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.
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
The In-Store Pharmacy: Back to a Different Future
There was a time when grocery stores sold groceries and retail pharmacies sold prescription medicines, OTC (over the counter) and health & beauty. But over the years, grocery retailers have stretched into the pharmacy space looking to drive additional footfall and revenue. Yet while the strongest players in the US, such as Walmart and Kroger operate significant pharmacy operations, they still sit firmly in the single digits for pharmacy market share. Recent years have been especially tough on in-store pharmacies. With low prescription volumes and undifferentiated H&B categories, growth has stalled and even declined as the industry has evolved. As such, grocery-led pharmacy seemed destined to slowly fade away as a casualty of financial cuts and focus back to core offerings.
Enter the Coronavirus.
Suddenly, the future has much less to do with the past and far more to do with the present.
In just a matter of weeks, there has been a global shift dramatically impacting the shopping missions of customers in both how they shop and what priority products are purchased. As we have collectively moved through lockdowns and closures, customers have settled into a new and dramatically different rhythm with a major emphasis on safety and efficiency.
- Less frequent trips but bigger baskets: As the initial waves of customer traffic subsided, retailers are seeing a significant decrease in customer counts that are significantly below YoY trends. This impact is being offset by large basket sizes in both units and spend as customers seek to limit trips in hopes of minimised virus exposure.
- Massive move to online: The transition to ecommerce has been an evolution 15 years in the making. 2019 saw a 14.9% jump in online retail sales in the US, bringing total online spending to 16% of total retail sales. The Coronavirus has accelerated that growth trajectory through two main drivers: providing a convenience solution to families that are now homebound and by providing a direct health need for all customers to limit in-store activities, especially older customers who have been slowest to adapt to ecommerce and now those that have the greatest need to use it.
- Localisation: In addition to fewer trips, customers are also narrowing their range of locations and retailers as they seek out the best option to fit their needs. This is not simply moving to the store that was most shopped prior, but an open consideration of new options as well.
- Value: During the early rush on hand sanitiser and OTC products, value was of little concern to customers. Now as the full impacts of the shutdown are being felt in terms of job insecurity and unemployment, sensitivity to price, balanced with the right level of quality will become increasingly critical to maintain customers.
As countries collectively move through the Coronavirus pandemic, these behaviours will continue to harden. A new focus on in-store pharmacy could now be a central strategy for grocers, not as a resurrection of the past, but based on the needs of the future.
Stretching across the behavioural shift comes a heightened awareness of staying healthy and practising good hygiene. This has impacted health & beauty categories as customers are learning to be self-reliant now hair salons and beauty spas are shut down. Walmart's CEO has stated that we are in the third phase of panic buying, of which two of three centred on H&B/OTC products . Even after the pandemic subsides, this broader view of personal health, that includes wellness of the person and their surroundings will drive a more holistic set of requirements that are met by grocery and pharmacy products and services.
China's experience with SARS and Covid-19 teach us that much of the acceleration of ecommerce will remain. Grocers will find themselves with increasing levels of underutilised space that can be repurposed with a supercharged version of the pharmacy that reflects the needs and expectations of today. Space will be outfitted with an emphasis on clinical services as well as prescription dispensing. The new services could encompass testing, vaccination, and relief of basic primary care so that hospitals can address those that need it most. Investments can be made in supporting H&B/OTC categories that allow grocers to build credibility in this space that had been previously a peripheral business.
The ability to implement such aggressive changes is a daunting task, especially in uncertain times. One approach to consider is the formation of strategic alliances with an experienced player in the space, specifically retail pharmacies. In the US, former competitors have joined forces to varying degrees with CVS assuming pharmacy operations at Target and Schnucks while Walgreens has built several experimental H&B/OTC spaces in Kroger locations. While these are currently limited to tests or purely the acquisition of formerly failing operations, they have the potential to become much more.
The joint operation can benefit as retail pharmacies continue to expand their capabilities in clinical/medical services and sophisticated H&B/OTC that include prominent innovation and leading-edge private label products. It is critical that efforts are co-ordinated, and the experience seamless for the consumer. There is always a risk of a partnership becoming 'two stores within a store' leading to unnecessary complication and a conflicting value proposition.
A successful implementation of this strategy will allow grocers to provide a compelling solution to customers during, and eventually emerging from Covid-19. A strong in-store pharmacy operation could directly address the health need the pandemic has instilled in customers globally and steer their choice of which stores to visit. Grocers could maximise the less frequent, but larger baskets through incremental products and services that are top of mind for customers.
Finally, opportunities to broadcast superior value through Health & Wellness themed combinations of consumables, H&B, and prescription medicines can appeal to customers as they work through the inevitable recession to come.
Just months ago, the in-store pharmacy was on life support, with a future limited to potential third-party operation at best and oblivion at worst. Coronavirus has changed all of that, and while we will emerge from this pandemic, customer behaviours will return to something other than the past. This new present, with its redefined focus in health will make these solutions essential for the grocery store of future.