One CVS Drive
Company Perspectives:
We operate in an extremely vibrant industry with highly favorable long-term trends. The key drivers of the pharmacy industry include the aging American population, the growth of managed care and the introduction of new and better drug therapies. CVS has expertise in serving the managed care industry and continues to take a growing share of the growing pharmacy industry.
Although it trails arch-rival Walgreen Co. in terms of overall revenues, CVS Corporation is the largest drugstore chain in the United States in terms of number of stores and number of prescriptions filled. CVS operates more than 4,100 stores in 27 states in the northeastern, mid-Atlantic, southeastern, and midwestern regions of the country and in the District of Columbia. These outlets carry either the CVS or CVS/pharmacy names and range in size from about 8,000 to 12,000 square feet; many of the newer freestanding locations include a drive-through pharmacy. Nearly 10 percent of all prescriptions filled in the United States are handled by CVS pharmacies. Supplementing the core retail pharmacy business of CVS are several other operations: a pharmacy benefit management business that provides services to managed care and other organizations; a specialty pharmacy unit that includes a mail-order pharmacy and a small chain of about 40 CVS ProCare retail pharmacies, which offer special services for patients with long-term health conditions, such as HIV/AIDS and multiple sclerosis, that require complex and expensive drug regimens; and an Internet pharmacy located on the Web at CVS.com.
The history of CVS is intertwined with that of Melville Corporation, whose own history dates back to the late 19th century but ends in 1996 when it changed its name to CVS Corporation. For much of its life, Melville was known chiefly for its chain of discount footwear stores, Thom McAn. During the late 20th century, however, Melville acquired more than a dozen other retailing operations. Among these was the Consumer Value Stores (CVS) retail drug chain, which Melville acquired in 1969, six years after that chain was founded. Melville continued as a retailing conglomerate into the mid-1990s, when the company then decided to concentrate on its best-performing chain, CVS. The company divested the last of its non-drugstore chains in 1997.
Concentrating on Shoes from the Late 19th Century to the Early 1960s
Melville Corporation traces its roots back to 1892, when Frank Melville, a shoe jobber, took over the three stores owned by his employer, who had left town under a cloud of debt. Melville parlayed the three New York shops into a small but thriving chain. In 1909 he brought his son, John Ward Melville, into the family business. The younger Melville, who dropped the "John" and was known by "Ward," was named vice-president in 1916 and became the driving force behind much of the company's growth. He ran the corporation for nearly half a century and served as chairman of the board until the day he died in 1977 at the age of 90.
While serving in the army during World War I, Ward Melville struck up a profitable friendship with J. Franklin McElwain, a New Hampshire shoe manufacturer. Together they devised a method to mass-produce shoes and distribute them at low prices through a chain of stores, which they decided to name after a Scottish golfer, Thomas McCann, shortened to Thom McAn. They opened the first Thom McAn store in New York in 1922, offering a few simple styles of men's shoes at the fixed price of $3.99. That same year, Melville Shoe Corporation was incorporated.
Despite the lack of variety, the discounting scheme was an immediate success, and new stores were opened all over the Northeast. By 1927 when the Thom McAn chain had grown to more than 300 stores, demand outstripped the capacity of McElwain's Nashua, New Hampshire plant, which produced 20,000 pairs a day. Consequently, McElwain acquired a new plant in Worcester, Massachusetts.
Melville Shoe, like other businesses, suffered during the Great Depression. In 1932, for example, sales dropped more than 21 percent from 1931 levels, from $26.2 million to $20.5 million. Despite rumors of bankruptcy that circulated in 1933, Melville Shoe weathered the storm with careful management, prudent expansion, and financial innovation. Melville made a public stock offering in 1936, taking its place on the New York Stock Exchange. Throughout the 1930s, Melville continued to open more outlets. By 1939 Melville operated 650 Thom McAn stores and also marketed its products through its smaller John Ward and Frank Tod shoe store chains.
In 1939 Ward Melville moved to centralize and unify the entire production and marketing operation under one corporate head. He proposed that Melville merge with McElwain's manufacturing company, J.F. McElwain Company, which then produced about 11 million shoes annually for Melville. The stockholders of both companies approved the merger in December 1939. The following year, J. Franklin McElwain and Ward Melville participated in a ceremony to commemorate the production of their 100 millionth pair of shoes.
