CVS (NYSE:CVS) and Walgreen (NASDAQ:WBA) are the leaders in rolling out in-store health care clinics, but pharmacies aren't the only retailers that hope providing basic health care services can boost their bottom line.
Kroger (NYSE:KR), one of the largest grocery stores in the country, is also getting in on the action. In the wake of reform driven insurance enrollment, the grocer plans to significantly increase the number of Little Clinics operating in its stores this year, so let's take a closer look at Kroger's health care clinic strategy and how it hopes to profit from it.
First, a bit of background
Kroger entered the health care clinic industry as an experiment roughly 10 years ago by leasing space it its store to then independent clinic operator Little Clinic. In 2008, Kroger made a significant investment in Little Clinic in a bid to cozy up more closely to the operator, which at the time ran 26 clinics inside Kroger's stores.
That Kroger investment helped Little Clinic open 48 clinics in 2008 and another 55 locations in 2009.
However, shortly after that spending spree, clinic volume sunk as consumer spending on health care fell in the wake of the recession, forcing all the major operators to pullback and re-evaluate. As a result, Kroger acquired all of Little Clinic for $86 million in 2010 and closed 20 under-performing clinics, leaving the company with 117 locations. At the same time, CVS also ratcheted back, placing 16% of its 460 MinuteClinics on seasonal schedules.
Back to growth
While the recession forced major clinic operators including Kroger, CVS, and Walgreen to re-evaluate their strategies, health care reform is pumping new life into the emerging market for quick, affordable care.
More than 8 million people signed up for private health care insurance during the first open enrollment period following the enactment of the Affordable Care Act. Another 6 million people signed up for Medicaid, either due to prior eligibility, or through Obamacare's Medicaid expansion.
The swell in insurance enrollment is expected to create significant bottlenecks in access to primary care physicians. That's because the number of new doctors entering the market every year has been fairly stagnant since 1997, even as the country's population has grown by 50 million people.
The pressure on the primary care system is expected to grow substantially as newly enrolled patients tied to reform seek to rely less on hospital emergency rooms for basic care. According to the American Association of Medical Colleges, the country will face a shortage of more than 45,000 primary care doctors by 2020.
To fill the gap between surging demand and a struggling supply of new family physicians, retailers like Kroger, CVS, and Walgreen have jump-started their retail health clinic programs.
Market leader CVS, which runs more than 800 MinuteClinics in 28 states, plans to operate 1,500 by 2017. Walgreen, the second largest operator, plans to boost the number of its in-store clinics by 25% to 500 this year. Meanwhile, Kroger's Little Clinic has announced seven new locations since December and reportedly plans to open as many as 50 locations in 2014.
Fool-worthy final thoughts
So far, the clinics are a rounding error in terms of sales for the multi-billion grocery store operator. Kroger lumps its Little Clinics into its "other revenue" category, and that category represented just $2.7 billion of Kroger's $98 billion in sales last year.
However, while Little Clinic sales aren't yet a driving force behind Kroger's success, the rapid industry growth suggests that they could become increasingly meaningful by the end of the decade. After all, revenue at CVS' MinuteClinics has grown about 30% annually over the past five years and as demand rises from reform and aging baby boomers require more treatment, the outlook for retail clinics growth should remain bright.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends CVS Caremark. 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.