 2004, 88 of them net new stores. Now, with Eckerd stores fully assimilated and operating with the look and feel of the typical CVS/pharmacy, CVS is looking to ramp up its store development efforts this year and beyond, planning about 125 net new stores in 2005, an increase in total retail square footage of 3.5 percent. And while it has stopped short of providing a number for new stores in 2006, it is planning for more or less the same increase in total selling space next year--which would suggest the number of net new stores will come in more or less the same in '06.

And it has remained committed to growing its presence in its key new markets--though certainly it made up a lot of ground in Florida and Texas via Eckerd. And unlike such previous acquisitions as Revco--when a big jump in store count was likely followed by a period of store consolidation that flattened store growth, even contracting the store base from one year to the next--there is a sense that another major acquisition could be in the works. CVS executives have expressed an interest in purchasing Albertsons' stand-alone drug stores, almost 700 in all.

And while the company reportedly has promised not to overpay, it also maintained it would remain flexible and would entertain a deal to buy the stores directly from Albertsons, as well as scenarios involving an acquisition partner or buying the stores later from a private equity group. Important, "not overpaying" is what CVS said in relation to the Eckerd deal. And much like the Eckerd deal, acquiring the Sav-on and Osco stores would quickly catapult CVS from a relative newcomer to a leader in three important markets:

* Southern California, where Albertsons operates 331 Sav-on stores

* Chicago, where it has about 100 Osco stores

* Phoenix, where there are about 75 Sav-on stores.

That would leave Minneapolis and Vegas as the only two of CVS strategic growth markets with store counts under 100.