In the immediate aftermath of Walgreens’ announced purchase of drugstore.com, the burning questions of the moment in mass retailing are these: Is a drug store a retail outlet or a health care provider? Or can it be both?


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Inside This Issue - Opinion

Walgreens, CVS are taking divergent paths

April 11th, 2011
by David Pinto

In the immediate aftermath of Walgreens’ announced purchase of drugstore.com, the burning questions of the moment in mass retailing are these: Is a drug store a retail outlet or a health care provider? Or can it be both?

Clearly, Walgreens is buying drugstore.com for one reason: to gain greater access to its potential customers, particularly those who shop online. The expectation is to convert at least some of those consumers into Walgreens drug store shoppers. Along the way the drug chain’s management team hopes to learn more about online shopping from a company that has clearly mastered the art, and so sharpen its own online presentation, already one of the more impressive in retailing, thanks in large part to the presence and ability of Sona Chawla, the company’s president of e-commerce.

Walgreens, it should be noted, even now boasts one of the strongest online businesses in mass retailing, one that attracts some 8 million unique visitors a month. Uniting with drugstore.com will surely move the Deerfield, Ill.-based drug chain into the very forefront of online shopping.

Contrast this approach to business with that of CVS, Walgreens’ rival for chain drug supremacy. Four years ago CVS spent $26 billion to join forces with Caremark, at the time the nation’s No. 3 pharmacy benefits manager (PBM). The intent was equally clear. As Tom Ryan, the architect of the merger, put it recently: “We were close to the end-user of our products,” he said. “The Caremark merger brought us close to the payer.”

As Ryan, who just stepped aside after 17 years as CVS’ chief executive, has repeatedly stressed: In merging with Caremark CVS was no longer merely a drug chain. Rather it had been transformed, overnight, into a health care provider, a company that manages patient lives and influences disease outcomes.

Here, then, is an instance where two closely competitive companies have taken different paths to build their businesses. CVS, on the one hand, is convinced that, going forward, an aging population facing the increasing cost of health care will reward a company that can monitor, influence and alter the health of its customers.

Walgreens, on the other hand, is equally certain that, at a time when online shopping is at record levels, a time when consumers increasingly use the Internet to find and evaluate products, compare prices and determine whether to shop online or at a brick-and-mortar retailer — and, in the latter instance, which brick-and-mortar retailer — for a particular product, its decision to purchase drugstore.com makes sound business sense.

In this instance, the strategy of both retailers appears to make perfect business sense.
Though CVS’ merger with Caremark has come into question of late, there is no doubt that, in theory, merging a health care retailer with a health care administrator makes sense. And though Ryan admits that the merger involved a steeper learning curve than originally anticipated, he is firmly convinced that the ultimate result of this amalgamation will be a positive one.

Similarly, it is difficult, at least at the outset, to fault the decision of Greg Wasson, Walgreens’ CEO, to buy drugstore.com. Indeed, those who know the online drug store company cannot help but be impressed with the level of sophistication its staff has brought to online shopping, the strength it has shown in several core drug store categories and, most particularly, the success it has enjoyed in attracting upscale beauty care companies to
its website while simultaneously building its mass beauty business.

Still to be determined, of course, is how Walgreens will approach its new acquisition, how it will handle the difficult task of integrating drugstore.com’s business with its own — for now, at least, drugstore.com will remain in Bellevue, Wash. — and how it proposes to utilize the online company’s very capable marketing and merchandising staff.

Whatever the challenges, integrating the two companies and identifying and utilizing the strengths of each will certainly prove more difficult in practice than on paper — as CVS has long since learned with Caremark.

For now, however, Wasson must be applauded for taking this bold step to separate Walgreens from its competitor, just as those who knew best congratulated Ryan on his perspicacity in joining CVS and Caremark. With each day and each new initiative, Wasson is showing himself to be an exceptionally creative leader, an innovative executive willing to take risks, even when the possibility of failure is involved.

For now, however, observers of chain drug retailing in America must be content to draw this conclusion: In acquiring drugstore.com — after recently divesting itself of its PBM — Walgreens has succeeded in formulating and developing a strategy that is dramatically at odds with that of its closest competitor.

Time will tell which of these strategies comes closer to the mark.

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