CVS’s 1999 acquisition and subsequent launch of its online pharmacy service marked a significant moment for web-based distribution of the heavily regulated pharmaceutical industry.
Here are a few notes and/or quotes I was drawn to while studying Harvard Business School’s famous case study of CVS’s first steps into web-based pharmaceutical distribution (as a major US retailer & not a “pure-play” company)
“On June 3, 1999, under pressure from Wall Street to respond to Web-based drugstores like Drugstore.com and Planet Rx, the CVS drugstore chain acquired a Web startup, Soma.com, for 30 million in stock. One consequence for Helena Foulkes was a wetter-than-usual summer. As vice president of marketing at CVS, she traveled often from the CVS headquarters in Woonsocket, Rhode Island to Seattle to work with Soma’s founder, Tom Pigott and others to relaunch Soma as CVS.com before the end of August.” (Harvard Business School, 1)
“She [Helena Foulkes] reflected on the uncertainties of the online drugstore world. It was not at all clear who would emerge with the upper hand in the pharmaceutical industry’s newest distribution channel. Pharmaceutical Benefit Managers (PBM’s) had threatened to exercise their muscle and deny reimbursement to online pharmacies.” (Harvard Business School, 1)
Foulkes’ fascination with CVS’s web development strategy was motivated by awareness of the relatively huge size of drugstore product sales compared to books and CD’s (which represented Web commerce’s most significant market in terms of sales statistics up to that point)
Strategic vs. Tactical issues:
(strategy) Would brand awareness be able to overcome reimbursement muscle?
(tactics) How much revenue would this new distribution channel (i.e. the Internet channel of distribution for drugstores and pharmaceuticals) generate in the short-term?
The Drugstore Industry
The drugstore industry is relatively insulated from industry changes yielded by way of sociological and technological changes. This is implicated in the fact that the very existence of the industry is primarily made possible by the governmental and regulatory pressures which govern the distribution of its essential products (i.e. prescription drugs). (Harvard Business Review, 1)
The industry’s insulation necessitates a relative stagnation in terms of progress in acceptable business practices correlated in other, non-regulated industries (e.g. self-service). (Harvard Business Review, 1)
Timeline of business practices development and corresponding sources of pressure
1950’s – introduction of self-service (response to supermarkets’ inclusion of the same practice)
1960’s – Lost drugstore soda fountain business to fast food restaurants
1980’s through the 1990’s – Independently-owned drugstores yield to chains
Largest chains pursue “regional dominance” – this implicated in the distinctly regional boundaries manifest in the top drugstore chains (CVS, Walgreen, Rite Aid, and Eckerd)
1997 – Employment of a nationally-motivated strategy marked by CVS’s purchase of Revco, which was located within Walgreen’s regionally-dominated boundaries
Web presence – criterions for decision
“Building a website isn’t that hard, we learned, but integrating it with a $17 million chain with over 4,000 locations and legacy systems and 280 million scripts per year was a huge challenge.”
Acquisition of Soma.com:
“First was speed. It would have taken us 3 to 4 months to build what we bought for the same cost. Second, with Soma.com, we were buying some very good health care talent, and a fulfillment center in Cincinnati that was high tech in terms of its ability to fill scripts. They had invested more than you’d think a start-up would, because they’d hired people with mail order prescription backgrounds. Third, CVS shared the health-care-focused beliefs of Soma.com. Finally, we wanted 100% ownership so that we would have no bias for or against doing business on the Web.”
Branding, Trust and Privacy
“Many marketers have noted that a brand is a promise to customers. Delivering on this promise builds trust, lowers risk, and helps customers by reducing the stress of making product switching decisions. Reducing stress is especially important online because of concern over security and privacy issues and because firms and customers are often separated by large distances.” (Strauss, El-Ansary, & Frost, 2006)
“Pricing on the web was trickier, particularly when cross-channel fulfillment was implemented.” (Harvard Business School, 2001)
For web-enabled, non-prescription drug products, CVS.com won the pricing war to the extent that products of these types saw lower prices while yielding better markup for CVS when compared to the markup of the same products sold in the stores.
Price determination was somewhat a function of customers’ selection of how the product will be made available to him, but there were complicating factors.
“One argument was that pricing should depend on how a customer took delivery of a product. If a customer ordered online and chose to pick up in the store, the argument went, the store’s prices should apply. If customers chose to have products mailed to them, should CVS meet competitors’ online prices or charge the prices prevailing at stores near to the customer’s home?”
Negotiations with Managed Care