Drugstores Getting Smaller So Grandpa Can Get His Meds Faster
CVS Caremark (NYSE:CVS) and Walgreen (NYSE:WAG) are the leading pharmacy chains in the U.S., each with a strong network of over 7,000 retail stores. While both have been expanding their retail footprint aggressively, there has been a gradual decrease in the average size of the newly opened stores. This is particularly noteworthy given that general merchandise, which by nature demands more retail space, makes up a significant 33% of our $39.50 Trefis price estimate for CVS Caremark’s stock and 41% of our $40.90 Trefis price estimate for Walgreen’s stock.
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CVS Caremark and Walgreen earn a majority (in excess of two-thirds) of their revenues from prescription drugs sales. From the consumer’s perspective, the accessibility to drugs is more important than the store size. Hence pharmacy chains prefer to have more stores at closer proximity to its customers as opposed to having fewer but larger stores.
High Retail Rental Rates
CVS Caremark and Walgreen pharmacies are mostly present in the densely populated regions and urban areas due to easier access to consumers. Densely populated areas command higher rental rates compared to suburban areas that have presence of large retail chains such as Wal-Mart (NYSE:WAL) and Costco (NYSE:COST). The high rental rates explain why the store size of pharmacies is shrinking. Pharmacies also have to sell general merchandise in addition to drugs to make up for high rental rates as well as shrinking margins on pharmaceutical drugs.
You can drag the graphs above to see the impact of store size on CVS Caremark’s and Walgreen’s stock price estimate.
Since non-pharmacy sales, which are dependent on the store size, contribute more to Walgreen’s stock than CVS Caremark’s stock, Walgreen is more sensitive to store size than CVS Caremark.
While pharmacies continue to stock general merchandise, going forward, we expect the pharmacies to reduce their dependence on non-pharmacy sales. Hence, the size of stores is likely to continue decreasing in the future.
View our detailed analysis for CVS Caremark and Walgreen here.