Why North America’s health and wellbeing could be the next big retail pharmacy battleground
The retail sector has experienced both of these extremes, with some seeing strong sales while others have been forced into bankruptcy and liquidation.
What we have seen is an acceleration of trends that were in motion prior to the pandemic but are now even more essential for success. One such trend is, understandably, the enhanced focus in retail on health and wellness. This is not a new phenomenon especially within Retail Pharmacy as "buy and build" expansion pushed the market towards saturation. More savvy competition, both within the sector, as well as grocery, mass merchant, and ecommerce began to expand into Health & Beauty (H&B) and prescriptions.
Prescription benefit managers (PBMs) grew increasingly powerful and began demanding lower reimbursement terms and restricted access to customers. Some even set up their own mail order prescription businesses and became direct competitors. This direct attack on the pharmacy business model, combined with the erosion of the convenience advantage forced chains to find other ways to extend their reach. For many, the answer lay in diversification and, specifically, the integration of products and services that had previously sat with dedicated medical providers.
Faced with limited development prospects, retail pharmacies once again needed to re-examine their offering and carve out a distinctive customer proposition.
Clinical decisions
In the US, prescription medicines account for around two-thirds of retail pharmacy revenues¹. As a result, repeat business is vital. Clinical services – a longer-term, more consultative offering than pure dispensary – can help to encourage ongoing business by building a stronger relationship between pharmacist and patient.
With that in mind, it's little wonder that for many retail pharmacies in the mid-2000s, the decision to expand into clinical services seemed like a natural evolution.
CVS, Walgreens and others went through a flurry of acquisitions, purchasing small health service companies up and down the US. In-store facilities were rolled out to capture new clinical business and commence the shift into a wider "health services" offering.
Certain activities, such as immunizations, had successful starts. But the growth of these clinics and their services rapidly dropped off and it soon became apparent that success would not be as readily won as those retailers may have hoped.
One major problem lay deep in the complex inner workings of US healthcare. Limited by their insurance plan benefit structures, customers would often find themselves unable to access the full range of services offered in-store. Clinical service costs, while usually lower than those available at a hospital or doctor's office, would likely be higher than the insured co-pay price paid by the consumer at the latter.
Retailers quickly learned that in order to integrate into the healthcare industry, they would need to learn how to influence and control it as well.
Playing a long game
CVS, which made the strongest initial investment into in-store clinics, has spent more than a decade in pursuit of that goal. Major product decisions, such as the removal of tobacco from stores (itself a $1bn annual business) were executed in the name of a slow repositioning towards healthcare.
Strategic acquisitions have only helped to further that ambition. With its first major vertical healthcare purchase – that of PBM Caremark in 2006 – CVS gained control of the levers of customer access and prescription reimbursement for millions of lives. 13 years later, with the acquisition of Aetna, the company added the ability to provide health, dental, vision and other insurance plans to customers.
Taken to its logical conclusion, this trajectory could lead to the eventual formation of an integrated healthcare system supported by some 10,000 points of service.
There is growing evidence that an empire of that kind is firmly in the retailer's plans. CVS has already announced its intention to evolve clinics into more expansive "Health Hubs", bringing enhanced services to 1,500 locations by 2021. Health Hubs include more space devoted to clinical services and a broader focus on proactive wellness and nutrition alongside extensive health services.
That wider remit is immediately evident in an enhanced product assortment, one that includes numerous specialized items and categories for maintaining health and preventative wellness products –. And, perhaps influenced by insights delivered by Aetna, CVS has also chosen to put significant emphasis on chronic condition management, an area that can provide a pharmacy with some of its most valuable customers.
While CVS is playing a highly strategic game, though, it is by no means the only player to watch.
Save money, live better
As the world's largest retailer, just about anything Walmart does is reason for the competition to pay attention. It may have taken more than a quarter of a century for Walmart to start selling groceries after all, but the retail behemoth now holds top position in that segment in North America by an overwhelming margin.
With that precedent in mind, and in light of Walmart now holding the position as the nation's third largest retail pharmacy provider, it seems likely that another fierce battle for the future of retail pharma is about to begin.
Launched in fall 2019, the Walmart Health Care Clinic serves as a good indicator as to the strength of the company's ambitions.
Staffed to deliver an expansive set of services that range from primary care and disease management through to dental, hearing, nutrition and fitness, these sleek, modern facilities offer the same one-stop-shop approach as Walmart's core store.
