CVS/Aetna: Evolution, Not Revolution
By Lanie Beck Published in GlobeSt
The merger of CVS with Aetna Inc. could bring changes to store size and layout, but over the long term, writes Stan Johnson Co.'s Lanie beck in this EXCLUSIVE commentary.
TULSA, OK—CVS Health Corp. recently announced that it intends to buy Aetna Inc. for just shy of $70 billion. This merger will combine one of the largest retail pharmacy companies in the U.S. with one of the most dominant players in the health insurance industry. This new marriage of healthcare services, products, providers, and insurers will undoubtedly change the way the healthcare industry works today.
But how will this merger impact commercial real estate? Will we slowly witness a natural evolution of the drugstore retail concept as consumers leverage the benefits of accessing combined services, and pharmacy tenants modify their stores accordingly? Or will we find ourselves thrust overnight into a retail revolution that completely alters the way we shop for healthcare products and access medical services?
At a time when the marketplace is seeing a tremendous amount of downsizing by retailers, it’s natural to question the likelihood of similar downsizing efforts by pharmacies and drugstores, especially as they face increased competition from online retailers like Amazon. But if a merger between CVS and Aetna leads to additional services being offered by the pharmacy’s brick-and-mortar locations, could we be looking at a unique situation where more square footage becomes necessary?
Toby Scrivner, senior director in Stan Johnson Co.’s Tulsa office, says no. “Expansion of the existing footprint seems unnecessary,” he says. “CVS would likely choose to reconfigure existing stores to expand clinical space, which helps drive foot traffic and supports retail sales—their core business.” Clint Robison, associate in SJC’s Phoenix office, agrees. “I don’t see CVS footprints changing any more than they already have with the addition of the existing clinics.”
The addition of new clinical space may not cause an overnight expansion, but in the coming years, if CVS chooses to add more services—such as vision or hearing providers, or laboratory services—or carry a wider variety of medical equipment and supplies, it may need to pilot a new store layout or prototype large enough to accommodate all the new services and products. But again, this is likely to impact the store model further in the future, rather than in the next year or two.
On the other hand, “CVS has already announced plans to build mini-health centers in some of their stores,” says Jason Powell, director in SJC’s Atlanta office. If these plans take shape, a new store layout could be closer than we think. “It’s difficult to say whether additional clinical space will create the need for a larger building footprint, or if they would simply convert current retail floor space,” Powell adds.
Tom Fritz, senior director in SJC’s Chicago office, could see a future CVS drugstore layout being about 20,000 square feet, which would be a noticeable increase from its typical 10,000-12,000 square feet today. “I can visualize a well-located, former 20,000-square-foot midbox retail space leased to CVS in the front with walk-in medical offices in the back,” he says. “It would be a one-stop-shop for all low-level, non-emergency medical care, supplies, and prescriptions.”
Approximately 10% of CVS locations have a walk-in clinic today, and given their small size, most have been added to existing stores without the need to expand or do significant renovations. But current CVS property owners should be on the alert. “The need to reconfigure floor plans to accommodate clinical space opens the door for tenant improvements, lease restructuring and renewal discussions,” says Scrivner. “Landlords should embrace the merger as an opportunity to enhance the consumer experience and increase the long-term viability of the real estate.” Significant changes to lease terms or structures won’t happen overnight, though. “This merger will allow CVS to renegotiate their leases over the long term,” says Robison. “But I don’t see them changing their operations and needing different locations, or drastically changing their real estate fundamentals.”
Others agree that the merger is unlikely to cause CVS to change their traditional term or expense structure when executing a new lease. However, significant alterations to existing CVS stores could “impact rental rates and lease terms if the landlord is required to contribute to tenant improvements,” says Powell. “Those tenant improvement dollars would likely need to be amortized over periods greater than five years, which is the standard periodic lease renewal in most CVS leases today.”
Fritz adds, “to maintain the quality of real estate that drugstores need for consumer convenience, they’ll have to pay to play. There will always be competition for the good corner location, so if they don’t step up and pay via rent and term length, another tenant will.”
As previously mentioned, it is unlikely that a merger with Aetna would fundamentally alter CVS’s real estate strategy, although we may see strategic growth in certain under-served areas. But fast, targeted growth by one drugstore retailer doesn’t necessarily point to a revolution within the commercial real estate industry. If the merger occurs as planned, the most likely scenario will be a slow evolution of the CVS brick-and-mortar stores as they roll out new clinical space in targeted locations. Over time, we may see store layouts change somewhat to accommodate new products and services, and while the average store size might grow, any discernable increase in square footage is likely several years away.