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The Wrong Customer

CVS Caremark is struggling. The Caremark side, which is a pharmacy-benefit manager, is bleeding losses and major customers. The company picked the wrong customers.

CVS is one of the country’s premier retail drug store chains. The company has grown through acquisitions over the last several years. On the retail drugstore side, these acquisitions have been a great success. Not so, on the pharmacy benefit side. (See the Perspective, “Buying Share, Not Sand” on StrategyStreet.com.)

A couple of years ago, CVS beat out Express Scripts, a competing pharmacy-benefit manager, to win Caremark. The other competitors in pharmacy-benefit management are independent companies, focused strictly on the wholesaling of drugs to large companies and institutions.

CVS has trodden another path. As a retail druggist at heart, CVS developed innovations aimed at the retail, rather than the wholesale customer. For example, the company offers the Maintenance Choice plan that lets pharmacy-benefit management patients pick up 90 day prescriptions in its drug stores at the same low price they would pay through the mail. Of course, this helps CVS sell more products through its drug store chain. It does not, however, help the wholesale customer who makes the pharmacy-benefit management buying decision. (See “Video #34: Types of Product Innovations That Reduce Customer Costs” on StrategyStreet.com.) But there is even a downside for the retail customer, the employee of the wholesale customers. These retail customers must use a CVS drugstore to fill their prescriptions or see their drug co-pays rise to 50% rather than 25%. Hear loud protests off-stage.

Trouble started early in this acquisition. The wholesale customers have been unhappy for some time. In fact, last year CVS offered lower prices to more than half of its pharmacy-benefit management customers in order to keep them from defecting. A few other clients simply left,

discouraged by the fact that CVS seemed to be focused more on the retail, than on the wholesale, customers.

Of course, the Medco’s and Express Script’s are delighted to be picking up such easy share from the failures of CVS Caremark. (See “Audio Tip #35: How Does a Company “Fail” in a Market?” on StrategyStreet.com.)

Posted 11/23/09

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