Case Analysis of CVS “Beauty 360”
Mike Kleinschmidt
Metropolitan State University

Abstract

As a business reaches a plateau, they often look for new and innovating ways to create new growth opportunities. One of the ways this can be accomplished is by entering into a more profitable market.
Drug store giant CVS found themselves in this situation and took on the task of competing in the upscale beauty market.
The drugstore chain was going to challenge the recession. The launching of a new retail concept in the midst of the then gloomy economic environment was certainly risky. Amid other high end beauty marketers struggling during this economic downturn, CVS was poised to try and lure away some of their clientele. Named Beauty 360, the first stores were launched in 2008.
This study will analyze the factors and decisions CVS made in deciding to enter this market, and, if these choices proved practical.

Introduction

CVS Pharmacy is the second largest pharmacy chain in the United States with over 7,000 stores in 41 states and $86 billion in revenue (Prior, 2008). As the retail pharmacy division of CVS Caremark, it sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods through their CVS Pharmacy and Longs Drugs retail stores and online through CVS.com.
For more than 10 years, CVS tried to entice high end beauty makers to offer their products in their stores and was shirked. These upper tier cosmetic giants balked at the idea of offering their products in a drugstore setting. Wanting to gain entrance into the high end beauty market, CVS set out to create a new retail environment to compete with these suppliers. These new stores would be adjacent to its core pharmacies, yet offer a different shopping experience (Bloom, 2009).
CVS attempted to grow through diversification by creating a new retail environment in the hopes of capitalizing on the high-end beauty sector and give its bottom line a boost. This venture was spearheaded by Mike Bloom, senior vice-president of merchandising.
To drive home the drugstore chain’s seriousness about tackling prestige beauty, the concept was named Beauty 360, with no mention of CVS in sight. Beauty 360 was designed to be interactive, with opportunities for customers to learn and try products prior to purchasing. The stores were to also offer pampering services such as pedicures, facials, hand massages and make-up application. With stores in Washington and California they had hopes of opening 50 locations that year, and over 500 over the next several years (Bloom, 2009). Bloom lured vendors with an environment that looks nothing like a CVS drugstore.
Analysis
Strengths, Weaknesses, Opportunities and Threats
Mike Bloom (2009) touches on several ideas that would have been identified in an S.W.O.T. (Strengths, Weaknesses, Opportunities, and Threats) analysis.
One of CVS’s core strengths are in their real estate assets. With a multitude of already placed convenient locations, consumers already know where their stores are, this reduces the need to build new locations and establish a fresh clientele. He says that 60% of the female population lives within five miles of one of its stores. New stores are often free standing and seek to be on the right side of the road for commuters on the way home, so consumers can easily pick up prescription or over-the-counter items on their commute home. Bloom also mentions that this concept will offer customers another option when shopping for high-end products which will be conveniently located right next door to where they can get their prescriptions and other small household necessities. According to Temmerman, shoppers choose stores that are convenient from both a place and time perspective, and younger adult consumers are less likely to be loyal to a specific store. Retailers have very little time to make a connection with their customers and must make sure to stock the right assortment of preferred products (2011). CVS
Bloom mentions a few weaknesses. He states that CVS’s main weakness in regards to their “Beauty 360” initiative is the current brands they carry and the marketing plan they use to sell those products. The current marketing strategy wouldn’t be able to translate into the premium market (Bloom, 2009).It will be a challenge to persuade high-end vendors to feel comfortable selling their brands in a mid-level space. Bloom states that, “We needed to create a space that would allow each individual brand to maintain its own integrity and we knew that we couldn’t make this work within the current four walls of our current store” (Bloom, p. 2, 2009). Beauty 360 needs its own identity apart from what people know of CVS. Drew says high-end retail stores must meet high expectations for justification that consumers should spend extra money on items that are more costly or not vital to their daily satisfaction. The right merchandising can persuade consumers that purchasing luxury retail items will enhance their quality of life in some way (2009).
There is opportunity in the current recessionary market for beauty products. Bloom references several typical high dollar cut backs that women will tend to make during recessionary times and makes a point that cosmetics tend to at least retain their overall level of sales. Referring to the state of the U.S. shopper, Bloom said, “She’s thinking about her shopping patterns differently, and going to fewer stores (p. 3)”. But pharmacies remain on her short list, particularly if she can have a manicure or hand massage while she’s there. Due to their relatively low cost, according to Bloom, women are more likely to spend more money on beauty products as sort of a cost effective way to treat themselves (Bloom, 2009). Bloom also stated referring to waning department store traffic, store closures, emerging alternative channels and a sour economy, he said, “It was the perfect storm” (p.4, 2009).
The major threat in this endeavor is the state of the economy. Essentially all retail locations are hurting for business yet Bloom feels the premium beauty products will help bolster CVS’s image and overall business. CVS has faced mounting competition from Walgreens and local chains, as a retrenchment in consumer spending has impacted businesses across the U.S. in the wake of the recession. Another threat is that this type of concept, a massive drugstore chain attempting to enter the high end beauty business, has never been tried before.
Porters Five Forces Model
Porter’s Five Forces Model talks about potential competitive threats to product profitability (Schermerhorn, 2012). These five forces are; new competitors, substitute products, bargaining power of buyers, bargaining power of suppliers, and degree of rivalry between existing competitors. The chances of a new competitor entering the market of the premium priced products are unlikely. These items are expensive making endeavors and difficult for the average entrepreneur. This leads into the buying power of CVS. As a large, well established corporation with over $86 billion in sales and 7000 stores nationwide, CVS should be able to easily leverage their suppliers into giving them their required merchandise at a discount, especially with the amount of capital they’re putting into their own retail sales efforts. ” They use large purchasing power to negotiate lower prices” (Murphy, p.1, 2012).
Substitute products could be a concern. There may not be an actual substitute on the market for the premium items but there are plenty of cheap, generic versions that are widely sold at all of CVS’s competitors, as well as many middle of the road products. This all comes down to what is defined as a “substitute” in the eyes of the consumer. Many customers would easily forgo the premium prices and purchase the cheaper products. As far as competitors and substitutes, there are a large number of businesses that sell cheap to moderately priced cosmetics, several are in fierce competition with CVS, but few sell the premium product.

