Challenges and Opportunities in The Pharmacy and Drugstore Industry

The pharmacy and drugstore industry is predominantly dominated by a duopoly consisting of Walgreens Boots Alliance and CVS Health Corporation, which make up just over 60% of the market share. Surprisingly, this industry is becoming increasingly competitive attributable to more cost effective competitors such as Costco and Walmart. The threat of entry is also increasing due to an alarming competitor known as Amazon, who could potentially dominate this industry. There is an ongoing threat of substitutes as consumers turn to healthier lifestyles, or convert to self-medicating. The industry’s regulations are continuing to become more hindering every year, and the industry is heavily influenced by the increase of implementation of technology and web based pharmacies as society is shifting into a further digital era. The prominent key success factor that propels profitability in this industry is the ability to obtain easy access for consumers so they can conveniently have access to their prescriptions and general health products, without having to turn to competitors. Overall, this industry appears to be unattractive and current companies should look for ways to improve their standing in this industry.

The Industry's Dominant Features

The Pharmaceutical and Drugstore industry consists of three major companies that hold 68% market share. Walgreens (34.8%), CVS (28.2%), and Rite Aid (5%) have very similar products and service directed toward positioning themselves to provide value to their customer segments (Ibis World). CVS has positioned themselves by attempting to consolidate with vertical integration process through the acquisition of Aetna. This provides CVS’s customers access to health care benefit programs and many retail locations from expansion business activities. Walgreens maintains its position with additional acquisitions, divestitures and strategic initiatives in recent years (Walgreens 10-K). Rite Aid is also focused on building momentum for key areas of its business like its innovative wellness store format, a highly successful customer loyalty program and expanded pharmacy service offerings, as it also enhances its omni-channel and own brand offerings to strengthen the Company’s competitive position and create long-term value for stockholders (Rite Aid 10-K).

Growth in this industry continues to be positive at a steady constant each year, which makes it in the maturity stage of the life cycle. Growth is not in a drastic influx but daily operation maintains each company's strategic position. Evidence of this growth can be observed by the accelerated expansion of each company regarding purchasing more stores location in the past 5 years. In December of 2015, CVS acquired 1,672 pharmacies and 79 clinics from the retail giant, Target Corp., which cost 1.9 billion (Business Insight, 2018). Walgreens Boots Alliance acquired a large amount of Rite Aid store which was a major success in the growth of the market. Rite Aid remain store have been combined with Albertsons to create an even larger chain while maintaining the name (Jaspen, 2018). The pharmacy and drugstore industry has an annual growth of 2.8% between 2014 and 2019, with the same 2.8% forecasted between 2019 and 2024 (Ibis World).

This industry has a wide breadth of products and services that focus on pharmaceutical prescription and nonprescription drugs, cosmetic beauty supplies, groceries and convenience food for customers. All of these companies have similar products just different ways of conducting business activities. Each store have their own private labels offering, to reduce cost and increase the brand appearance, motivated as an alternative to national brands. These private label products contribute to the majority of sales within these companies, Warren Buffet says in Forbes “House brands, private label, is getting stronger… and it’s gonna keep getting bigger,” forecasting the successful potential growth with having these products (Danziger, 2019).

The largest demographic of consumers that purchase prescription and non-prescription drugs are the 65 and older age group, in contrast, individuals who are ages 44 - 65 make up 35.9% of the market segment revenues. The market is valued at 2.6 billion and 71.7% of total industry revenue results from the sale of prescription medications (Ibis World). Majority of the customers have third-party insurances such as pharmacy benefit managers, insurance companies and governmental agencies. These are regulated systems that pay all or partial cost for the customer’s prescription drugs that meets the requirement. Third-party payers account for a significant amount in sales in the retail pharmacy industry (Walgreens 10-K). The industry is extremely reliant on 3rd parties. Manufacturers manage the actual distribution of drugs from manufacturing facilities to drug wholesalers, and in some cases, directly to retail pharmacy chains, mail-order and specialty pharmacies, hospital chains, and some health plans (Health Strategies Consultancy, 2005). Any complication in key relationships can severely impact the company position and negatively impact consumers.

Vertical integration and consolidation are highly used in this industry to encourage lower cost to the consumer for purchasing prescription drugs. Companies in this industry have acquired or positioned interest to work with pharmacy benefit management (“PBM”) solutions. For example, Anthem, CVS Health, UnitedHealth, Express Scripts, Prime Therapeutics, and Walgreens have announced or rumored to increase relevance in the supply and value chain for the end consumers. The right partners and purchases might just allow a more flexible and muscular response to what the public views as too many unconscionable drug price increases and lofty introductory charges for new drugs (Barlas, 2018).

