In a February 10, 2003, BusinessWeek article, \"CVS\'s Potent Growth Potion,\" J

Question

In a February 10, 2003, BusinessWeek article, "CVS's Potent Growth Potion," Joseph Agnese points out that the retail pharmacy sector has remained relatively strong throughout an extended period of general economic downturn. Pharmacy sales of nearly $200 billion reflect this sector's recent double-digit percentages in annual revenue growth. Of this nation's leading retail pharmacy chains, CVS Corporation has emerged as being one of the most successful and progressive. The company currently holds either the no. 1 or the no. 2 market-share position in 70 percent of the country's top 100 markets.

Prospects for CVS Corporation appear to be very strong. However, some analysts believe that a shift in CVS Corporation's sales mix to increased pharmacy revenue from third-party insurers could put pressure on the company's gross profits margins. Explain what is meant by these analysts. (Hint: Refer to exercise 6.11.)

Explanation / Answer

Gross profit margin is sales less cost of goods sold. Third party insurers tend to negotiate lower prices because they are large companies which have the clout to do it and they need to keep their premiums to customers down to be competitive. So lower prices mean lower gross profit margins.

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