CVS/TGT: What Does the Store-In-Store Strategy Mean for RAD?
If we assume CVS cannot repeat the TGT store-in-store deal with other major mass merchants, but can do such a deal with a single supermarket (who would likely impose limits on further deals with other supermarkets), its next best option is a store-in-store deal with KR. A CVS/KR deal would increase by 5.9% the share of the US population living in areas in which CVS cannot be excluded from pharmacy networks
If we assume WBA can complete deals with one major mass merchant and one major supermarket, its best options are WMT and KR. WMT would increase WBA’s ‘cannot-be-excluded’ percentage by 7.6%, and KR increases the percentage by 5.0%, for a total theoretical gain of 12.6%
If we assume WMT will not give up control of its pharmacies (we don’t think they should) and that KR is unavailable to WBA (perhaps having gone to CVS), WBA’s best store-in-store strategy would be SWY plus Kmart, for a combined 4.7% gain in the share of the population living in areas where WBA cannot be excluded from retail pharmacy networks
By way of comparison, a RAD acquisition would increase CVS’s ‘cannot-be-excluded’ percentage by 8.5%, and WBA’s by 9.7%. Acquiring RAD is a better option than any single store-in-store deal, and if WMT keeps control if its pharmacies, RAD is a better option than any feasible combination of store-in-store deals
In theory, the store-in-store strategy has the advantage (relative to a RAD acquisition) of eliminating outlets that likely would have been used as loss leaders to drive front store traffic by their supermarket and/or mass merchant operators. In truth, we doubt WBA and CVS can soak up enough of these outlets to have an effect
For our full research notes, please visit our published research site