CVS goes small in latest retrenchment move

• The approach isn't without precedent. Before declaring bankruptcy, Rite Aid tried opening a handful of 3,000-square-foot stores, calling it the "apothecary model," saying it was trying to address pharmacy deserts.

The big picture: National retail pharmacies are struggling to find a winning business model in an increasingly challenging environment.

• They've laid off thousands of employees and closed hundreds of locations, struggling with oversized store footprints in a shifting landscape that's weakened "front of store" sales — once a key driver of profits.
• CVS Health is shedding 270 stores around the country this year.
• "There is a lot of concern about how CVS is going to navigate its way out of its own challenges," Peter Bonis, chief medical officer at Wolters Kluwer Health, told Axios.

State of play: CVS plans to begin opening 5,000-square-foot stores, which will be about one-half to one-third the size of the current average location. Each will feature a full-service pharmacy with limited over-the-counter products available for purchase, the company said.

• And each "will be designed to meet the community's specific pharmacy needs," officials told Axios in a statement.
• CVS officials also plan to open 30 additional locations this year, including inside Target stores.

Between the lines: About 80% of CVS Health's store revenue comes from its drug business, the Wall Street Journal reported.

• Decades ago, a much bigger piece of their revenue was retail, said Douglas Hoey, CEO of the National Community Pharmacists Association, which represents independent pharmacies.
• "I think the smaller footprint is a recognition that that model is going [away] for them as consumers have migrated for those non-prescription purchases either online or in some of the big box stores," he said.

With that in mind, this makes sense as a way to optimize for the higher-margin business while benefiting from less expensive leases and smaller staff needed for a smaller store, Bonis said.

• "It's about maximizing return on retail square footage," he said.
• Walmart, Target, Best Buy, Ikea and others have all experimented with smaller format stores, largely in suburban areas or dense urban areas, with varying degrees of success.

Reality check: CVS Health continues to explore other business models, including providing primary care to Medicare recipients through its Oak Street partnership, while maintaining significant real estate dedicated to MinuteClinics and HealthHubs.

• "They try out different models ... you would expect an organization as large as CVS to do things like this," said Evercore ISI analyst Elizabeth Anderson.
• It may follow other retailers in a hybrid model of stores, Anderson suggested. "But if this is a successful experiment, it probably will be rolled out over the course of at least the next several years."

Yes, but: CVS' latest plan for new locations raises concerns that CVS, which owns the pharmacy benefit manager CVS Caremark, will further use its model to steer patients toward buying high-value drugs, including specialty medications, to their stores over independent pharmacies, Hoey said.

• It also raises questions about whether CVS may wind up investing in higher-density neighborhoods rather than underserved markets, further expanding pharmacy deserts.
• CVS has not yet said where the smaller-format stores will open but said it intends to address "gaps in care."
• "The new pharmacies will be introduced in select neighborhoods to help bridge gaps in care and make it easier for patients to access medications, immunizations, and other pharmacist-provided health care services," CVS said in a statement to Axios.