The elements presented in the analysis, suggest continued steady growth as new data and innovation becomes more available. The industry recognizes the shift towards more demand for their products and services at a lower cost to the segmented consumers, with convenience of delivery. Each company in this industry will make aggressive actions to maintain its competitive position in the Market, with the understanding of potential adverse effects.

Porter’s Five Forces

Intensity of Competitive Rivalry in the Industry

In the industry of Pharmacies & Drug Stores in the US, there are three major players: Walgreens Boot Alliance Inc., CVS Health Corporation, and Rite Aid Corporation. The rest of the market segment is based on other smaller players in the industry. Based on 10-K reports provided by the companies as well as the total industry revenue provided by IBISWorld, Walgreens Boots Alliance Inc., and CVS Health Corporation have a duopoly and own over half of the market share, at 34.8% and 28.2% of the market share respectively. Rite Aid Corporation, the next biggest competitor to the previously mentioned, has roughly 5.0% of the market share. There are other companies that are slowly rising and gaining a footing in the industry, such as Costco Wholesale Corporation and Walmart Inc. who offer lower price solutions for expensive medications, as well as Amazon, who is entering the market through an online platform through their purchase of PillPack (Angelicalavito, 2018). With new companies entering into the market and each of them trying to increase its share and take advantage of the growing market, rivalry in the industry is high.

Threat of Substitute Products

For the industry of Pharmacy & Drug Stores in the US, there are several substitutes for prescription-based medication as well as the convenience aspect that the industry offers. The need for prescriptions can be circumvented by a change of lifestyle (Harvard Health Publishing, 2017). According to Harvard’s article “Alternatives to taking pills,” plenty of research shows eating healthier, exercising more, as well as implementing other positive changes to lifestyle. Other research has shown that medical marijuana can be a substitute for standard medications and pharmaceuticals, as a study by Keyhani showed that 81% of adults studied believe that it has at least one benefit and 66% of patients reported that it helps with pain management (Keyhani). In addition to medical marijuana, according to the National Institute of Alcohol Abuse and Alcoholism, alcohol has been used as a substitute of pain relievers and successfully reduces pain in humans and animals (National Institute on Alcohol Abuse and Alcoholism). Aside from providing pharmaceutical services, the industry also provides self-care and health products. These self-care and health products could be substituted by going to an emergency room or hospital. For instance, if someone is having an allergic reaction, instead of going to your local Pharmacy and Drug Store, you can go to an emergency room and receive proper treatment. All in all, the threat of substitute products is high.

Threat of New Entrants

The barriers to entry for the Pharmacy & Drug Store industry in the US is high. Big name pharmacies such as Walgreens Boots Alliance, CVS Health Corporation and Rite Aid Corporation have already established contracts with the major wholesale pharmaceutical distributors. For a new entrant to come into the industry and try to establish a similar or cost-efficient deal with a wholesale distributor is extremely difficult. In addition to the contracts that already established players in the market have with wholesale manufacturers, pharmacy benefit management (PBMs) add to the barriers of entry for new prospects. PMBs “handle the distribution of drugs for large employers, insurance companies, and government programs like Medicare,” according to Feldman’s article “Big Pharmacies Are Dismantling the Industry That Keeps US Drug Costs Even Sort-of Under Control” (Feldman, 2016). By PBM’s consolidating and strengthening their preferred pharmacies and drug store relationships, this causes another barrier for new entrants into the industry to cross. Though these barriers of entry exist, if the company attempting to enter has enough money to mitigate the costs of entering, it is possible to enter. For instance, in 2018 Amazon purchased PillPack, an online pharmacy, allowing them to enter into the Pharmacy and Drugstore industry (Angelicalavito, 2018). With multiple barriers for entry, but the barriers being overcome by a large amount of capital, the threat of new entrants is moderate.

