THREATS AND OPPORTUNITIES FACING RETAIL PHARMACY

Traditional drug store retailers seek to become one-stop healthcare destinations amid competition from online players and others

BY MARK HAMSTRA

Drug store retailers are under increasing pressure from multiple competitive threats, including a growing raft of online pharmacies, as well the ongoing threats posed by mailorder pharmacy and business challenges such as reimbursement and the tight labor market. In addition, front-of-store categories are also under pressure from online and specialty retailers, as well as from the proliferation of dollar stores and the expansion of the dollar stores’ assortments into more HBC products.

However, drug stores are reinventing themselves to compete in this environment by adding more clinical services and transforming into one-stop healthcare destinations with a range of offerings. In this way, they are approaching convenience from the perspective that providing a more holistic health care experience can simplify the process for patients and at the same time improve health care overall.

“I think there’s a number of challenges which are coming to a head,” said Rodey Wing, a partner in the health and retail practices of global strategy and management consulting firm

Kearney. “One, you have ongoing reimbursement pressure. The reimbursement level for drugs continues to decrease, so profit margin on the core part of the business is under pressure.”

Operating a retail pharmacy is a “scale” business, Wing said, which means sales volume needs to remain at a level that supports the fixed costs of the store and the labor costs associated with employing a staff of pharmacists and pharmacy technicians.

“As you have a bunch of new niche solutions or home delivery solutions coming on, it chips away at that volume,” said Wing.

These cost pressures come at the same time that retail pharmacies are seeking to cope with a tight labor market that has been exacerbated by the pandemic. Pharmacists have been under increasing pressure for the last few years, which has led to an increase in retirements and a slower uptick in new hires, which in turn has led some drugstores to reduce their operating hours.

“That starts a bit of a vicious cycle, because it starts to impact volume, and then that volume drives lower profitability and becomes a bit of a challenging spiral to get out of for retail pharmacy,” said Wing.

In the front of the store, traditional drug retailers have had difficulty competing on convenience, he said. The growth of online players, such as Amazon and others, have made it easy for consumers to fulfill immediate needs without a visit to their local pharmacy, eroding the convenience factor that many drugstores have long leveraged.

In addition, drug stores in business districts have lost some of the front-of-store traffic they previously enjoyed from workers who may now be working from home at least part of the time.

Drug store assortments have also become more homogenized across locations among many retail operators, said Wing, reducing their local relevance to the needs of individual communities. Many drug retailers also struggle to compete on price for front-of-store items, said Wing.

“When you have dollar stores popping up nearby, it’s become even harder to try to maintain that premium [price positioning], particularly given the size of premium that they’ve tried to maintain,” he said.

Jonah Ellin, chief product officer at 1010data, a retail analytics firm, said he believes online players in the pharmacy space pose a bigger threat than the traditional retail industry may be acknowledging.

“It’s a repeat of what happened with the independent pharmacies and drug stores getting taken on by the chains, but now the chains are being taken on by online,” he said. “And people are saying the same things—that customers won’t like giving up personalized service. They said it when customers went from independent drugstores to chain drug stores, and now the chains are saying it as customers go online.”

Drug store retailers need to take a closer look at what their customers need and want, and figure out ways to execute against that in the store to differentiate themselves, he said.

Although the online pharmacy players have largely offered a narrow assortment of medications—often emphasizing lowpriced generics—they could expand into providing more products and services over time, Ellin said.

That bundling of healthcare products and services is at the heart of drug stores’ efforts to transform themselves with the addition of clinics, in-store screenings and tie-ins with other healthcare providers. It presents opportunities for brick-and-mortar retailers that can execute this type of experience in their stores, leveraging the data they have about their customers to help determine their needs, said Ellin.

Some consumers will always be attracted to the retailer or platform that can offer products at the lowest price, he said. It remains to be seen how companies like Amazon and low-cost providers, such as Mark Cuban Cost Plus Drugs, will evolve and expand over time, and if they can succeed in attracting additional volume from traditional retailers.

When it comes to HBC and cosmetics, online retailers are capturing some share from traditional drug store retailers, but consumer interest in online sources for these items may vary, according to Ellin.

Jonah Ellin Chief Product Officer 1010data

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