I'm of two minds about Wal-Mart's (NYSE: WMT) impending move into health care. The retailer announced plans last week to open co-branded health clinics in its Supercenter stores, starting this April. Is this a great new growth strategy that will propel the company to finally fulfill its true potential? Or is it just another me-too reaction to competitive pressure from the likes of CVS (NYSE: CVS) and Walgreen (NYSE: WAG)?
Patient history
Utilizing third-party partners has helped Wal-Mart move into new business segments in the past. Its jewelry and shoe departments were originally leased operations, with Wal-Mart simply collecting rent for the use of space in stores. Eventually, as the company figured out how to run these businesses, Wal-Mart phased out these partners and took over.
More recently, Wal-Mart has added financial services and gas stations to its portfolio of consumer offerings. Both of these businesses also involve third-party vendors, which has helped make them highly successful. But the company is still struggling to figure out the way to fill space in the cavernous front ends of its Supercenters. Stepping into your local Wal-Mart, you'll likely encounter an overwhelming mix of portrait studios, hair salons, and other miscellaneous ventures.
Health care, of course
Given the success Wal-Mart has enjoyed in the pharmacy and vision business, expanding into limited-service health-care clinics seems like a natural next step. Wal-Mart already has 78 clinics across 12 states, offering routine health services like blood screening and school physicals. No appointment is necessary, prices are clearly posted, and insurance is accepted at some locations.
With more than 40 million Americans lacking health insurance, it's hard to imagine that this isn't an idea whose time has come. Wal-Mart also has a potentially large captive market in its enormous workforce, many of whom will likely find the ability to get routine medical care at their place of work a major convenience.
What's the business model?
But I'm a bit confused about the ultimate business model Wal-Mart has in mind for this venture. This week the company announced the intention to open 400 co-branded clinics by the year 2010, under the simple moniker "The Clinic at Wal-Mart."
However, these locations will still be managed by local third-party operators. The company has signed a letter of intent to work with RediClinic LLC, and its health-care network also includes a bevy of third-party providers, including Quick Health, Smart Care, Solantic, and several others. Of course, there are difficulties using this local-provider approach. For example, Checkups, which operated 23 clinics, had to close last month because of bankruptcy.
A different approach
Rival Target (NYSE: TGT) is following Wal-Mart's lead by using third-party providers. But CVS and Walgreen have taking a completely different approach, choosing instead to acquire their own third-party operators and roll out in-store clinics that are company-owned and -managed.
These drugstore operators are miles ahead of Wal-Mart in developing in-store clinics. CVS ended the most recent year with 462 clinics, opening 169 in the fourth quarter alone. Walgreen is about a year behind CVS, but it expects to have 400 locations open by the end of 2009.
Will the winner please rise?
I have far more confidence in the ultimate success of a company-owned approach to in-store health clinics. While Wal-Mart will control the look and feel of its clinics, and the services and prices offered, it'll still depend on a stable of small providers delivering a consistently high level of service across its network. That's no easy management task in any environment.
The company-owned and -operated approach allows drugstore operators to custom-design their business model over time. They can add new services quickly across the entire network as their capabilities grow, and ensure that all the clinics meet consistent operating standards. In addition, cost synergies are likely to become a major profit-enhancer as such operations scale up.
The customers may not be able to tell the difference between a Wal-Mart and a CVS clinic when they walk in the door, but I have a hard time envisioning how a collection of locally operated rent-a-clinics can successfully compete with what is clearly becoming a powerhouse company-owned drugstore model.
Let's get serious
Is Wal-Mart really taking this seriously, or is the company just dabbling to see whether it can make the idea work? I have no doubt that Wal-Mart has the resources to successfully build any business it chooses to enter. And health care is an enormous market, with loads of potential for companies to deliver services more conveniently and cost-effectively.
I'm not ready to bet against Wal-Mart's ability to figure out how to capitalize on in-store clinic opportunities. The company has the benefit of huge traffic through its stores every day, and a customer base that is clearly looking for a more convenient and affordable delivery system for basic health care. But in the near term, the drugstore channel seems to be taking a more comprehensive approach to filling the niche.
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