Moreover, Health Care Clinics also employ the company's "everyday low pricing" model, something that makes for a compelling proposition regardless of insurance coverage. Medicare and Medicaid are both accepted too, encompassing what is likely a significant number of customers.
The battle within
Similar at their core yet, subtly different, these offerings from CVS and Walmart represent a dramatic shift in healthcare delivery in the US.
While the scale of each remains too small at this point to draw many conclusions, those small differences could carve out room enough for both to flourish. CVS' focus on providing specialist-level health and chronic condition care is different enough from Walmart's "low price, one-stop shop" approach to appeal to a distinct group of customers.
Rather than between each other, the biggest challenges ahead for CVS and Walmart may actually be found within. As both companies make fundamental changes in order to facilitate a future in which healthcare is a significant part of their offering, they will need to focus on evolving their relationships with their long-term customers too.
CVS, for instance, will need to ask customers to reconcile the idea that a company that continues to dominate in snacks and candy is now an active participant in their healthcare. And Walmart, famed for its leadership in building highly efficient operations, will need to scale and sustain a healthcare business rooted in flat, affordable pricing, as well as build the credibility as a viable provider of quality healthcare.
Neither challenge is easy. But if history has taught us anything, it's that when companies of this size decide to redefine an industry from the ground-up, they tend to succeed.
The arrival of Covid-19 also introduces a new reality unthinkable less than a year ago. Health and wellness permeates all aspects of our lives and vigilance is essential to protect ourselves and our loved ones.
- PPE has become a category in its own right with massive and sustained demand across such items as masks and sanitizers.
- Hospital capacity is being tested repeatedly with infection surges and unable to address lower level and elective procedures
- Vaccination is now a global necessity requiring a distribution network capable of rapidly reaching billions of people
FOR RETAILERS
Smarter operations and sustainable growth, powered by Customer Data Science.
FOR BRANDS
Better understand and activate your Shoppers to grow sales.
Build Customer Loyalty with Personalization
Retail success takes many forms in today's dynamic marketplace. From large legacy retailers to disruptive start-ups and all manner of competitors in between, the paths to retail success involves common principals around which there is a wide variation of understanding and execution.
To bring clarity to the issue of what makes a winner, dunnhumby, the global customer data science firm, conducted a massive survey of more than 7,000 U.S. shoppers for the second annual Retailer Preference Index (RPI), the first study of its kind in the industry. In what's quickly become known as retailing's equivalent of research firm Gartner's often-cited Magic Quadrant, dunnhumby's RPI is a ranking of more than 50 large food and consumable retailers based on a combination of shopper sentiment and financial performance.
Join Retail Leader and dunnhumby's Grant Steadman, SVP of Client Services, and Erich Kahner, Associate Director of Strategy, for a deep dive into the RPI, the levers for success, and an unvarnished look at why some retailers win and others don't.
Topics discussed include:
- The 7 drivers of consumer preference and what's changed.
- Understanding the RPI methodology.
- How retail winners make emotional connections.
- The new rules of value perception, key drivers and amplifiers.
- The three things RPI laggards must do to improve their appeal to shoppers.
For a look at the retailer rankings and to understand how your business can benefit from implementing the RPI success framework, watch our webinar which took place on Thursday, September 5, 2019.
Covid-19 has fundamentally changed shopping behaviour in a short space of time with shoppers visiting fewer stores less often, but leaving with bigger baskets. Ecommerce sales have near tripled, leaving some Retailers struggling to meet demand and cannibalising in-store margins. What's more, these changes are anything but transitional, with lockdowns and social distancing of some variety likely to dominate society for the foreseeable future, or until a vaccine is released.
With price sensitivity likely to resurface as a recession kicks in, continued disruption to supply chains, and a potential price war in the making as cash-rich retailers fight to retain newly acquired Shoppers and market share, the implications for CPGs and their retail partners are varied and potentially vast.
This report explores how CPGs can maintain a collaborative, win-win relationship with Retailers in the face of changing shopper needs.
his blog was co-authored by Jeremy Neren, Founder & CEO of GrocerKey, part of the dunnhumby Ventures' investment portfolio.
In the past few months the shift to online sales in grocery has been significant, increasing across all geographies. We now expect to see online grow to 5-7% of sales in most grocers and up to 15% for those retailers who have the ability to capitalise on that demand.
With this growing demand from consumers and heightened importance of the online channel, it's important for retailers to both maximise the customer experience while at same time drive efficiency and profitability of their service.
