As CVS converts Target pharmacies, data is key to health
If CVS Health is as dedicated to the fitness of its brand as the wellness of its customers, it will ensure the target of its latest expansion plan is on insights as much as real estate.
CVS's $1.9 billion deal to acquire Target's 1,700 pharmacy locations is now entering the thick of its conversion stage, and with it a compelling case study of maintaining customer relevance is playing out.
Key to the plan's long-term success is how both retailers use their customer data throughout the process. CVS Health, which is transitioning Target pharmacies and clinics to its own store-within-store brand, has made it evident that its reward program, ExtraCare, will play a signature role. This shift, if aided by Target's own purchase insights, will emphasize the power of data as a profit accelerator.
In 2015, for example, the more than 70 million-member ExtraCare program generated roughly $4 billion in customer savings, Larry Merlo, CEO of CVS, told analysts in a fourth quarter earnings call. "We continue to see ExtraCare as a source of growth as we leverage customer data to create even more relevant and personalized communications."
Further, the 9,655-store retailer is earmarking more of its investment toward ExtraCare, rather than promotional circulars. "I think the big thing we've been focused on and continue to focus on is being smart about where we invest our margin dollars, so you can see us continue to downplay our circulars," Helena Foulkes, president of CVS/pharmacy, told analysts in the same call.
1,672 opportunities – to start
The addition of Target's pharmacies not only delivers incremental sales through the added locations, it expands CVS's growth avenues in the health field, a central focus of the merchant. This opportunity bodes well for Target, too – CVS processes prescriptions for more than 75 million plan members, according to its annual report. That could translate to a significant increase in the number of Target product sales.
Further, the Target deal includes 79 clinics that will be rebranded as CVS MinuteClinics, which are staffed by nurses and medical assistants who diagnose and treat minor health conditions. CVS operates 1,135 MinuteClinics, including the Target locations, and plans to open as many as 20 new clinics in Target stores within the next three years.
Additionally, a CVS Pharmacy will be included in all new Target stores that offer pharmacy services.
The expansion, the company explains in its annual report, is viewed as an investment in the core business, designed to step up growth in part by increasing patient access, which translates to additional customers.
The path to medicinals
These customers will journey through Target stores and buy many of the products, medicinal and otherwise, they might need. The potential of such incremental sales gains is crucial for both retailers as there is no profit-sharing arrangement between them, according to Target's most recent quarterly report. CVS will pay rent, however, starting at $20 million to $25 million in the first year.
Indeed, the heads of both companies have said they are confident the retailers can maintain distinct identities. Target will get to focus on its core business of food, apparel and home goods, while CVS capitalizes on its pharmaceutical expertise. (The two retailers did enter into an agreement that permits them to jointly develop a small-format store.)
The extent to which they will share data is unclear, but they should. I had written before that the success of the partnerships would hinge, largely, on how data factors in to the deal. For example, among the opportunities of data sharing is the ability to compare notes on the performance of products both chains carry in-store, and use those insights to better engage the customers most important to each brand's strategy.
Both retailers are encouraging Target pharmacy customers to use the CVS ExtraCare program as the Target Pharmacy loyalty program is discontinued.
Converting Target guests
Target's own purchase insights, if combined with CVS', would provide both retailers a more complete understanding of their customer preferences, needs and patterns, and therefore enable both to better serve and reap the benefits via purchases.
Target's reward program is implemented through its REDCard, which accounted for 12 percent of total sales in the first three quarters of 2015 (the most recent figure available). That is up from 11.2 percent in the same period in 2014.
CVS has already successfully converted a handful of pilot stores and expects the process to ramp up throughout this quarter and next, with all store conversions completed by end of summer. As each store is rebranded as a CVS Pharmacy, the retailer will launch its other core offerings, including the ExtraCare Pharmacy Rewards and its digital tools, Merlo told analysts in the Feb. 9 conference call.
"We'll begin adding marketing elements as geographies convert, all with the goal of converting Target guests who currently don’t use the pharmacy," he said.
The strength of those marketing elements will increase in proportion to the extent of how the two merchants share their customer insights. In marketing, we identify four key behavioral patterns that would enable a clean capture of such knowledge:
Customer place: Literally the geographic location of the customer, showing where she lives and works, including commutes and other activities.
Customer life stage: This area signifies life events or points in time that indicate present or future behavior, such as a new home purchase or small children.
Personal interests: The shopper's activities, hobbies, recreational pursuits and even values are represented here. If she buys new workout clothes at Target, for example, she might also want over-the-counter vitamin supplements or energy boosters.
Customer culture: Often this category refers to any activities that group people together, such as ethnicities, causes, age or even sports teams.
If Target and CVS can share insights at this level, their business deal will likely lead not only to a robust relationship, but a long-lasting one.
This article originally appeared on Forbes.com, where Bryan serves as a retail contributor. You can view the original story here.
Bryan Pearson Bryan Pearson is President and CEO of LoyaltyOne Inc. and the author of the best-selling book The Loyalty Leap: Turning Customer Information into Customer Intimacy. www