Why Target sold out to CVS

Last week, the first CVS Health pharmacy-within-a-store was unveiled at a North Carolina Target, the first evidence of the drugstore retailer’s acquisition of Target’s pharmacy business, completed in December.

It seems obvious how CVS Health benefits from this partnership: It represents a significant expansion for the nation’s number one drugstore chain as 1,672 Target pharmacies and 79 clinics in Target stores nationwide morph into CVS Pharmacy and Minute Clinic concessions, boosting CVS’s number of pharmacies by some 20% and allowing it to enter new markets. It also helps solidify CVS Health’s substantial pivot to become a health care provider as well as a more traditional retailer of health and beauty products, and, as with most drugstore chains in the U.S., mini-grocery stores.

But why would Target give up this lucrative and expanding area of retail when other retailers with pharmacy businesses are expanding? The answer is likely found in its recent history and its future goals.

Since CEO Brian Cornell’s arrival in 2014, Target has worked diligently to come out from under a series of debilitating self-inflicted wounds, including a push into low-margin groceries at the expense of other merchandise, a major data breach over the 2013 holiday season, and a disastrous expansion into Canada.

The retailer has begun to improve stores, adding department-style signage, presentations, and mannequins to its apparel and home goods areas and overhauling shelves and customer service for its beauty and baby areas.

“We realized we were making [our shoppers] work too hard,” Cornell said in October at Women’s Wear Daily’s Apparel and Retail CEO Summit in New York. “We could deliver great print ads, amazing 30-second spots, but when you went to stores and started browsing or went to target.com, all you saw was a sea of racks or a string of search results. We owed our guests a better presentation.”

The changes, and the return to the retailer’s previous stance as a general merchandiser with designer chops, was perhaps best exemplified by its highly successful Lilly Pulitzer collection last year. And, Cornell has noted, traffic is back to Target’s stores as a result.

“Target is just now getting its own mojo back after frittering it away over the last seven or so years, which is to say they were focused, importantly, on interesting, well differentiated goods in addition to having the everyday things that people shop for,” Columbia University business school professor and retail expert Mark Cohen told Retail Dive earlier this year.

According to Target spokesperson Erin Conroy, the partnership with CVS Health allows the retailer to continue to revamp stores and focus on its core business while also giving customers the pharmacy and health care services and products they say they want.

“Target’s relationship with CVS Health advances our transformation and benefits our guests,” according to a statement supplied by Conroy to Retail Dive. “We decided to seek a strategic relationship that enables Target to draw on the operational strengths and expertise of a proven healthcare leader to offer our guests access to best-in-class services during their Target run. At the same time, tapping an expert partner to operate pharmacies and clinics in Target stores frees up resources to focus on our strengths in product design, merchandising and marketing to grow Wellness as a signature category.”

While Target for years seemed to be joining the likes of CVS Health, Walgreens, and other drugstore retailers in beefing up their health care clinic services, it likely realized that in order to compete, it would have had to make a move to boost its competitive edge in the pharmacy business, as CVS and Walgreens have done, says Nick A. Egelanian, a retail expert at retail real estate services firm SiteWorks.

CVS Health , for example, last year announced the acquisition of prescription-drug fulfillment company Omnicare Inc., which fills many rare and expensive medications that are shipped directly to patients and provides drug services to nursing homes and other long-term care facilities, for $10.4 billion. Similarly, Walgreens Alliance Boots in 2013 announced a 10-year deal with drug distribution company AmerisourceBergen. Both deals gives those retailers enhanced negotiating power for more favorable drug prices.

“Walgreens and CVS, what they have in common is they also own very large drug distribution businesses,” Egelanian told Retail Dive. “So, the two biggest are in that business and consider it important to be in that business. If I’m Target, I‘m not in that [drug distribution], I’m probably better off to seek that CVS partnership, given the nature of that business. It had a lot to do with the inside game in that business, where they competing heavily in scrips.”

Target could also be paying for its disastrous move in and out of Canada, an expensive failure that may have limited its choices to expand in other areas, including pharmacy and health care services, Egelanian notes.

“Don’t underestimate the debacle of the expansion in Canada,” he says. “I was hearing almost from the first day that a third of the shelves were empty, it was really true. People were so excited about them coming there, and it was a very basics debacle. It was not about bad real estate —they couldn’t get the products on the shelves. And they were getting totally discredited in the market. It was a really bad thing and it never got fixed.”

A sale of the pharmacy business was a way to generate money, he says, and exit a line of business that may have been a weak spot for Target, considering the ambitions of the other drugstore retailers.

“Perhaps they wanted to monetize it, generate some cash, and get out of a business that would be limited as to how they can grow it,” Egelanian says. “Remember, they are much smaller than Wal-Mart.”

In the end, the sale of Target's pharmacy business to CVS may have been a missed opportunity. But, at a time when it's impertive that Target regain and even grow its reputation and its customer loyality on its strengths as a general merchandiser, and considering its recent history and future goals, it may nevertheless also have been the smart play.

Why Target sold out to CVS