It's not without challenges, but there are some key strengths retailers can focus on.
Online satisfaction and adoption
Whilst satisfaction with online is higher than stores during the Covid-19 crisis, getting customers to fully adopt this new way of shopping can be massively influenced by delivering on what matters most:
1. Amplify your offline strengths – shoppers tend to use their preferred offline grocers for online if they can, so reflect your brand strengths fully be it key categories, private label, your loyalty programme. Most customers will be using both offline and online channels going forward and expect a seamless experience
2. Make the first few shops easy and quick to do – baskets are bigger online, typically 60+ items, so quick and easy basket building is essential. Instant favourites – where Shoppers can see all their normal items they've brought previously in-store when they register can save significant time and frustration.
Simplicity is the key in eCommerce grocery. It's a convenience-oriented experience, so you can ultimately drive the greatest convenience by providing customers with the quickest path to locating items of interest, allowing them to easily build their basket, and check out quickly.
3. Go big on Fresh. Shoppers are keen to do their full weekly shop, so fresh is the key category. It needs special care and attention in terms of picking and delivery routines, as well as the right shopping cues for Shoppers such as date codes, provenance, seasonality, and ease of choosing the right quantities and weights.
4. Focus on reliability – late deliveries, missing items, poor substitutes are the most common reason for leaving or switching service. Set outstanding operational metrics on these and improve functionalities such as integrating substitutability science into picking and ordering routines. Services such as reminders for forgotten items and amending your order before delivery also make a big difference to service satisfaction.
With out-of-stock challenges retailers need to be proactive with easy options for Shoppers to pre-select preferred substitutes and have a reactive approach to substitutes with great data supplied to personal shoppers for when the Shopper hasn't selected their preferred substitute.
5. Personalising the shopping experience – online enables many things that just aren't possible in-store. Relevant product recommendations, personalised merchandising of associated products or specific ingredients, displaying the most relevant promotions, help improve the experience and the basket size by 10-20%.
Improving the customer economics
Making the online service drive incremental value to the business is key to success.
Many retailers make the mistake of treating eCommerce like an IT project. Simply standing up a nice looking front-end eCommerce experience, while simultaneously ignoring all of the major operational considerations and many nuances of eCommerce grocery, will lead to failure. Collectively, these considerations can make or break the success of an eCommerce grocery business. Just like grocery retailers obsess over the details in their physical stores, they must do the same with their eCommerce business in order to drive profitability and ultimately sustainability.
This requires continued choiceful investment and focus in the following 4 areas:
1. Track customer value not just channel performance.
Having a cross channel view of shopper impact is key for right investment decisions. In most cases online sales at 70% incremental driven by existing shoppers spending more and attracting brand new shoppers to the business.
It's important for retailers to cultivate multichannel shoppers by augmenting an integrated digital experience with promotions that drive in-store customers to shop online and online shoppers to shop in-store. This ultimately will lead to increased visits, improved loyalty, and greater share of wallet.
2. Maximise basket size and frequency.
Whilst already 3-4 times higher than the store continuously growing average Shopping basket is essential for bottom line profitability. Dynamic product recommendations, forgotten item reminders, and delivery subscriptions are a few examples of activities to have in place.
Making "sale items" immediately accessible as a distinct category with filtering options (i.e.; past purchases, dietary preference, brand preference, etc) is helping drive basket size. This is an area where eCommerce is simply 10x more efficient than the store as you can essentially browse all promotional items of interest in a matter of a few clicks vs. traveling to the store and walking each aisle.
3. Drive operational efficiency.
Expanding current capacity is clearly important but equally reviewing ways to maximise pick per hour rates and delivery rates is key. Systematic reviews of picking by zone, planogram mapping, labour scheduling, dynamic routing of delivery orders are necessary.
One way GrocerKey is driving efficiency is by creating incremental staging capacity via temperature controlled totes. This is far less expensive than adding freezers / coolers – so there's major capex savings, more efficient from a space allocation standpoint, growth can be handled in a modular fashion, and the retailer can then promote never breaking the chill chain because the product is kept at the appropriate temperature from the time it's picked until it's in the customers hands.
4. Provide suppliers a combined data asset across offline and online.
Multichannel insights and activation that enable brands to grow the channel with you through highly personalised digital onsite and offsite media will be very beneficial to the economics of and profitability of your service.
The tipping point for online grocery is underway and retailers need to be ready to make the most of this opportunity.