In 1940 as the economy started climbing out of the Depression, Melville posted sales topping $40 million for the first time. Sales continued to climb through the war years. The growth continued unabated until 1952, when total sales actually fell for the first time since the Depression. The decline from $92 million to $90 million signified the first inkling of a weakness in Melville's time-tested strategy of producing a few styles of relatively cheap shoes. In an expanding and competitive economy, diversity and specialization became increasingly necessary. Accordingly, Melville began to add more women's and children's shoes in an effort to diversify.
In 1952 Melville acquired Miles Shoes, a chain of 151 stores. With this acquisition, better results were realized immediately: sales for 1953 increased about 20 percent, topping $108 million. By 1955 Melville had grown to include 12 factories and 850 stores. The following year, Ward Melville, then 69, was named chairman of the board, although he retained his post of chief executive officer. Robert C. Erb assumed the post of president, which Melville had vacated.
As part of a sustained effort to increase market penetration, Melville created a new division in 1960. The new unit, Meldisco, was dedicated to leasing and supplying family shoe departments in self-service discount department stores. That year, however, earnings declined slightly from the 1959 totals--to $6 million in profit on sales of $151 million. The trend continued in 1962, as sales climbed to $176 million while net income dropped to about $5 million.
In 1964 Francis C. Rooney, a vice-president, succeeded Robert Erb as president. Over the next two decades, Rooney oversaw tremendous growth at Melville that transformed the nature, breadth, and scope of Melville's operations. Between 1962 and 1967, sales jumped 50 percent and net profits tripled. By 1967 sales topped $260 million. At the end of the 1960s, Melville was the nation's largest shoe retailer, operating 1,400 Thom McAn, Miles, and Meldisco outlets. The growth also brought increasing differentiation and specialization, as Thom McAn turned into a suburban-based family chain, whereas Miles specialized in women's and girls' shoes.
Diversification of Melville in the Late 1960s and 1970s
In 1968 Melville made one of its most important moves of the decade, opening the first of its Chess King stores, a clothing chain geared toward fashion-conscious teens and youth. This was Melville's first venture into the fashion industry, but it was not to be its last. In 1968 Melville also acquired Foxwood, renamed Foxmoor, a 16-store apparel chain that catered to young women.
The following year brought even more expansion. Melville bought three companies: the Consumer Value Stores (CVS) chain of drug retail outlets; Mark Steven, Inc., a firm that distributed products to CVS; and Retail Store Management, Inc. The first Consumer Value Store opened in Lowell, Massachusetts, in 1963 as a discount health and beauty aid store in which customers bagged their own merchandise. It was founded by brothers Sid and Stanley Goldstein and Ralph Hoagland. The CVS name was first used in 1964, by which time the founders were running a 17-store chain. A key development came in 1968 when pharmacy departments began to be added to the CVS outlets, prompting the company's eventual emergence as a leading drugstore chain. At the time of its acquisition by Melville, the CVS chain consisted of 40 stores.
Buoyed by these acquisitions, Rooney boldly predicted in 1969 that Melville would attain total sales of $1 billion by 1975. By 1970 Melville, the fifth largest and most profitable U.S. shoemaker, operated 1,644 total retail outlets. In 1972 Melville was ranked as the 43rd largest retailing company in the United States, with sales of $512 million, and more than 15,000 employees.
Not satisfied with this accretion, Melville continued to expand. In 1972 Melville acquired Clinton Merchandising, Inc., which operated 80 Clinton Drug and Discount stores in the Midwest and Northeast, as well as Metro Pants Co. and Spotwood Apparel, Inc., both manufacturers of men's and boys' clothing. The Clinton stores were merged into the CVS chain. That year Melville left its longtime midtown Manhattan headquarters for a larger building in Westchester County, New York.
Melville's expansion took on an international character in the 1970s as well. In 1971 Melville entered into a joint venture with C.F. Bally of Switzerland, contracting to sell the upscale Bally shoe line in the United States. The same year, Melville formed a European buying company. In 1973 Melville initiated a venture to market Thom McAn shoes in Japan.
