Our new grl>lab area is designed to capture the attention of teenage girls by offering beauty, hair and other accessory items in a fun and appealing environment. The introduction of grl>lab is part of CVS' efforts to establish loyalty at an early age by an important group of core customers. CVS' exclusive Essence of Beauty bath and body products have received an excellent response, generating strong repeat purchases.

Unparalleled Convenience In The Front Store

    Today's busy customers appreciate convenience. Therefore, our strategy at CVS has been to find the most convenient locations and to develop in the front of our stores the best selection of merchandise to meet our customers' everyday needs.

Unique Products Exclusive to CVS

    One of the ways that we create value for CVS customers is by offering products and services that are unique to CVS. Because of our size and scale, we are able to forge partnerships with some of the nation's largest manufacturers to jointly develop merchandising strategies solely for CVS. For example, in 2000 we teamed up with Procter & Gamble to launch grl>lab®, an area in our stores featuring beauty, hair and other accessory items that are relevant to teenage girls. grl>lab will help us grow by reaching out to a whole new group of convenience shoppers, who we hope will remain loyal customers into their adult lives.
    We tailor our stores to focus on key customer segments. For example, we have a Women's Health Initiative focusing on the health needs of women with specific conditions, such as diabetes or osteoporosis. We also carry ethnic beauty products in certain markets. We further reinforce CVS' convenience through an accessible, easy-to-shop store format and our extended hours.

...innovative... "We take pride in knowing our customers, and creating unique products and services to meet their different and changing needs."

    Private label and controlled label products serve as another important vehicle for differentiating CVS from its drugstore and mass merchant competitors. During 2000, we introduced a line of exclusive bath and body products under the Essence of Beauty® brand name. The early results demonstrate the generation of strong repeat purchases and customer traffic in our stores; therefore we have already begun to add new products to the Essence of Beauty line.
    We also continue to register solid growth in our CVS-brand products, which increased 7% and represented 12% of our total front-store sales. We now have more than 1500 CVS-brand products, including over-the-counter items and health and beauty aids, as well as our premium line of Gold Emblem® snacks and beverages. These private label products offer quality and cost savings for our customers and competitive profit margins for us.

CVS operates 3,000 one-hour photo labs, up from 2,000 in 1999, and our share of the U.S. photo processing market continues its rapid growth.

CVS' First-to-Market Advantage

    For those new products that are not exclusive to CVS, we place a priority on bringing these items to market faster than our competitors. Our success with the introduction of Olay Total Effects® demonstrates the benefits of this strategy. By being first to market, CVS has achieved a 36% share within the total U.S. drug market, significantly higher than our 23% moisturizer segment share. We have found that being first to market allows us to build sustainable market share ahead of our competitors and reinforces our innovation with consumers.
    The most dramatic front-end growth occurred last year in our photo business where sales rose more than 20%, and our market share of Kodak's business increased significantly. To enhance convenience, we added more one-hour labs in 2000, reaching a total of 3,000 chainwide. At the same time, we have been at the forefront in introducing new photo-related services. For example, we now offer a service that allows customers to drop off film from a regular camera and have their pictures uploaded onto the Kodak Picture Center® at CVS.com. The popularity of this site has made it the industry's fastest-growing photo-sharing service, making us Kodak's #1 online customer. We continue to explore opportunities for the introduction of other unique photo services.
    We aim to further enhance our value to customers through the introduction in 2001 of a new branded relationship marketing initiative, ExtraCare®, making us the only major drugstore with a loyalty program chainwide. This initiative has been tested in six markets for a number of years, enabling us to continually refine our program. Through ExtraCare, we are offering special promotions and incentives to our best customers, to reward their patronage of CVS and encourage higher loyalty. For example, benefits may include opportunities to earn rewards and free merchandise in select categories through support from our vendor partners, exclusive savings on purchases, access to special mailings with highly customized coupons and health information, automatic sweepstakes entries, and participation in a college savings program. CVS is the exclusive pharmacy participant in UPromise, a savings network that makes it easy for families to accelerate savings for college through partnership with America's most trusted brands.

Innovative Technology to Improve Efficiency

    Consistent with other areas of our business, we are investing in technology to improve efficiency and maximize performance in our front-store operations. Computer-assisted ordering is lowering inventory levels in selected categories, and we are testing vendor-managed inventory programs with key over-the-counter and prescription suppliers. We believe that the reduction of inventory levels will accelerate our ability to reach our return on invested capital goals. In addition, we are continuing to reap the benefits of our Promotional forecasting and allocation system, which helps reduce promotional out-of-stocks, increase sales and reduce seasonal residual inventories. After a pilot test in more than 30 stores, we are also rolling out an improved store-level system, Assisted Inventory Management, or AIM, which we believe will significantly reduce out-of-stocks, drive sales and improve inventory productivity.