CVS is one of the largest retailers in the U.S. by store count, with more than 9,000 locations across the country. And while a consistent experience is important for the chain, increasingly, the pharmacy retailer is working to create a store environment that caters to each local community individually.
“We’ll always have mindshare in pharmacy, we’ll always have mindshare in healthcare and beauty products, but the mindshare that really grows our retail business is the mindshare that you can come to CVS for most anything,” said Musab Balbale, SVP and Chief Merchandising Officer of CVS Health during a session at Shoptalk this week. “If you want tennis balls, you can wait for them to be delivered or you can go to a big-box sporting goods store, but if you’re on the way to the courts shouldn’t you be able to go somewhere really convenient along the way? It’s almost like the old general store — that is the core of what we offer.”
Key to delivering on this promise is an intricate localization strategy that includes everything from store formats to merchandising to pricing. The strategy is powered by having an understanding of local communities, combined with machine learning insights into purchasing patterns and demand.
Localizing Assortment and Inventory Placement
The retailer’s recent announcement that it was testing out a new small-format, pharmacy-focused concept (more on that in a bit) might lead one to believe that the company was looking to lean into that side of its business. That’s true, partially, but only in areas where that is the need.
The fact is, three-quarters of CVS’s foot traffic last year came from its “front store,” — the non-pharmacy, retail side of the business, shared Balbale. So while CVS might be testing formats that emphasize pharmacy, don’t expect to see a chainwide deployment.
“For those of you that have a CVS in the neighborhood, there’s probably another CVS a mile-and-a-half down the street; on the [Las Vegas] Strip there are three CVS’s,” said Balbale. “We are a mass retailer with 9,000 locations that are serving small communities. The question becomes, how do we use technology to help us enable real localization?”
Taking into account CVS’ store footprint, SKU roster, regular pricing and promotional pricing, the company can create up to 900 million different combinations of assortment and price across its stores. As Balbale noted, that’s “an insane number.”
Which is why localization at the scale that CVS aspires to requires technology in addition to the savvy of local merchants. Traditionally, assortment localization was done by creating regional clusters of stores, but new technology advances are allowing the retailer to get much more granular in how it stocks and merchandises each store.
Data insights are helping CVS discover, for example, that “if you’ve got a beauty dupe that’s really flying off the shelves, is it flying off the shelf because it’s at a low price point or is it flying off the shelf because it’s a dupe and people want a dupe?” said Balbale. “That information can be used to inform our seasonal assortments; the consumer psychology starts to really come into play.”
The competitive landscape surrounding each store also is a critical facet of how the store will be merchandised. Stores near a hospital will feature different inventory, and different placements, in the front store than locations that have a neighboring grocery store or those near an apartment complex, for example.
When asked if having some of these merchandising decisions dictated by algorithms and analytics was displacing the traditional role of merchants, Balbale replied in the contrary: “My merchant team is constantly thinking about what comes next,” he said. “If you look at what our merchants have done with our seasonal selection over the last three years, it’s really exciting. And [it’s the same] across beauty, across health and wellness. Our merchants want to be out there following the trends, and this gives [them] a lot more time to do that.”
Localizing Store Format
In some cases, localization will go beyond differentiation in product selection and placement, as with the new pharmacy-focused format CVS is currently testing in a dozen markets.
“There are places where the pharmacy is in a [pharmacy] desert, and we need pharmacies in our country serving those patients from the clinical perspective, but with around 9,000 stores, our stores can’t be the same across the country,” said Balbale. “What we’re trying to do is not think about one monolithic format, but what is the right format with the right assortment for that location?”
For example, CVS also is looking to serve the country’s “grocery deserts” as well.
Localizing Price Point
The same machine-learning approach that the company is applying to its assortment strategy also is being applied to pricing, said Balbale, although it’s currently being done in a more “macro-cluster” way — that is, looking at regional segments and determining pricing for groups of stores rather than for each individual location.
This approach to pricing has led to surprising insights into what brings customers in, and more importantly, what keeps them coming back. By understanding what categories bring customers in and pricing competitively in those categories, Balbale said the company has been able to observe a subsequent lift in customer frequency over time.
This has created a shift in mindset toward a longer-term view of the customer, focusing on margin not at the item level, but at the basket level. “[We’re seeing] equally profitable baskets with a better pricing proposition to the customer, and over time the LTV [lifetime value] of that customer goes up because the frequency starts to increase,” said Balbale. “You would have never thought about that in the past.”