Competition Heats Up Between Navarro Pharmacies & CVS
Case Type: business competition.
Consulting Firm: Bain & Company 2nd round job interview.
Industry Coverage: healthcare: hospital & medical; retail.
Case Interview Question #00533: Navarro Discount Pharmacies, Inc., frequently referred to as Navarro, is a small regional drugstore chain based in Medley, Florida, just outside of Miami, Florida, United States. The company mainly operates in Miami-Dade and Broward Counties and currently has 25 drug stores. 
Navarro Discount Pharmacies has about 20% market share in South Florida, making it the largest regional player in this market.
Recently, pharmacy chain CVS is entering the local market and the CEO of Navarro is concerned about the implications of this. In addition, the Navarro pharmacy chain is trying to expand but is being outbid for real estate by CVS in markets they are much more familiar with (CVS is paying 2x as much per square foot). The CEO of Navarro would like to know what CVS is doing that allows them to pay twice as much and what his pharmacy chain needs to do to compete with CVS. What would you advise him to do?
Instruction to the Interviewer:
The objective of this case is
- To see if the candidate can hypothesize about possible impacts
- To see if the candidate can structure the problem
- To see if the candidate can conduct profitability analysis and synthesize a solution
Suggested Structure:
- Income and cost figures for both chains (CVS vs. Navarro)
- Product mix of both chains
- Future of the market
- Synthesize suggestions
Question #1: What metrics would a drugstore use to measure itself?
Possible Answers: (all are for any set time period)
- Number of drug stores
- Number of transactions per drug store
- Revenue per store
- Profit per store
- Revenue per square foot
- Profit per square foot
- Labor costs / revenue
- Inventory turnover
- Profit per section (make-up, food, cards, etc.)
Additional Information: to be provided to candidate
- CVS products:
- Pharmacy
- General merchandise (OTC)
- Navarro products:
- Pharmacy
- General merchandise (OTC)
- Home wares (plates, trashcans, gardening, etc)
Question #2: Much of the general merchandise has low to no margin, is this surprising? Hypothesize as to why CVS is paying twice as much for square foot.
Additional Information:
| CVS | Navarro | |
| Number of Stores | 1,000 (in Florida) | 25 |
| Revenue | $8,000m | $200m |
| COGS (cost of goods sold) | $5,600m | $140m |
Question #3: What are the sales and gross margins of each on a per store basis?
Possible Answer:
CVS:
- Revenue per store = $8,000m / 1,000 = $8m
- Gross margins per store = ($8,000m – $5,600m) / 1,000 = $2.4m
Navarro:
- Revenue per store = $200m / 25 = $8m
- Gross margins per store = ($200m – $140m) / 25 = $2.4m
The sales and gross margins for both chains are $8m and $2.4m each, respectively.
Additional Information:
| CVS | Navarro | |
| Average Store Size in sqft | 1,000 | 1,500 |
| Rent per sqft per year | $800 | $400 |
| SG&A (selling, general & administrative expenses) as a % of Revenue | 5% | 5% |
| Labor as a % of Revenue | 10% | 15% |
Question #4: What is the pre-tax income on a per store basis for each of the two pharmacy chains?
Possible Answer:
| CVS | Navarro | |
| Revenue | $8,000k | $8,000k |
| COGS | $5,600k | $5,600k |
| Rent Cost | $800 * 1,000 = $800k | $400 * 1,500 = $600k |
| SG&A Cost | $8,000k * 5% = $400k | $8,000k * 5% = $400k |
| Labor Cost | $8,000k * 10% = $800k | $8,000k * 15% = $1,200k |
| Pre-Tax Income | $2,400k – $800k – $400k – $800k = $400k | $2,400k – $600k – $400k – $1,200k = $200k |
Question #5: Given the following additional information on the percentage of revenues, tell me what you would advise the CEO of Navarro.
| CVS | Navarro | |
| Pharmacy | 50% | 30% |
| General Merchandise | 50% | 30% |
| Housewares | 0% | 40% |
Possible Answer:
Some analysis regarding the probable lack of profitability of the house wares sales given the huge square footage focus and the significantly smaller pre-tax income. A strong answer should point out that CVS can pay twice as much for the square footage because they are selling more profitable products, in smaller stores, with less labor cost.
Question #6: Ask the candidate to give a 30-second summary of his/her findings.