Target-CVS deal could be future of retail

While Target provided a number of solid, business-specific reasons for the sale of its pharmacy operations to CVS Health, one thought that struck me is whether or not pharmacies, and the services which they offer, have become too complex for non-specialists to operate.

Pharmacy services have become more specialized
Over the last five years there has been an explosion in the type of services that companies such as CVS Health and Walgreens offer. Beyond services such as immunization, health testing and pharmacy consultations, they also offer healthcare clinics at their retail outlets, with direct access to nurse practitioners and in some cases, doctors.

However, beyond these services, they have been building their outpatient and after-care services in hospitals, providing specialty medications, treating a broad range of acute and chronic conditions and offering clinical and therapy management programs. These companies have become an integral element of the broader healthcare system.

Opportunity to expand offer and drive traffic
If directionally this is where the role of the pharmacy is headed, Target’s decision to partner with CVS Health, while bold, may be a smart one. As consumer expectations of what they expect from a pharmacy evolve, operators are likely to face important strategic decisions over the next few years, particularly as the services-based model becomes significantly more profitable than the one based on dispensing and providing advice.

For Target, the rationale was clear. Partnering with CVS enables it to offer significantly more healthcare services, which will hopefully drive traffic, while also providing the headroom to focus on its core business. With the in-store pharmacy being such an integral element of the supermarket offer, operators are likely to face a similar dilemma at some point in the future — invest to maintain pharmacy share, or divest to specialist companies that can offer a much broader range of services.

Specialists could operate other areas of the store
And why stop at the pharmacy? Similar logic could be applied to other services that supermarkets offer. How about foodservice? While many grocery retailers excel at this, and have built their models around the category, many are just observing from the edges. Why not bring in a specialist company to operate this part of the store?

E-commerce is another example where some companies are choosing to run the operation in-house from start to finish, while others are using the expertise of companies such as Instacart and Google. While this route enables companies to accelerate their positions in the channel, it also means less control of the delivery process and interaction with customers.

New models emerging as grocery retailing is rethought
Over the next few years I believe that we will continue to see more deals like the Target/CVS Health tie-up. Retailers will increasingly focus their resources on their core operations, building expertise in the areas that they want to be really famous for and using specialist companies to drive traffic in other areas of the store. Retailing is still being rethought and redesigned, meaning there is scope for new operating models to emerge.

Which other areas of the store do you think specialists could be brought in to operate?