5 reasons why Target sold pharmacy biz to CVS
Target acknowledged the health care business is too complex, revealed that its pharmacy business was not profitable.
At first glance, Target's (TGT) decision to offload its pharmacy and clinic business to CVS Health (CVS) may seem strange.
Why invite a retail competitor inside your stores?
But investors applauded the $1.9 billion deal.
Here are five reasons why the deal might make sense:
1. Complexity. The health care business is exceedingly complex, requiring a knowledgeable workforce to navigate a regulatory thicket that's evolving rapidly in the wake of the Affordable Care Act.
Target's primary business is selling consumer goods, not prescriptions. CEO Brian Cornell acknowledged Target simply lacks the expertise to operate its pharmacy business efficiently.
2. Profitability. Target's pharmacy business was losing money. Chief Financial Officer John Mulligan confirmed the pharmacy business posted "modestly negative" results in the company's last fiscal year, despite $4 billion in sales.
3. Lack of scale. Target is big, but its real estate footprint is not as wide as CVS'. Target had 1,793 U.S. stores as of 2013, while CVS had more than 7,800. In the pharmacy business, customers need quick access to medications, and more locations makes CVS a more enticing place to fill a prescription.
Also, many CVS locations are open 24 hours a day, giving the drugstore chain an edge in competition with Target.
4. Focus. Target has other priorities that have taken on more urgency. For example, Target is chasing after customers in the highly competitive grocery business.
Cornell said the company must place its emphasis on "elevating our focus on reinventing food." And it must remain relentlessly focused on customer satisfaction to fend off Amazon, Walmart and other players.
5. Foot traffic. Executives believe Target will reap higher foot traffic from CVS customers who visit Target stores to fill prescriptions.
"From a guest perspective, they're going to view this as a very positive change, and we expect it to improve traffic and script counts," Cornell said.
Follow USA TODAY reporter Nathan Bomey @NathanBomey.