The Power of Buyers

In the Pharmacies & Drug Stores industry in the US, buyers have low power in the industry. The rate of which the population of 65 and older is growing. The projected rate of population increase for the demographic is to jump from 3.303% in 2019 to 3.368% in 2020 (US Census Bureau, 2017). In addition to an increase in the population of the elderly who are dependent on medication, the need for certain medications by different age groups does not change. Though there are different alternatives for prescription medication, there are certain illnesses that cannot be treated with a change of diet and increase in exercise. For instance, strep throat in viral form needs antibiotics to be treated (Streptococcal Infections?). With the demographic of ages 65 and older being more dependent on medication for livelihood and there not being a substitute for medication that is required for a specific or unique illness that they or any other demographic may have, the power of buyers is low.

The Power of Suppliers

Wholesale distributors of pharmaceuticals and manufacturers are the typical suppliers of large drug retailers. However, most drug retailers and pharmacies do not rely on a sole wholesale manufacturer and instead have multiple wholesale manufacturers that they rely on. However, the cost of switching wholesale manufacturers would be costly as the relationships that the pharmacy and manufacturers have are generally formed through contracts. Furthermore, the manufacturers will have a decrease in patents expiring over the next coming years. Based on data from the National Pharmaceutical Services, from 2018 to 2022, about 78 different brand name pharmaceuticals will have their patents expire, allowing generic brands of the same medications to enter into the market (National Pharmaceutical Services, 2017). Though this will allow for an increase in profit margin as generic brand medications enter the market, the patent expiration is happening at a decreasing rate, with fewer patents expiring in 2019 compared to the previous years. This allows for a slower decay of the power of suppliers, causing it to still be moderate.

Summary of Forces and Attractiveness

There is a high amount of rivalry in the industry between the three major competitors of Walgreens Boot Alliance Inc., CVS Health Corporation, and Rite Aid Corporation, along with the new entrants of Costco Wholesale Corporation, Walmart Inc. and Amazon into the market. There is a high threat of substitutes for pharmaceuticals such as healthy lifestyle changes, medical marijuana, and alcohol. The industry has a moderate threat of new entrants due to high barriers of entry which can be overcome if the company attempting to enter the industry has enough capital. Buyer power is low due to people being dependent on medication and moderate power of supplier due to patents for pharmaceuticals expiring at a decreasing rate. Taking all of the summaries into consideration, the Pharmacy and Drug Store industry in the US does not appear to be attractive.

Trends in the General Environment

Political

Beginning in early 2019, a political trend emerged with respect to repeal of the tax penalty for those who are not enrolled in the Affordable Care Act. According to Forbes, “ under the Trump Administration, Congress repealed the tax penalty last year that has to be paid by those without health insurance, effective from the tax year 2019” (Gleckman, 2019). The tax penalty was an incentive to promote the Affordable Care Act. “Depending on which of these assumptions or combination of assumptions are in play, we estimated around 3 to 13 million fewer people would have health insurance by 2020 due to the penalty’s elimination, and that premiums for most individual market plans would likely increase by 3 to 13 percent” (Eibner and Nowak, 2018). Without health insurance converge, the price of drugs would be unaffordable for an individual. Hence, pharmacy and drug retail industry will be forced to either reduce the profit margin or maintain their products’ prices in order to maintain their customers.

Economic

The household income level usually indicates the consumer's ability to purchase industry products. However, need-based for prescriptions drugs are less likely to be impacted by a change in discretionary income. Matter of fact, per capita disposables incomes and consumer spending are seeing drastic growth in the current year. According to the Wall Street Journal, “Consumer spending has increased 2.7% on average in the four quarters through September compared with the same period a year earlier, as disposable income rose 2.7% on average” (Andriotis, 2018). Hence, the growth in disposable incomes and consumer spending can be seen as a potential opportunity for the pharmacy and drug retail industry.

Social

The United States is expecting to see a sharp rise in the aging population. According to Census.gov, “The nation’s 65 and older population is projected to nearly double in size, from 49 million to 95 million people in 2060. As a result, the share of people 65 and older will grow from about 15 percent to 17 percent between 2017 to 2020, and by 2060, older adults are projected to make up nearly one-quarter of the population” (Vespa and Medina, 2018). Hence, more Baby Boomers will be out there with Medicare. “The boomer generation tend to focus more on their wellness and maintaining good health. More than 60% of boomer take a multivitamin or supplement, and more around 25% take a calcium supplement” (Smart Retailing Rx, 2014). There is a trend in health consciousness in the US which is growing by the day. Hence, the drug retail industry is also ramping up its health and wellness offerings in order to meet consumers needs. “We’ve seen the drug store channel made significant enhancements in recent years to better serve consumers’ increased needs on holistic health and wellness, through the addition of in-store pharmacies, health clinics, dieticians, and healthier food and snack offerings” (Rains, 2017).

