This Company's Expansion into Health Care is Bad Medicine for Drugstore Companies
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A major factor in the long-term success of Wal-Mart (NYSE: WMT) has been its ability to move into new business areas, both in commercial function and geographic region. Two obvious examples are the offering of groceries starting in 1988 and the first Wal-Mart store opening in China in 1996. Its expansion into the health care sector in even greater force should prove to be just as rewarding for its shareholders, likely taking a chunk of business from competitors such as Walgreen (NYSE: WAG), Rite Aid (RAD) and CVS Caremark (NYSE: CVS).
Wal-Mart will start offering an expanded menu of vaccinations at 2,700 stores. At present, the health-and-wellness segment of Wal-Mart is focused on prescriptions, eye clinics and over-the-counter products, among other goods and services. In toto, these medical-related items accounted for 11% of Wal-Mart's $264.2 billion in sales in the United States for the last year.
According to a questionnaire sent from Wal-Mart to health-care providers last year, it is the goal of the world's biggest private employer to also be, "the largest provider of primary health-care services in the nation." Competitors in the vaccination field and related areas include drug store chains Walgreen, Rite Aid and CVS Caremark. Wal-Mart is planning on using nurses to administer the shots so that a wider variety can be offered to customers. That will put CVS Caremark, Rite Aid and Walgreen at a severe disadvantage to the world's largest retailer.
The immunization shots will be offered from kiosks at the front of Wal-Mart stores. Wal-Mart is contracting with Mollen Immunization Services in this venture. Managing a registered-nurse network, Mollen Immunication Services has been administering flu shorts for Wal-Mart for the past few years. Offered now will be shots for shingles, hepatitis and meningitis, among other diseases.
From this expanding selection of vaccinations, Wal-Mart hopes to increase revenues from customers in health care needs, ranging from flu shots to prescription drugs. Stated Dr. John Agwunobil, Wal-Mart's president of health and wellness, "The goal is to take advantage of the fact these individuals are in our stores shopping for groceries every day. We want our customers to begin to see us as a destination not just for nutrition but for preventative health care."
Rite Aid is particularly vulnerable to Wal-Mart increasing its health care offerings in this area. At present, about two-thirds of the revenues for Rite Aid emanate from its prescription drug sales. A direct blow against this profit center was suffered when Wal-Mart instituted its $4 generic drug program back in 2006. As a result, Rite Aid has fallen from trading around $6.50 a share in 2007 to about $1.25 now.
Interestingly enough, Warren Buffett has sold shares very recently this year of the health care giant Johnson & Johnson (NYSE: JNJ) while greatly increasing the position of Berkshire Hathaway in Wal-Mart stock. One likely reason for Buffett unloading two-thirds of his position in Johnson & Johnson is its earnings-per-share growth declining for the quarter, year and last five years. It is an understatement to state that is a very bearish trend. By contrast, earnings-per-share growth for Wal-Mart has risen about 8-9% for each of these periods, which is very bullish. As a result, Wal-Mart is now the sixth largest holding of Berkshire Hathaway.
WMT Earnings Per Share Growth data by YCharts
Hall-of-Fame hockey player Wayne Gretzky, "The Great One," once attributed his success to, "skating to where the puck is going to be." That has certainly been a hallmark of the success of Wal-Mart. With the aging population in the United States, there will be a greater demand for health care and overall wellness goods and services. Wal-Mart is positioning itself to capture more of this business. Towards this goal, at present, there are 150 health clinics in Wal-Mart stores as a pilot program. Expect that number to increase as the share price of Wal-Mart has since it started selling groceries in 1988.
For the 4,263 Wal-Mart stores outside of the United States, Wal-Mart will profit from the greater spending in emerging market nations on health care. Emerging market consumer spending is expected to reach $30 trillion by 2025, according to a recent report by the global consulting firm, McKinsey & Co. Much of this will be spent on health and wellness goods and services as a greater demand for medical items always results from a more affluent populace. The emerging market middle class even expanded during The Great Recession, so this is a lucrative market that will keep growing and keep seeking more health and wellness goods and services.
Both at home and abroad, Wal-Mart is constantly and continually expanding the products and services it offers from its stores. Based on the steady earnings-per-share growth, this is meeting a burgeoning consumer demand that continues unabated. From this, the revenues from its health-and-wellness unit should also continue rising along with the share price for Wal-Mart.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
