Making Profits in Sickness and in Health- a Big Change for CVS

Americans are sick of getting sick.

Based on the full occupancy of Kripalu, a yoga and meditation retreat in the Berkshires that I visited recently, it doesn’t surprise me that people are spending more money on products and services to help keep them healthy.

Preventative and self-care products are growing at three times the growth rate of traditional over the counter sick-remedy items. Products like Emergen-C and Airborne, supplements that used to be considered niche products, now enjoy mass distribution and are considered standard preventative cold therapy.

Growth in sales of holistic and preventative health care products is pushing retailers to rethink their merchandising choices. CVS, whose chain of 9,600 pharmacies has made a living out of selling product to fix sick people, is hoping to catch them on the healthier end of the spectrum.

It recently unveiled a prototype of its health-focused store which highlights natural vitamins and supplements, organic beauty and skin products and healthier food items. It hopes to steal customers from Whole Foods, the grandaddy of healthy living whose stores have aisles dedicated to supplements, oils, vitamins and beauty care products free of chemicals and harsh ingredients.

George Coleman, vice president of healthcare, pricing, and business planning for CVS recently told Forbes magazine that CVS hopes to differentiate its stores with the new prototype. He goes on to describe how adding these unique products should bring in new customers:

“When looking at the market as a whole, classic, over-the-counter health products, characterized traditionally as acute symptom relief treatments are more than 90% penetrated in the mass channel,” Coleman said. Yet less than half of the wellness-focused health products CVS Pharmacy is adding to its stores are available at mass retail.

CVS will start with just 70 stores operating in this new format but hopes to add several hundred more in 2018. First off it wants to reinforce its credibility as a health guru. It got a great start in 2014 when it made the bold move to drop tobacco products which were contributing $2 billion to its top line.

It will now require manufacturers of vitamins and supplements sold by CVS to have their products tested by public health organization NSF International to confirm they are up to health and safety standards.

Parabens, phthalates, and formaldehyde will be removed from all CVS brand and private label beauty and skin merchandise. A “trend wall” showcasing products like Wunder2’s highly coveted Wunderbrow eyebrow gel, will roll out to 2,100 stores to lure in customers who were previously buying these products online.

With almost 10,000 stores, any tweaks CVS makes in its merchandising mix can reverberate in big changes for its suppliers. Manufacturers of traditional acute care OTC products, who are feeling the heat from shrinking shelf space at grocery and price concessions from Wal-mart, are likely to feel the pinch.

For Profit Catalyst Alert I’ll be looking for ways to play stocks whose products will get a bump from broadened distribution and have been adding bearish option positions on companies distributing acute care OTC products that are losing shelf space to make way for healthier serums.

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