WOONSOCKET, R.I. — While the acquisition of Longs Drug Stores, Walnut Creek, Calif., by CVS Caremark here is likely to have little short-term impact on supermarket pharmacy operations, retailers and other observers are keeping an eye on how CVS uses the additional selling space in the Longs stores.
Last week, CVS reported that it had amassed the number of shares of Longs' common stock necessary to acquire the chain. CVS said the deal could close before the end of the month.
The average 16,000 square feet of selling space in Longs' stores is significantly larger than the average 11,000 square feet of CVS and Walgreens stores, and closer to the new grocery formats being opened by Tesco, Wal-Mart and others. There is some industry speculation about whether CVS will use this space to get more deeply into the food business.
“CVS is definitely going to be a very strong competitor, but we've done well competing against Longs,” said a pharmacy executive with a West Coast retailer. “As a complete supermarket, we have an alternative for those patients that are interested in a different store experience.”
Longs and CVS have different cultures, with Longs being more regional, so Longs' employees are in for an adjustment, the executive said. “It's very difficult getting pharmacists to accept change, so they are going to have to do a lot to merge the two cultures.”
In past acquisitions, such as Eckerd and Sav-On/Osco, CVS has focused on its core business, although it could use the Longs space to expand on that, for instance, with larger in-store clinics, said a knowledgeable source in the pharmacy industry.
In terms of adding more food, “CVS is big enough to do whatever they want, and try various formats to see what works for them. But I'm not aware of any indication that they are going to go in that direction.”
For supermarkets, “it's another example of the change that the supermarket industry has to recognize and deal with. With the merger of Longs into CVS Caremark, there are going to be some definite synergies that will make it a more competitive market in the West,” the source said.
“There could be an opportunity here for CVS to create a new kind of drug store — one that has never existed before, with a much larger food selection,” said Roy White, vice president, sales, the Food Institute, Elmwood Park, N.J. Longs has a significant food selection, as does CVS, which also has a private-label food offering, he noted.
In addition, “this opens up a huge opportunity for CVS to expand the style of its clinics within these larger stores,” White said.
“Certainly they are going to apply CVS' merchandising and marketing savvy and expertise to the West Coast in a very meaningful way, so market dynamics could change with this,” he said.
Longs is already strong in the pharmacy business, and CVS is unlikely to move quickly to expand in food, so the immediate impact on supermarkets will be minimal, said Neil Stern, partner, McMillan Doolittle, Chicago. “CVS has been focused on being a pharmacy and health and beauty provider in its stores. Whether they would look at this as an opportunity for a departure, I think that is down the road a bit,” he said.
In past acquisitions like Eckerd, which mostly had similar-sized stores, “CVS worked hard to get it as close to a CVS operative box as fast as possible. They haven't done a whole lot that is out of the box in terms of handling the uniqueness of acquisitions,” Stern said.
“So I don't know that this particular acquisition is much of anything to supermarkets, although it is perhaps seismic for drug stores, which is why Walgreens and CVS were tussling over it.” The real estate was CVS' main reason to buy Longs, Stern added.
The acquisition could affect some supermarkets if CVS is forced to close some stores, said Robert Gorland, vice president, Matthew P. Casey & Associates, Harrisburg, Pa., which specializes in supermarket and pharmacy feasibility studies. “Some drug stores that close in shopping centers because of nearby sister-store conflicts have actually opened an opportunity for supermarket operators to expand the store, adding or retrofitting an in-store pharmacy,” he said.
Adding Longs' 520 stores to CVS' 6,200 still falls short of the 6,900-store count of Walgreen Co., Deerfield, Ill., although the two are now closer to parity. Rite Aid, Camp Hill, Pa., has about 6,000 stores, and CVS also owns the large prescription benefits management company Caremark.
Both CVS and Walgreens have, in recent years, been broadening their health care services, and both companies competed for the right to purchase Longs. Walgreens chairman and chief executive officer Jeffrey Rein resigned shortly after the company ceased its effort to buy Longs earlier this month.
Longs was seen as a prize primarily because of its store locations in the expensive real estate markets of California and Hawaii, but also because it was regarded as a good operator, industry sources said.