The "Amazon effect" on pharmacy isn't about medicine
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America's largest pharmacy chains are having a tough time competing with Amazon, and it isn't primarily because of medicine sales.
The big picture: CVS and Walgreens have long boosted their margins by selling products that customers find on their way to pharmacies at the back of their stores, but that model is no longer working.
Zoom in: Both incumbents have reported declining retail sales, with Walgreens citing a "challenging" retail environment that reads like code for locked-up items and "Amazon."
- Amazon's retail business, meanwhile, continues to grow — even if its prescription pharmacy sales remain just a fraction of what CVS and Walgreens generate.
- "Pharmacies have an attachment factor — you go there for one product and buy another one on the way out," says Steven Wardell, managing partner at Wardell Advisors.
- "Anything that challenges this model is bad news for your neighborhood pharmacy."
Catch up quick: Walgreens in June announced plans to shutter a "significant" number of its 8,600 U.S. stores, and reportedly is in talks to be acquired by a private equity firm.
- CVS in 2021 said it would close 900 stores, or roughly 10% of its U.S. retail locations, over three years. One explanation was changing consumer spending patterns.
- Rite Aid recently emerged from bankruptcy.
Behind the scenes: While Amazon Pharmacy represents an existential threat to incumbents, it's not what's forcing retail stores into immediate crisis.
- CVS and Walgreens' estimated prescription revenues for 2023 were roughly $91 billion each, per a March report from Adam Fein's Drug Channels.
- By comparison, Amazon's pharmacy sales are projected to hit $1.8 billion this year after recording $1.25 billion last year, per a leaked company document obtained by Business Insider.
Yes, but: Walgreens' retail sales fell 3.5% from the prior-year quarter, and comparable retail sales declined 1.7%.
- CVS in August said front-of-the-store same-store sales dropped about 4% during the second quarter from the same period in 2023, citing a "general softening of consumer demand" as a cause.
- Amazon, meanwhile, reported a 7% improvement in the quarter ending Sept. 30 to $61.4 billion in retail sales.
What's next: Pharmacies' core business faces challenges too, including reductions in drug reimbursement, recent legislation to break up pharmacy-benefit managers, and ongoing pharmacist shortages.
- Amazon, meanwhile, has the luxury of crafting a pharma strategy while its retail sales eat incumbent revenue for lunch.
The bottom line: Amazon's impact on pharmacy today is less about its health care expertise and more about its retail behavior knowhow — something that could help it consumerize health care in a very literal sense.