Five Steps in the Decision Process
Identify the problem. CVS was looking for ways to increase its revenues on their retail drugstore side. CVS tried to entice high end beauty makers to offer their products in their stores. These cosmetic giants balked at the idea of offering their products in a drugstore setting.
Generate solutions. CVS identified the profitability in the high end beauty business as a possible market to enter. The cosmetic, beauty supply, and perfume store (beauty store) industry includes about 13,000 stores with combined annual revenue of around $10 billion. Major companies include Sally Beauty Supply, Ulta, Sephora, and divisions of Limited Brands (Bath & Body Works) and L’Oreal (The Body Shop International). The industry is concentrated: the top 50 companies have almost 75 percent of industry revenue (Wood, 2010).
Course of action. After years of trying to entice beauty makers to supply them with their products, CVS decides to open their own high end beauty store. Implementation. In 2008 the first Beauty 360 store was opened with the hopes of 500 stores within years (Bloom, 2009). Built with white tiled floors, brushed metal walls and sea foam colors, these Beauty 360 units ranged between 2,500 and 4,000 square feet in size are housed in an adjacent store, accessible to CVS shoppers via a breezeway. Evaluate results. The results of CVS’s attempt to enter the high-end beauty market failed as the stores closed in 2012 (Gumz, 2012).

Action Plan
As CVS ventures into this new arena, they should keep an eye on market control. Schermerhorn explains this as the influence of market competition on the behavior of organizations and their members (p. 143). This will be an important factor in the success or failure of Beauty 360. As their competition makes adjustments in pricing, promotions and products, Beauty 360 must be aware of these changing climates and conditions and act accordingly to stay in line and competitive.
I feel this was CVS’s attempt at product distinction. CVS is trying to offer a high quality product to women in a location that is perceived as more convenient than the traditional department store. In an article found in the Marketing News titled “Product Differentiation is not for everyone,” Peterson discusses several reasons why a business would not want to differentiate its products from their competitors. Among the reasons are unruly cost, similar products, and products where consumers are not readily involved in the purchasing decisions (p.1, 2005). In addition to these reasons I would add by stating that a company should not spend the effort separating a product that does not fall into its primary focus of existence. CVS, like its main competitor Walgreens, has carried convenience items for as long as it has been in business. CVS as an organization is a pharmacy. Spending efforts that attract from their primary mission seems to be an unnecessary waste of the company’s funds.
CVS is well established as a leader in the drug store and pharmaceutical business. CVS should have stayed the course in what was working for them; they do large-scale retail and pharmaceutical rather well.
CVS didn't time its Beauty 360 roll-out well. The first store opened in late 2008, when the country was gripped by recession. It was a bad time to sell high-margin products, no matter how pretty they made people look. Luxury demands a high degree of expertise and attention, and its specialized and more personal approach runs counter to the way a mass retailer approaches its market.

