CVS, Target Make a Deal

By Keith Loria, Contributing Editor

Courtesy: Mike Mozart, flickr user

CVS Health Corp. has agreed to acquire the Target Corp.’s pharmacy and clinic businesses for approximately $1.9 billion, creating a seismic shift in the drugstore industry.

In the deal, CVS Health will acquire Target’s more than 1,660 pharmacies across 47 states and operate them through a store-within-a-store format, branded as CVS/pharmacy. Additionally, a CVS/pharmacy will be included in all new Target stores that offer pharmacy services and Target’s nearly 80 clinic locations will be rebranded as MinuteClinic.

It allows CVS Health to increase its retail presence in new markets, such as Seattle, Denver, Portland and Salt Lake City.

“It shows you that major drugstores are trying to expand, and expand beyond the traditional bricks-and-mortar new store model,” Jeff Green, president of Jeff Green Partners, told Commercial Property Executive. “For the most part major drugstore chains have fully saturated their market; meaning that building a new store will cannibalize sales at your existing store, something retailers are trying to avoid.”

However, the deal is expected to have a major effect on retail, as well, as the two corporations will seek out joint development opportunities in select locations best-suited for new small format Target stores with a CVS/pharmacy inside.

Brian Cornell, Target’s chairman & CEO, announced that over a two-year period following the close of the deal, Target and CVS Health plan to fully assess and select from sites in CVS Health’s current consideration set to jointly build five to 10 TargetExpress stores with a CVS/pharmacy inside.

“The co-development of stores adds a new retail channel for CVS Health as well as expanding convenience for more patients,” Michael Lagazo, senior advisor, retail, with commercial real estate advisor Sperry Van Ness, told CPE. “CVS Health adds chain drugstore expertise and has a strong store development strategy in markets well suited for smaller formats. Target will now be able to compete directly with category killers with a larger pharmacy business such as Wal-Mart.”

Target is outsourcing the drugstore business because they have outgrown their expertise in a highly regulated industry with unique product flow issues not similar to apparel, daily needs, and soft goods. The move allows Target to continue offering wellness products and services while redirecting more operating capital and energy towards electronics, household goods, and groceries.

“Target will benefit from the knowledge and experience brought by the second largest drug store operator in the country,” Green added. “Further, CVS has the most experience in delivering healthcare at the store level through their ‘Minute-Clinics’ a business that Target would like to be in also. Both can increase market share in their respective businesses, and differentiate themselves from their competitors.”