CVS Health is one of America’s biggest grocers

Strangely, the drugstore operator CVS Health is one of America’s biggest grocers. In fact, CVS Health Corporation (NYSE: CVS) had a bigger share of the US grocery market in 2017 than Aldi, Trader Joe’s and Whole Foods.

To clarify, CVS had a 3.9% share of the American grocery market in 2017, The Guardian notes. Meanwhile, Aldi, had a 1.1% share of the grocery market, Whole Foods owned 1.4%, and Trader Joes had a 1% share in 2017, UBS estimates. Interestingly, economics professor Steven Horwitz estimates CVS is now America’s fourth largest grocer.

Moreover, CVS’s share of the grocery market is bigger than those of Dollar Tree (NASDAQ: DLTR) 1.7%; Dollar General (NYSE: DG), 1.5%, Target (NYSE: TGT), 2.7%, Publix 3%, Walgreens (NASDAQ: WBA) 2.4%, Meijer 0.9%, and Sprouts (NASDAQ: SFM) 0.4%.

However, CVS is still a minor player when you compare it to America’s largest “grocer” Walmart (NYSE: WMT), and largest standalone grocer Kroger (NYSE: KR). For the record, Kroger had 10.2% of the grocery market and Walmart 21.4%.

Why is CVS a Major Grocer?

Thus, a corporation that is basically a health insurance company, a drugstore operator, and a prescription plan administrator is a major grocer.

Oddly, CVS could have gained its grocery market share by accident. The Guardian alleges many of CVS’s stores are in “drugstore deserts.” A drugstore desert is a neighborhood with drugstores but no grocery store.

Consequently, many people; especially low-income Americans, use the drugstore as their supermarket. Unfortunately, the food CVS sells is often unhealthy. Common drugstore offerings include frozen food, processed foods, prepackaged food, candy, soda pop, sugary cereals, and prepackaged snacks, for example.

Traditional supermarkets have a hard-time operating in low-income and inner city areas because of their business models. Supermarkets with low margins often face high rents, small customer bases, labor shortages, and high labor costs in urban and low-income areas.

CVS, on the other hand, can operate in those areas because of its smaller sizes, small staff, and business model centered on high profit items prescriptions. Additionally, CVS taps other sources of income in the form of health insurance, Medicare, and Medicaid.

How is CVS a Major Grocer?

Larger trends in America including wage stagnation, growing income inequality, and declining incomes help explain CVS’s grocery success.

In particular, the share of America’s economic output going to workers is falling, The Hamilton Project estimates. Specifically, American workers received 64.5% of national income in 3rd Quarter 1974 and 56.8% of national income in 3rd Quarter 2017. As a result, workers have less money which discourages them from shopping at supermarkets.

Additionally, labor force participation in America is declining particularly among working-class men, The Balance estimates. Specifically, US male workforce participation fell by 8% over the past 60 years. Plus female workforce participation is also declining.

Obviously, people without a job are less likely to shop at more expensive supermarkets. In addition, low-income people have to put up with the shame of food stamps at a supermarket. Many SNAP; or Food Stamps, users report being abused and mocked by other customers at supermarkets. However, you are less likely to stand in line at CVS and avoid the humiliation of using your SNAP card in front of your neighbors.

Finally, those outside the labor force are more likely to have health problems that require prescriptions. Hence, they are more likely to shop at CVS and may lack the physical stamina or ability to shop at two stores.

Can CVS Remain a Major Grocer?

CVS’s share of the grocery market raises questions about monopoly, nutrition, and income inequality. Critics of business on both sides of the aisle will wonder if the Federal Trade Commission should force drugstores out of the grocery business.

Many progressives will use the inability of Americans to shop at supermarkets as a pretext for radical economic solutions like a basic income and the jobs guarantee. Meanwhile, health advocates will criticize CVS as hypocritical for refusing to carry cigarettes while selling unhealthy processed foods.

Consequently, leaving the grocery business could be a smart move for CVS Health. Unfortunately, CVS’s exit from groceries could leave some low-income neighborhoods with no food stores; or convenience stores as the only source of food. Thus drugstore deserts could turn into food wastelands with no food retailers.