Technology

In the Pharmacies and Drug Stores industry, companies have come a long way toward implementing the use of technology (Lightspeed, 2019). Drug stores have improved their digital capabilities, such as their websites and mobile applications, because their customers are expecting some type of digital service to accompany their in-store experience. Currently, “45% of consumers are using a combination of in-store shopping and digital channels to search or purchase what they need” (Mintel, 2019). This spans across a multitude of generations, especially since the main users of this industry are the incoming Generation X, the Baby Boomers, and the older generations. Walgreens reports that almost 30% of their mobile users are 55 years and older. Additionally, the diagram below shows the results of a survey done in December 2018 about consumers’ attitudes towards drug stores’ digital capabilities by generation (Lightspeed, 2019).

Additionally, pharmacies and drug stores are privy to confidential and sensitive data, such as personal health and financial information. Information technology helps keep that data safe and private because these businesses depend on their customers’ “willingness to trust” them with their information, therefore, companies must take measures to make sure that that information is protected and kept out of the wrong hands through cybersecurity (CVS 10-K). But players in the industry are and have been vulnerable to cyber attacks which can disrupt or damage their systems which can result in loss of their financial and business position as well as lose positive consumer perception (Rite Aid 10-K).

Environmental

Companies competing in the pharmacy and drugstore industry are “subject to various federal, state, and local laws, regulations, and other requirements pertaining to protection and the environment, public health and employee setting, including, for example, regulations governing the management of hazardous substances, the cleaning up of contaminated sites.” In other words, there are rules in place to make sure that pharmaceutical companies and drug stores are keeping the environment safe. Failure to abide by these rules can result in fines or other consequences given by government officials as well as the loss of environmentally conscious customers (Walgreens 10-K).

Some companies take this one step up and create their own environmentally friendly products. For example, Walgreens created their own line of eco-friendly household cleaning products which was endorsed by Healthy Child World Charity, a company that aims to create healthy environments for children and to protect them from harmful chemicals (Mintel GNPD, 2012).

Legal

Because the pharmacy and drugstore industry is so heavily regulated, there are a considerable variety of laws and regulations that companies have to consider and abide by at the state, federal, and international levels when doing business in this industry. “These laws and rules governing the businesses and the interpretations of those laws and rules continue to expand and become more constrictive every year,” without the ability to predict if pending or future legislation will change laws within the industry which creates uncertainty and can affect the businesses’ operations, financial conditions or market share (CVS 10-K). The regulations, such as Medicare regulations, privacy and confidentiality requirements, laws related to reimbursement, pharmacy and professional licensure and regulation, and state and insurance holding company regulation, help protect the consumer but continue to strain pharmaceutical companies sales growth caused by longer FDA approvals, higher copays, drug safety concerns, and dependency on third-party payors (Rite Aid 10-K).

Companies in the Strongest/Weakest Positions

The three biggest players in the pharmacy and drugstore industry are Walgreens, the industry leader, CVS, second leader, and Rite Aid. Although considered one of the top three companies in the industry, Rite Aid is significantly behind CVS and Walgreens and struggling to catch up. So much so that it is starting to disappear and being eaten up by other companies, one of which is Walgreens who bought 1,932 stores and 3 distribution centers (Jaspen, 2018). One of the reasons that Walgreens is at the forefront of the industry is because of its high switching cost. Although it is possible to switch, consumers tend to stick with the original pharmacy because they don’t want to get through the hassle of filling out new paperwork for their insurance and new pharmacy, as well as intangible considerations such as relationships with the pharmacists (Stoffel, 2019).

The pharmacy and drugstore industry is changing to adapt to current and upcoming problems, such as Amazon buying PillPack. With news of Amazon preparing to get in the mix, the top three companies have begun to focus on maintaining their market share once it happens. All three companies are trying to get away from dependence on third parties to provide a more cost-effective solution to customers. CVS especially has been working on this through its acquisition of Aetna, in which they state that they are “working to transform the consumer health experience and build healthier communities by offering care that is local, easier to use, less expensive and puts consumers at the center of their care (CVS Heath, 2018).” Another tactic companies in this industry are heading for is the use of an omnichannel system. This means that they are trying to follow the social trend of e-commerce and creating a stronger online presence using websites and mobile applications. This would create a hybrid type of experience for the consumer since they are shopping in-store but using the app to search for the item location in the store and for digital coupons or discounts. Walgreens has been able to understand this concept and apply it strategically to get the maximum impact out of it. Walgreens’ Senior Director of Mobile Commerce said that through the use of omnichannel, their customers spend up to six times the amount they normally would with an in-store only form. The graph below breaks down the differences.

