Why Shrinking Drugstores Are Good for CVS, Not So Good for Walgreens

CVSCVS Caremark (CVS) and Walgreen (WAG) are the leading pharmacy chains in the U.S., each with a strong network of over 7,000 retail stores. While both have been aggressively expanding their retail footprints, there has been a gradual decrease in the average size of the newly opened stores.

This is particularly noteworthy given that general merchandise, which by nature demands more retail space, makes up a significant 33% of our $39.55 Trefis price estimate for CVS Caremark's stock and 41% of our $43.73 Trefis price estimate for Walgreen's stock.

'More Stores' Better Than 'Bigger Stores'

CVS Caremark and Walgreen earn in excess of two-thirds of their revenues from prescription drugs sales. From the consumer's perspective, the accessibility of those prescriptions is more important than the store size. Hence, pharmacy chains prefer to have more stores in closer proximity to more customers, as opposed to fewer but larger stores.

High Retail Rental Rates

CVS Caremark and Walgreen pharmacies are mostly present in the densely populated regions and urban areas where access to consumers is greater. Densely populated areas command higher rental rates compared to suburban and rural areas, where large retail chains such as Walmart (WMT) and Costco (COST) have a strong presence. The high rental rates help explain why the size of pharmacies is shrinking. But pharmacies also have to sell general merchandise to make up for those high rents, as well as shrinking margins on pharmaceutical drugs.

You can drag the graphs above to see the impact of store size on CVS Caremark's and Walgreen's stock price estimate.

Since non-pharmacy sales, which are dependent on the store size, contribute more to Walgreen's stock than CVS Caremark's stock, Walgreen is more sensitive to changes in its store size equation than CVS Caremark.

While pharmacies will continue to stock general merchandise, going forward we expect them to reduce their dependence on non-drug sales. Hence, the size of their stores is likely to continue decreasing in the future.

View our detailed analysis for CVS Caremark and Walgreen here.

Trefis is an online investment research platform targeted towards individual and professional investors. Trefis also includes a community of users that can create and share their models and analysis on trefis.com.

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.


Increase your money and finance knowledge from home

Introduction to Value Investing

Are you the next Warren Buffett?

View Course »

Investing in Real Estate

Learn the basics of investing in real estate.

View Course »

Add a Comment

*0 / 3000 Character Maximum

13 Comments

Filter by:
hatstix

CVS has high-priced, poor quality merchandise that rivals 99cents stores. Matter of fact, the dollar stores have better quality in goods. You don't know you've been ripped by CVS until you take the stuff home, then have to return it for its failures. My Rx are filled at the local mom-and-pop drugstore since they're more attentive and accomodating.

July 13 2011 at 7:19 AM Report abuse rate up rate down Reply
digger65

Walgreens tends to be a more pleasant atmosphere than CVS so I hope they can march on somehow.

Grocery Stores that used to be 15-25K sq. ft. max now are easily 35-50K sq. ft. Yet their profit margin is 1-2% at best.

July 13 2011 at 1:31 AM Report abuse rate up rate down Reply
savemycountry911

They are very like Walmart.

July 12 2011 at 9:49 PM Report abuse rate up rate down Reply
LizAndrsn

I find this interesting, given that not more than 12 months ago Walgreen's was pumping up non-medical inventory to lure customers inside. This has given way to Exteme Couponing those products to death, at the cost of Customer Service and good public relations. If Walgreen's isn't careful they'll out think themselves out of the marketplace.

July 12 2011 at 3:32 PM Report abuse rate up rate down Reply
quintondall

This was always going to be the case as the like of Walmart takes out any profit margin from the front end. These are now simply traffic builders / loss leaders. Only a few areas in the front end are actually (directly) profitable. Express stores within these chains (those with minimal front end sales - basically restricted to medical items only) are by far the most profitable. Management somehow just cannot seem to let go of volume. They are too scared. They simply don't get the concept of how much relative volume it takes to replace a small amount of lost margin. So what you end up with is a downward spiral of chasing more and more volume at the expense of quality. It is a hole that is very difficult to get out of. The walgreens near me is showing those exact signs. All these super specials, but of course they cannot employ enough people to actually run the store. Half the time the poor pharmacist is on her own with three incoming lines, two drive throughs, a prescription pick up line and a counselling window to run. I kid you not. Now why would anybody go to a place like that.

July 12 2011 at 3:08 PM Report abuse rate up rate down Reply
David

I don't why anybody would go to a CVS, it's the highest priced drugstore of all the chains!

July 12 2011 at 2:13 PM Report abuse rate up rate down Reply
Anita

cvs is a junk store. They took over a good drug store chain and ruined everything. Minimal service, overpriced and discontinued products. And there is no choice for me. There are 2 cvs stores in one small town. They really need some competition.

July 12 2011 at 12:31 PM Report abuse rate up rate down Reply
LNOFT97

Sometimes you can get a discount card for one of these places. There's a Rite Aid up the street and everything is so hideously overpriced without a card. I don't know how they stay in business, with Wegmans and Walmart and Target close by. There are never any cars in the parking lot and the same familiar faces that have been working there for a hundred years still man the cash registers in their slow-motion way. There used to be a Dollar Store across the street which was so handy, in bad weather especially, to run in and get ibuprofen, t.p., a greeting card, a bag of noodles, a can of spaghetti sauce, or box of saran wrap. Now they're gone and I can either go to Rite Aid and pay through the nose or make the trek to the grocery store 10 miles away (better selection and cheaper).

July 12 2011 at 11:45 AM Report abuse rate up rate down Reply
robert

dont like cvs they are expensive and the basically run the city of woonsocket and the state of rhode island. too much power

July 12 2011 at 11:30 AM Report abuse rate up rate down Reply
Gina

I love Walgreen! That's the ONLY drug store we shop at! Here in the Detroit area we finally got a Wallgreen a few years ago and we haven't gone anywhere else since!

July 12 2011 at 11:25 AM Report abuse rate up rate down Reply