Is CVS Leaving Groceries?

Tellingly, CVS is trying to move beyond groceries with plans to open 1,500 HealthHub stores by 2021, CNBC claims.

A HealthHub store features a clinic, a lab for blood testing, health screening, and a pharmacy. Additionally, some HealthHubs could offer respiratory specialists, dietitians, and even yoga.

The HealthHubs and last year’s acquisition of insurer Aetna are part of CVS’s efforts to transform itself into a private version of Britain’s National Health Service (NHS). The NHS offers health insurance and medical care for all of Her Majesty’s subjects in one place. CVS Health hopes to leverage a similar business model across America to reduce medical costs and cash in on a changing healthcare industry.

In particular, I think CVS is trying to capitalize upon growing shortages of basic healthcare services in some parts of the US, anger at rising costs, and a growing reliance on government health insurance programs.

The federal government is America’s health insurance company. It covers 17.2% of the US population through Medicare, 19.3% of the population through Medicaid, and 4.8% through military coverage, the US Census Bureau estimates. Moreover, 91.2% of the US population has some sort of health insurance; which makes them potential HealthHub customers.

Does CVS want out of the Grocery Business?

Finally, CVS management could want out of the low-margin and highly competitive grocery business.

Grocery competition is heating up with Amazon (NASDAQ: AMZN) and Lidl entering the market and Aldi dedicated to a major expansion. I think Aldi is CVS Health’s most dangerous direct competitor in groceries because it operates smaller stores that concentrate on sales of low-priced items.

In addition, Aldi opens stores in low-income, rural, inner city, and other areas most American grocers avoid. Plus Aldi offers a larger selection of groceries that includes meats, vegetables, and dairy products.

Beyond Aldi; and its German competitor Lidl, there is the looming threat of online grocery delivery which could reach inner city and low-income customers. Amazon, Kroger, Walmart, and Instacart are all making major pushes into grocery delivery.

Under these circumstances, exiting groceries could be a wise move for CVS Health. By exiting groceries, CVS can abandon a low-margin and low-profit segment, and end the criticism it is selling unhealthy food to the poor. Plus, CVS could reduce labor costs by reducing the need for stocking of food and cashiers.

Is CVS Health Making Money?

Many investors will ask if CVS Health is making money because of its exposure to the grocery business.

Currently, the answer is yes; CVS Health reported a gross profit of $10.94 billion; a net income of $1.421 billion, and an operating income of $2.69 billion on 31 March 2019. Additionally, the CVS Health Corporation records $61.646 billion in revenues for the quarter that ended on March 31, 2019.

Revenue growth exploded at CVS Health last quarter, rising at a rate of 34.77%, Stockrow estimates. More importantly, CVS is generating some cash with an operating cash flow of $1.948 billion, a financing cash flow of $816 million, and a free cash flow of $1.232 billion for the last quarter.

As a result, CVS had $5.896 billion in cash and equivalents and $2.426 billion in short-term investments on 31 March 2019. Thus, CVS had access to $8.322 billion in cash and short-term investments at the end of last quarter.

Is CVS Health a Value Investment?

I think CVS Health (NYSE: CVS) is a value investment because of its low stock price. Mr. Market priced CVS at $54.37 on 11 June 2019. At that price CVS seems like a bargain because it operates nearly 10,000 stores in the US and a major health-insurance company.

Notably CVS paid a 5₵ dividend on 3 May 2019. However that divided has not increased since November 2016 when it was 4.25₵. Presently, estimates CVS Health offered a dividend yield of 3.68%, an annualized payout of $2, and a payout ratio of 28.4%.

Given these figures I think CVS is a value investment in retail and healthcare that could grow as America’s demand for medical care rises. In particular, an aging population, the decline of traditional healthcare providers, and growing demands for single-payer health insurance in America present CVS with huge opportunities for growth and profit. Thus, I consider CVS Health a value investment with a potential for significant growth.