CVS PRESCRIBES STRESS ON FRONT-END GROWTH

CHAPIN CLARK

NEW YORK -- Thomas Ryan, chief executive officer of CVS Corp., says the prescription drug business is the best he has seen in 20 years.

But if Ryan's recent address to a group of financial analysts is any indication, the pharmacy's front end is where the real action is.

Speaking at the annual Donaldson, Lufkin & Jenrette Food & Drug Retailing Conference here last month, Ryan outlined a growth plan for CVS that strongly emphasizes profitable nonpharmacy categories like vitamins, photoprocessing and greeting cards.

"Customers are using the pharmacy and the front end differently," said Ryan, who has also been named chairman of the board of CVS, effective April 14. "People are coming in to buy food items, to buy general-merchandise items."

That's good news for CVS and the entire chain drug industry, as the increasing number of prescriptions covered by cost-conscious insurers generates ever decreasing margins for retailers. More than 80% of CVS' prescription sales come through third parties.

CVS, based in Woonsocket, R.I., operated 4,122 stores as of Dec. 26, 1998, all in the East and Midwest. The company reported net sales of $4.19 billion for the fourth quarter of 1998, a 15.9% increase from the prior year. CVS plans to open 440 new and relocated stores in 1999.

While CVS' average front-end ring is less than $10, Ryan said, 45% of all customers who come to CVS to fill a prescription end up buying something from the front end. According to its last annual report, CVS filled 225 million prescriptions in 1997.

The high-margin photoprocessing category will be of primary focus in 1999, Ryan said. CVS plans to have 2,000 in-store photo labs by the end of 1999, up from the current total of 800, he said.

Private label is another area CVS is targeting for growth this year. The company is aiming for a store-brand penetration level of 14%, up from the current rate of 11.5%. To that end, Ryan said, CVS is adding between 200 and 250 new private-label stockkeeping units "selectively and appropriately" in hot categories like home testing kits and vitamins, as well as in convenience foods.

The CVS brand led a 30% increase in sales of herbal supplements last year, Ryan said. The retailer will expand its vitamin and supplement departments by 28 feet in some 3,000 stores this year.

At the same time, even as beauty sales are up 12% in comparable stores, CVS is looking to rationalize SKUs in cosmetics and related categories and to outsource its fragrance business, Ryan said.

CVS also has high hopes for Estee Lauder's extremely popular Jane brand of youth-oriented cosmetics, which CVS recently began carrying. "We think Jane is going to be a big winner for us," Ryan said.

CVS has been playing with the front-end mix in several former Revco stores in an experiment that has achieved tremendous results and will serve as a blueprint for a wider rollout this year and next, Ryan said. (CVS acquired the Revco chain in May 1997 for $2.8 billion.)

Last year CVS transformed 600 linear feet of front-end space in a number of converted Revco stores, cutting back in skin care, stationery and other categories and stocking more general merchandise like small travel appliances and gift sets. Comparable-store sales subsequently rose 20%, Ryan said.

CVS is also eliminating promotional front-end discounts in former Revco stores, which had been applied indiscriminately and lost money for the chain, Ryan said.

Ultimately, however, prescriptions are and will remain CVS' core business, and here things are looking up. Ryan was particularly optimistic that third-party margins have stabilized, that there may soon be a Medicare prescription drug benefit and that the new-product pipeline is healthy. (Ryan said CVS expects $150 million in sales this year of Monsanto's new painkiller, Celebrex.)

"We've been fairly successful in operating a profitable company in a low-margin environment."