Despite the diversification, shoes still accounted for 71 percent of Melville's $765 million in sales in 1974. That year, the CVS chain generated sales in excess of $100 million and had grown to include 232 units, although only 45 of the locations had pharmacies. In 1975 Melville branched out further into nonshoe retailing when it bought Marshalls Inc., then a chain of 32 retail apparel stores. Expansion continued apace in 1977, when Melville bought the 36-unit Mack Drug Co. chain and merged it into the CVS unit.
In 1976 Melville, then the nation's 32nd largest retailing company, belatedly reached Rooney's vaunted goal of $1 billion in sales, due to the combination of acquiring new chains and expanding existing units. In 1976 total receipts from the firm's 3,300 outlets totaled $1.2 billion. As part of a continuing trend, the footwear sales portion declined to 60 percent.
Upon Ward Melville's death in June 1977, Francis Rooney, who already held the posts of president and chief executive officer, was named chairman of the board. The transition marked the end of an era and the beginning of a new one in which shoes would play an increasingly smaller role in the Melville scheme. By 1978 Melville operated 3,812 stores and had sales of $1.75 billion. Shoes accounted for about 53 percent of the total.
Accelerating Diversification in the 1980s and Early 1990s
As the 1970s came to a close, Melville continued to boom. In 1980, Melville, with 48,000 employees and more than 4,500 stores, saw its 26th straight year of increased sales. CVS had grown to 408 locations, with sales totaling $414 million, making the chain one of the top ten drugstore chains in the United States. That year, Kenneth Berland was named to the post of president.
The following year, in which sales soared to $2.8 billion, Melville acquired Kay-Bee Toy and Hobby Shops Inc. By 1982 Melville, the largest U.S. shoe retailer, operated nearly 5,200 total stores. These included 470 Chess King, 588 Foxmoor, 433 CVS, and 1,200 Thom McAn outlets. In 1982 Melville added leather retailer Wilsons to its roster, and the following year it acquired home furnishings specialist Linens 'n Things, which had been founded in 1975.
Despite the recession of the early 1980s, sales rose to $3.3 billion in 1983; nevertheless, Melville suffered some retrenchment during the 1980s. The firm began to phase out six of its seven shoe factories in late 1983, eventually terminating about 2,000 jobs. In 1985 Melville sold the 614-store Foxmoor chain, whose sales were declining. The same year, Melville shut down 72 Thom McAn outlets. Despite the closures or sales of various stores, 1985 receipts rose to $4.7 billion, and profits surged to $219 million. CVS sales surpassed the $1 billion mark for the first time.
In 1985 Stanley Goldstein, the CVS cofounder who joined Melville when his corporation was acquired by the shoe giant, succeeded Berland as president and took his place as heir apparent. The following year, Goldstein was named chairman and chief executive officer, replacing the retiring Rooney. To Goldstein fell the task of building on Rooney's phenomenal record. Rooney had transformed the firm from a successful shoe company into a diversified retailing giant.
Melville's expansion continued under Goldstein. In 1987, while amassing $5.9 billion in sales, Melville acquired 25 Heartland and Pharmacity drugstores and 36 Leather Loft stores. In 1988 Melville bought athletic footwear retailer Finish Line as well as Bermans Specialty Stores.
In 1989 Melville underwent some structural renovation. The firm created a profit-sharing plan and an employee stock ownership plan, under which about 6 percent of the company's common stock was distributed among its employees.
The year 1989 brought to a close a remarkably successful decade, one in which sales and earnings both increased more than threefold. The Melville that left the 1980s was vastly different from the one that entered that decade. In 1989 shoes, once the firm's mainstay, accounted for only 22.5 percent of total sales; the apparel sections accounted for 36 percent; and the drugstore business accounted for 28 percent. The toys and household furnishing division accounted for the remainder of sales.
This trend continued in 1990, as Melville acquired more non-footwear retail outlets. Melville bought both Circus World Toy Stores Inc., which it folded into the Kay-Bee division, and Peoples Drug Stores, a 490-store chain. By the end of 1990, Melville operated 7,754 stores and listed 119,000 employees on its payroll. Sales for 1990 totaled $8.68 billion. Further expansion came in 1991, when Melville acquired FootAction Inc., a Dallas-based chain of 128 athletic footwear stores, for $46 million.
