Why Would Walmart Want to Buy an Insurer? The Retail Squeeze

First Walmart Inc. WMT 1.37% dropped “stores” from its legal name. Now the retail giant, faced with shrinking profits and in search of growth, is exploring an acquisition that would push far beyond its big-box roots.
On Thursday, The Wall Street Journal reported the world’s biggest retailer is in preliminary discussions to buy U.S. health insurer Humana Inc., HUM 0.48% according to people familiar with the situation. The companies are discussing various options, one person said, and there is no guarantee they will agree on a merger or pursue some other partnership.
Walmart’s revenue eclipsed $500 billion in its latest fiscal year—more than Apple Inc. andExxon Mobil Corp. combined. But Walmart’s profits have declined 30% over three years to $10.5 billion, squeezed by competition and e-commerce investments to fend offAmazon.com Inc. AMZN 1.11%
Walmart’s total shareholder return over the past five years has been 35%, compared with 87% for the S&P 500, although Walmart has outperformed the broader market in the past year.
“The company is of such scale that the opportunities for future expansion in the U.S. are limited,” said Neil Saunders, managing director of GlobalData Retail, a consulting firm. “Moving onto this turf would give Walmart a whole new arena in which to expand,” at a time when retail margins are under pressure, he said.
Still “the risks of becoming entangled in the complex U.S. health-care industry are considerable,” Mr. Saunders added.
Taking over a health insurer would put the retailer into a complicated and highly regulated business. Humana’s business is particularly tied to the government because it focuses on Medicare coverage, at a time when health care is a political flashpoint.
Humana, however, has withdrawn from the Affordable Care Act’s exchanges, after suffering losses, and the private Medicare plans it offers, known as Medicare Advantage, have recently been protected by both Republicans and Democrats.
A Humana deal would also be a hefty expense for Walmart. Humana has a market value of $37 billion and a buyer would need to pay a premium. Walmart’s largest acquisition to date came in 1999 when it bought U.K.’s Asda Group PLC for $10.8 billion. Walmart ended its fiscal year with less than $7 billion in cash on hand.
  In recent years, Walmart has expanded the pharmacy and health services it offers in stores, adding cheaper generic drugs for sale, procedures like vaccinations and urgent-care locations. It is part of an effort to give shoppers another reason to visit Walmart’s cavernous locations even as they buy more online.
Walmart is also the largest seller of food in the U.S., putting it in a unique position to capitalize on shopper data or use a health insurer’s data to inform decisions on what products to carry in stores. The average age of a Walmart shopper is 50, according to Kantar Consulting, and it has gotten older over the last five years in line with the broader U.S. shopper population.
“If I can get you in for your health care and your meds... then you are hopefully going to buy some blue jeans and laundry detergent,” said Steve Barr, consumer markets leader at PwC.
A Brief History of Retail
The retail industry is undergoing another major shift -- to e-commerce. How did we get here? Photo: Associated Press
Walmart and Humana have already partnered for over 10 years on a popular Medicare drug plan that lets customers fill prescriptions at Walmart pharmacies with low co-pays.
“They’ve proven these two companies can work together in a retail setting,” said John Gorman, chairman of Gorman Health Group, a consulting firm focused on government health programs. A merged Walmart-Humana could create a Medicare plan that could be sold in Walmart stores and tap into Walmart’s other potential health offerings.
In addition, he said, Walmart’s heft as a major purchaser of goods including drugs might be able to generate savings for Humana and its members. Humana already owns its own pharmacy-benefit manager, but it is smaller than the giants in that business, such as CVS Health Corp. and Express Scripts Holding Co. , and has less leverage with pharmaceutical companies. Express Scripts has agreed to be bought by insurer Cigna Corp., while CVS aims to take over Aetna Inc.
For Humana, joining Walmart could also bring chances to reach consumers more closely, track them through richer data, and bring down the cost of care by moving some services into a cheaper setting. Humana has already been forging more deeply into health care as a way to manage its members. It is working closely with doctor groups and plans to buy a stake in a home-health and hospice operator.
But Walmart’s stores aren’t as ubiquitous as CVS, said Sarah James, an analyst with Piper Jaffray. “It’s not going to give them the same footprint as CVS,” she said, as the stores aren’t as integrated into neighborhoods as the smaller drugstores. That may limit Walmart’s ability to be a convenient touchpoint for consumers with routine health questions or needs, she said.