Why Walgreen and CVS Are Selling More Groceries

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 |  Includes: CVS, WBA
by: Trefis

CVS Caremark (NYSE:CVS) and Walgreen (NYSE:WAG), the leading pharmacy chains in the U.S., have a strong network of more than 7,000 retail stores each spread across the country. While prescription drugs make up for a majority of the revenues, over-the-counter drugs and other merchandise such as groceries, cosmetics, convenience foods, etc. contribute significantly to sales and account for around 33% of CVS’s and 35% of Walgreen’s stock values. Here we explore the significance of non-pharmacy related products and which of the two leading pharmacy chains is more sensitive to the sale of non-pharmacy related products.

General Merchandise Contribution to Stock Values

CVS Caremark

General merchandise along with over-the-counter drugs contributes almost 19% to the total sales at CVS Caremark. We estimate that general merchandise and OTC drugs make up for almost 33% of our $39.50 Trefis price estimate of CVS Caremark’s stock.

A 1% increase in the sale of general merchandise has a 1.3% potential upside on CVS Caremark’s stock. You can drag the graph below to see the impact on CVS Caremark’s stock price estimate.

Charts created using Trefis' app

Walgreen

Since Walgreen is a more retail focused pharmacy chain, OTC drugs and general merchandise contribute almost 35% to its sales and make up for more than 41% of our $40 Trefis price estimate of Walgreen’s stock.

A 1% increase in the sale of general merchandise has a 4% potential upside on Walgreen’s stock. You can drag the graph below to see the impact on the stock price.

Why Groceries Doing at Drugstores?

Consumer’s perspective: It’s all about convenience.

CVS reports that almost three quarters of the U.S. population lives within a three-mile radius of a CVS store while Walgreen claims to have 75% population within a five-mile radius. It's then safe to assume that in the U.S., you’re never too far from a pharmacy!

Drugstores selling groceries and general merchandise is particularly suited for consumers looking for a quick trip. These shoppers aren’t looking for high volume, discount purchases that supermarkets like Wal-Mart (NYSE:WMT), Carrefour and Costco (NYSE:COST) will continue to dominate.

Drugstore’s perspective: It’s all about traffic.

While supermarkets and hypermarkets are more sparsely located owing to their space requirements and high rental rates in densely populated urban areas, drugstores have leveraged their small size, convenient locations and proximity to the consumers and stocked up their grocery supplies to attract traffic.

Apart from attracting more traffic at drugstores, selling general merchandise generates more sales, which then absorb the rising rental rates and shrinking gross margins on pharmaceutical drugs in general.

Disclosure: No positions