Mid-1990s: Retrenchment, Restructuring, Emergence of CVS Corporation
Retrenchment came to the fore in 1992 and 1993, however, as Melville struggled in a more difficult environment for retailers. In early 1992 CVS exited from the California market when it sold all 85 of its stores in that state to American Drug Stores Inc., a unit of American Stores Company, for $60 million. In December of that same year Melville announced a major restructuring involving the closure of up to 800 stores and a pretax charge of $347 million. About 390 of the 730 Thom McAn locations were subsequently shuttered, as were 240 of its 1,250 Kay-Bee stores and 75 smaller Linens 'n Things outlets. In addition, the 500-plus-unit Chess King chain was sold off in the spring of 1993 to Merry-Go-Round Enterprises Inc. and the 114-store Accessory Lady chain was sold to Woolworth Corporation in November 1993. Of the closed units, about 100 of them were converted to faster growing formats, most notably, FootAction. With these series of moves, Melville was focusing more strongly on CVS and Marshalls, which together accounted for more than 60 percent of the company's sales and operating profit, as well as Kay-Bee Toys and the up-and-comers FootAction and Linens 'n Things.
Another development in the early to mid-1990s was the merger of Peoples Drug Stores into CVS, which thereby gained locations in Maryland, Pennsylvania, Virginia, West Virginia, and the District of Columbia. In 1994 Thomas M. Ryan, a pharmacist, was named CEO of CVS, which now had more than 1,350 locations. CVS was by far the largest of Melville's chains, with 1994 revenues of $4.3 billion, or 38 percent of Melville's overall revenues of $11.3 billion. During 1994 CVS entered the burgeoning market for pharmacy benefit management services by forming PharmaCare Management Services to serve managed care and other organizations.
With its financial performance faltering and shareholders increasingly agitating for change, Melville in October 1995 announced a sweeping restructuring through which it planned to spin or sell off several of its businesses to focus primarily on its most profitable unit, the CVS drugstore chain. Melville had already agreed to sell Marshalls, its second largest chain, to arch-rival TJX Cos., in a $600 million deal that closed in November 1995. Next to go, during the first half of 1996, were Kay-Bee Toys, which was sold to Consolidated Stores Corp. for about $315 million, and the Wilsons leather goods chain and the This End Up chain of furniture stores, both of which were sold off through management-led buyouts. Later in 1996, Melville spun off two of its footwear operations, the 444-unit FootAction chain and Meldisco, operator of leased shoe departments in nearly 2,200 Kmarts and almost 400 Payless Drug Stores, into a new public company called Footstar, Incorporated. The Thom McAn chain was closed down, after the conversion of about 100 of the stores to FootAction outlets.
In addition to CVS, Melville also had planned initially to retain the Linens 'n Things chain and Bob's Stores, a 34-unit chain selling off-price active apparel. In mid-1996, however, the company announced that it would shed those operations as well by the end of 1997. In September 1996 Melville moved its corporate headquarters from Rye, New York, to the headquarters of CVS in Woonsocket, Rhode Island. Two months later, Melville changed its name to CVS Corporation. Goldstein continued to serve as chairman and CEO, and Ryan was named vice-chairman and chief operating officer. Shortly after becoming CVS Corporation, the company completed an IPO in which it sold a 67.5 percent interest in Linens 'n Things to the public. CVS sold its remaining interest in Linens 'n Things during 1997.
Late 1990s and Beyond: Reaching for the Top Through Major Acquisitions
The newly focused CVS moved quickly to become one of the top players in the rapidly consolidating U.S. drugstore industry. In May 1997 CVS acquired Twinsburg, Ohio-based Revco D.S., Inc. for $2.8 billion in stock plus the assumption of $900 million of Revco debt. Revco had about 2,600 drugstores located in 17 midwestern, southeastern, and eastern states. To gain regulatory approval, CVS had to sell 120 Revco drugstores, mainly located in Virginia. As a result, CVS emerged from the deal with nearly 4,000 drugstores in 24 states and the District of Columbia, giving it the largest store count in the industry. In terms of revenues, however, it ranked number two behind Walgreen Co. CVS, in the meantime, sold the last of its non-drugstore units in November 1997 when it sold Bob's Stores to a management-led group.