Conclusion
It was an interesting experiment. Beauty 360 was a misstep for CVS, but an understandable one. It is already firmly established in the retail beauty business, so why not make an attempt at pushing more expensive products? Drugstores generally operate at net margins of 3%-4% (Fein, 2011), and CVS is no exception. If Beauty 360 were to succeed and become a thriving business, those numbers would stand a good chance of climbing significantly. The NPD Group says sales for prestige beauty and fragrance products totaled $9.5 billion last year, a jump of 11% from the prior year. Not only did the results top pre-recession levels, in the 15 years that NPD has been tracking the prestige beauty industry, we have never seen growth like this, especially across all categories, the Port Washington, N.Y.-based research company says in its release. Fragrances sold in department stores gained 11% to $2.8 billion, skincare products rose 14% to $3.1 billion, and makeup sales gained 9% to $3.6 billion (Marketing Daily, 2012).
Drugstores are a volume business and succeed by managing inventory well, bulk-buying prescription drugs as cheaply as possible for their pharmacy operations, and bringing thousands of customers into their stores. Luxury demands a high degree of expertise and attention, and its specialized and more personal approach runs counter to the way a mass retailer approaches its market.
The idea that a consumer is going to go out of their way to visit a pharmacy to by premium cosmetics seems very unlikely. Recent research determined that 95% of consumers shop for price over brand or look for sales, deals, rebates or best advertised prices prior to shopping at least some of the time. Further, 94% of consumers now review circulars or other adverting to compare prices before shopping at least some of the time (Parago, 2012). They are not a premium fashion boutique and despite their best efforts, without reworking the business model, probably never will be. Mike Bloom said it best himself “In order to market these products they would have to do it outside the realm of CVS (p. 2, 2012)”. All you need to do is visit beauty360.com. It’s a fancy webpage filled with glamorous models and music, but when a potential customer click’s on the “shop now” link, you are redirected to CVS’s plain red pharmacy site. Once on the CVS site you are removed from the world of high fashion and glamour and thrown back into the world of corner store convenience. Yes, the products are top shelf, but if you were to visit the CVS site as an uneducated consumer, you would just be turned off by the price.
The blend of fancy cosmetics and ordinary retail/pharmaceutical offerings is a difficult one, and the company just couldn't make it work. The high-margin luxury segment is a tempting one to enter, particularly for a rather plain-Jane midmarket drugstore operator like CVS. However, the blend of fancy cosmetics and ordinary retail/pharmaceutical offerings is a difficult one. In March of 2012, it was announced that CVS was planning to shut down all of its Beauty 360 stores and websites(Gumz, 2012). The company is eyeing growth in other beauty segments, and analysts said the stores had underperformed over the past few years. CVS has faced mounting competition from Walgreens and local chains as a retrenchment in consumer spending has impacted businesses across the U.S. in the wake of the recession (Volkman, 2012).

References
Drew, Bettina (2009). Merchandising Tips for Luxury Retail Stores. Retrieved October 9, 2012 from http://www.ehow.com/info
Bloom, M. (2009). The Issue: CVS Goes Upmarket. Retrieved September 30, 2012 from Business Week: http://www.businessweek.com/managing/content/feb2009/ca20090213_670826.htm
Fein, Adam (2011). Drugstore Margins Jump. Retrieved October 7, 2012 from http://drugchannels.net/2011/05
Gumz, Jodi (2012). CVS to close Beauty 360. Retrieved October 8, 2012 from http://mercurynews.com
Marketing Daily (2012). High End Beauty: Strongest Sales in 15 years. Retrieved October 9, 2012 from http://www.mediapost.com/publications/article/169206/high-end-beauty-strongest-us-sales-in-15-years.html
Murphy, Tom (2012). CVS Casemark Profits Jump 9 percent. Retrieved October 9, 2012 from http://archives.lincolndailynews.com/2012/May/02/News/business050212_E.shtml
Parago (2012). Shopping Behavior Insights. Retrieved October 9, 2012 from http://www.parago.com/marketing/pdfs/2012
Peterson, R. T. (2005). Product Differentiation Is Not For Everyone. Marketing News , 19 (3), 1.
Prior, Molly (2008). Moving into Prestige. Retrieved September 28, 2012 from http://www.wwd.com/beauty-members-news
Schermerhorn, J. (2012). Exploring Management (3rd ed.). Hoboken, NJ: Wiley & Sons
Wood, Laura (2010). Research and Markets: Cosmetics, Beauty Supply, and Perfume Stores in the US: Retrieved October 9, 2012 from http://www.businesswire.com/news/home/
Temmerman, Trish (2011). Targeting Convenience Store Customers. Retrieved October 9, 2012 from http://www.csdecisions.com/2011
Volkman, Eric (2012). CVS Loses its Beauty. Retrieved October 5, 2012 from www.dailyfinance.com