They are able to accomplish this by tying their products and services with their different channels, such as prescription refills, photo prints, and virtual doctors appointments (eTail). And the last common trend throughout this industry is the beginning use of mail order. With the tech giant soon joining this industry, Walgreens and CVS are trying to beat it before it’s even in the game by integrating home delivery services to prevent being “Amazon’d.” According to a survey done by Business Insider Intelligence, 65% of Walgreens consumers, 68% of Rite Aid consumers, and 69% of CVS customers would switch over to an Amazon offered pharmacy. Therefore they are rolling out delivery services to solve “pain points for consumers” to stay ahead of the game and to be better positioned while they still can (Beaver, 2018).

Key Success Factors (KSFs)

In order of prevalence, the 3 key success factors that have the strongest relationship with profitability and success in this industry is obtaining easy access for clients, the ability to control stock on hand, and having an experienced workforce. Obtaining easy access for clients is what differentiates this industry from others. Customers can easily get a wide variety of items without having to go to large retailers like Walmart or Target. In addition, businesses in this industry such as Walgreens or CVS have numerous locations to ensure they are able to reach customers all over, without having to travel far. Convenience is a key success factor that can generate success for this industry. The ability to control stock on hand is vitally important for any industry. Keeping track of inventory enables a company to establish customer satisfaction if products are consistently in stock. Overall, proper inventory management ultimately generates greater sales. An experienced workforce is beneficial in this industry to stand out against competitors. When customers arrive with a particular health issue, an experienced employee can guide them in purchasing the correct product. This results in higher customer satisfaction, which translates into increased sales. Maintaining an experienced workforce can drive out competitors, resulting in a higher market share and higher profitability.

KSFs Variations by Segment

According to MarketLine, the pharmaceutical and drug store industry primarily operates through three business segments: retail pharmacy, pharmacy services, and retail drugstore (MarketLine, 2019). When all key success factors are taken into consideration, they do not vary despite the different segments.

KSFs Likelihood of Vary Over Time

Delivering easy access to clients in the pharmacy and drugstore industry (which is known to have a multitude of locations nationally and internationally) is exceptionally important. Convenience is prime competitive factor in this industry; however, this could vary over time with competitors like Amazon being able to deliver products in a matter of hours. If pharmacies and retail drug stores consistently update their POS systems, issues of stockouts or incurring holding costs from too much stock, should not arise. Therefore, the expectation is that having sufficient stock on hand should not vary much over time. Finally, having an experienced workforce shouldn’t vary over time as long as staff is properly trained to accurately assess customers in finding the right products.

Implications of this Evolution

The implications of this evolution in this industry include businesses finding new ways to improve their levels of convenience by enhancing their mail-service, and ultimately transitioning into a more digital friendly business. They could also improve by remaining up to date with POS systems to obtain customer satisfaction through consistent stock on hand. Additionally, they could supersede competitors by hiring employees with great customer service and training them on knowledge of products, which is less accessible to receive with online retailers.

Industry’s Prospects for Long-Term Profitability Analysis

In today’s Pharmaceutical and Drugstore industry, many factors affect the economic and structure of each company that has a strategic position in regards to market share. This analysis provides an overview of all external factors that affect the industry as a whole, specific key feature of the industry that allows competition, and provides a snapshot of the performance of each of the major players. This industry in the maturity phase of its life cycle where growth is at steady increase as more people are living longer and more young individuals are becoming more health conscious. Pharmaceutical and drugstores companies are shifting aggressively toward a more global online presence that are influenced by new innovative technology, with a more comfortable perspective for ordering all prescription and nonprescription drugs by customers preference for deliveries to their homes automatically. This new trend is a result of new information of the potential that Amazon interest in this industry, which will be a major new player that will cause more competition and dilution of market shares among all current players. Based on the results from Porter’s five forces analysis this industry is not attractive high level of rivalry, substitutes, and with a moderate threat of new entrants makes it more difficult for any smaller company to make a serious impact unless they have large capital to overcome these obstacles. Companies like Amazon increases the level of uncertainty for problem involving all players in this industry and should be adapt to the change.