In early 1998 Ryan was named president and CEO of CVS, with Goldstein remaining chairman. The company completed yet another significant--albeit much smaller--acquisition in March 1998, a $1.48 billion deal for Troy, Michigan-based Arbor Drugs, Inc. Operating primarily in southeastern Michigan, Arbor had more than 200 stores and nearly $1 billion in revenue during fiscal 1997. The addition of Arbor increased CVS's store count to nearly 4,100 and also made CVS the country's largest dispenser of prescription drugs as it now filled more than 11 percent of all prescriptions. CVS still trailed Walgreen in revenue, but its 1998 sales of $15.27 billion were nearly three times the level of 1996.
In addition to pursuing acquisitions, CVS also was growing organically by aggressively opening new locations. In 1998, for example, the company announced plans to open as many as 200 stores in New York City over a three-year period. At the same time, some of the older locations, particularly those in strip malls, were being closed down in favor of freestanding sites, some of which began featuring drive-through pharmacies.
An end of another era occurred in April 1999 when Goldstein retired as chairman of CVS, 36 years after cofounding the first Consumer Value Store. Ryan was named chairman and CEO. Later in 1999 CVS acquired Soma.com, the first major online pharmacy, for $30 million in stock. The web site, soon rebranded CVS.com, enabled customers to order prescriptions and general merchandise for either in-store pickup or mail delivery. Another initiative in 1999 was the launching of CVS ProCare, a chain of specialty pharmacies, about 1,500 square feet in size, serving patients with chronic diseases and conditions that require complex and expensive drug regimens. The market for specialty pharmaceuticals, estimated at about $16 billion in 1999, was a particularly fast-growing segment of the drug industry, but it was highly fragmented, consisting mostly of mom-and-pop operations. CVS clearly saw the potential for being a consolidator in this segment of the market. Its first such acquisition came in September 2000 with the purchase of Stadtlander Pharmacy, a Pittsburgh-based subsidiary of Bergen Brunswig Corporation, for $124 million. Stadtlander generated annual revenues of $500 million by selling drugs by mail-order to patients with chronic conditions. By the end of 2000, CVS's specialty pharmacy business consisted of mail-order operations and 46 CVS ProCare pharmacies located in 17 states and the District of Columbia. Overall, CVS saw its revenues surpass the $20 billion mark for the first time in 2000, while net income reached a record $746 million.
After entering four new markets in 2000--Chicago; Tampa and Orlando, Florida; and Grand Rapids, Michigan--CVS continued to enter new territories in 2001, expanding into Fort Lauderdale, Florida, and Las Vegas, Nevada. The latter would represent the chain's first presence west of the Mississippi since selling its California stores in 1992. CVS also announced in 2001 plans to expand into Phoenix, Arizona; Miami Beach, Florida; and three new markets in Texas: Dallas, Houston, and Fort Worth. In February 2001 CVS launched a chainwide loyalty card program called ExtraCare that would offer cardholders exclusive savings, mailings, and health information. The company's fortunes turned south later in the year, however, as profits began to decline. Management cited a lack of new prescription drug introductions, the growth of mail-order prescription services, and increasing competition. CVS had also had difficulty filling positions for pharmacists and been forced to shut down some pharmacy counters as a result. Furthermore, the general economic slowdown had taken a toll on sales of general merchandise. In October a major restructuring was launched, involving the elimination of 300 jobs, the closure of 200 underperforming stores (including ten CVS ProCare units), and a $350 million charge. It was difficult to foresee whether these events were a momentary blip in a record of consistently positive performance for CVS since its emergence out of Melville in 1996 or the beginning of a deeper crisis.
Principal Subsidiaries: CVS Rhode Island, Inc.; CVS Center, Inc.; CVS Foreign, Inc.; CVS Pharmacy, Inc.; Nashua Hollis CVS, Inc.; CVS Vanguard, Inc.; CVS Meridian, Inc.; CVS New York, Inc.; CVS Revco D.S., Inc.; Revco Discount Drug Centers, Inc.; Hook-SupeRx, Inc.; Big B, Inc.; Arbor Drugs, Inc.; PharmaCare Management Services, Inc.; ProCare Pharmacy, Inc. (95%); CVS Washington, Inc.; CVS Rx Services, Inc.
Principal Competitors: Walgreen Co.; Wal-Mart Stores, Inc.; Rite Aid Corporation; Eckerd Corporation; The Kroger Co.; Albertson's, Inc.
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