Copyright 1999 Globe Newspaper Company
The Boston
Globe
May 18, 1999, Tuesday ,City Edition
SECTION: ECONOMY; Pg. E1
LENGTH: 713 words
HEADLINE:
CVS agrees to buy Net pharmacy;
Watershed deal may offer hint to industry's
future
BYLINE: By Chris Reidy, Globe Staff
BODY:
In a first for the drugstore
industry, CVS Corp., the 4,100-store pharmacy chain based in Woonsocket, R.I.,
said yesterday it has agreed to pay $30 million to acquire
Soma.com of Seattle, an Internet pharmacy that sells
prescription drugs on line.
In terms of dollars, the deal is
insignificant, but it may offer hints of how consumers will buy medication in
the future. Buying prescription drugs over the Internet can be far more
convenient than making a trip to a drugstore and waiting in line while the
prescription is filled.
But most Internet drugstores lack the size and
clout to negotiate good prices from the managed health care plans that pick up
the tab for most of these medications. And, in an emergency, such as when a
child gets sick, few consumers are willing to wait even one day for an earache
medicine to arrive by a home-delivery service.
By acquiring Soma, CVS,
the nation's second largest drugstore chain, wants to offer its customers the
best of both worlds. "This is a home run deal," said CVS chairman and chief
executive Tom Ryan.
"Conceptually, it makes sense," said Gary Giblen, an
analyst with NationsBanc Montgomery Securities.
In part because health
maintenance organizations are looking for efficiencies and squeezing costs, the
drugstore industry has been consolidating rapidly. With $15.3
billion in sales, CVS has emerged as one of the big players in the industry,
along with Walgreen Co. and Rite Aid Corp., among others.
Recently,
several upstarts, such as PlanetRx and Drugstore.com, a firm partly backed by
Amazon.com, have taken to selling prescription drugs, over-the-counter drugs,
and vitamins over the Internet.
How much of a threat these virtual
pharmacies are to the big brick-and-mortar chains is still unclear, said analyst
Eric Bosshard of Midwest Research. Several big chains, including CVS, have been
experimenting with retail Web sites, and the acquisition of Soma could give CVS
an early head start.
Ryan said CVS would put its considerable buying and
marketing muscle behind Soma and widen the number of products Soma would sell on
line. Ryan declined to disclose sales figures for Soma.
One concern:
On-line marketing promotions can raise red flags about privacy because many
consumers are uncomfortable sharing their medical history over the Internet.
In buying Soma, CVS seems to be pursuing a strategy similar to other
chains in different segments of the retail industry.
According to this
line of thinking, Internet and traditional stores aren't necessarily direct
competitors; in fact, some observers think the successful retailer of the 21st
century will sell its wares at both traditional stores and Web sites.
Macy's, for example, now offers customers several options, believing
that the same customer who visits its department store this month could well buy
something from its Web site a month later, and vice versa.
CVS thinks a
similar philosophy will work for drugstores.
Many drugstore
customers, he believes, may someday place orders for prescription drugs on line,
then go to the local CVS store to pick them up. At the current CVS Web site,
customers are limited mostly to ordering prescription refills.
The Soma
acquisition offers some other potential advantages. It has a relationship with
Microsoft Corp. that CVS may be able to take advantage of, and it widens the
chain's customer base.
CVS has no stores west of the Mississippi River.
The Soma acquisition will help make CVS more of a national presence.
There could, however, be a drawback to the Soma deal. As HMOs have
squeezed prescription drug prices, drugstores have relied on impulse buys to
boost profits. A customer comes into the store to get a prescription filled,
then also winds up buying a paperback book, a greeting card, and a candy bar.
If a Web site means that customers visit the drugstore less frequently,
won't that cut into impulse buys and overall sales? Analysts don't think so. A
few years ago, similar concerns were raised when drugstores began adding
drive-through windows. The convenience of these windows improved customer
loyalty and, over time, that loyalty translated into higher sales.
On
the New York Stock Exchange, CVS shares rose 1/2 to close at 46.
LOAD-DATE: May 18, 1999 
