Industry in transition
After several years of acquisitions and store expansion, the retail drugstore industry is now focused on the nuts-and-bolts that will be involved in transforming into a more holistic—and profitable—provider of healthcare services.
In some ways, the major national chains are “deciding what they want to be when they grow up,” said Elizabeth Anderson, senior managing director and research analyst at Evercore ISI.
As a result, retailers are rethinking everything from the products they offer to the design and locations of their brick-and-mortar stores. Importantly, they are seeking to determine how all of the pharmacy-adjacent businesses they have acquired, including clinics, can best work in tandem under each company’s broad umbrella.
“How do they evolve their businesses from the traditional pharmacy model, to ‘pharmacy retail-plus?’” said Anderson. “How do they think about scaling that business? How do they think about the right way for those businesses to link up with the core pharmacy business? Those are things they need to sort out.”
Aditya Kaushik, analyst at Coresight Research, said retail pharmacies are in a prime position to meet the healthcare demands of today’s consumers.
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“With U.S. healthcare costs surging and the dearth of pharmacists continuing, an evolution in convenient, affordable healthcare services is the need of the hour in the U.S.,” he said in a recent Market Navigator report on the retail drug store industry.
As drugstores increasingly expand the services they offer, they have an opportunity to become “the next generation of primary care providers, treating patients with acute illnesses and chronic conditions, such as asthma, diabetes and hypertension,” Kaushik said.
He predicted that the U.S. drugstore and pharmacy sector would grow revenues by 4.7% in 2024, reaching $373.9 billion, after an estimated 7.3% rate of growth in 2023, which featured high inflation on some items. The growth in the year ahead will be driven by strong demand for prescriptions, over-the-counter products, and other health and wellness items amid a broad consumer shift toward prioritizing health and wellness, he said.
It is still early in the process of figuring out exactly how its business will evolve, following the hiring of Tim Wentworth, the former CEO of pharmacy benefit management company Express Scripts, as its new CEO late last year. A Walgreens board meeting scheduled for April will include a strategic review that will set the stage for more specific plans about how the company will move forward, he recently told investors at the 44th Annual TD Cowen Healthcare Conference.
“There will not be a big bang after that where we announce and unveil some incredibly new Walgreens,” Wentworth said. “What you’ll see is that will be the starting gun for a lot of work that we have to deliver.”
A Strategic Review at Walgreens
With a new CEO at the helm and a host of other new executives joining the ranks during the last several months, Walgreens Boots Alliance is perhaps undergoing the biggest transformation among retailers in the industry.
Digital Efforts Gain Traction
In addition to technologies that hold promise for the streamlining of labor processes, drugstore retailers also are continuing to invest in ecommerce solutions, digital loyalty programs and other tech-driven solutions.
Speaking at the 44th Annual TD Cowen Healthcare Conference, Walgreens CEO Tim Wentworth said Walgreens seeks to “engage with the consumer where she or he wants to engage with us,” whether that involves ordering online for in-store pickup or delivery, or visiting the drive-thru, or coming into a brick-and-mortar store.
“We’ve got to be able to deliver on all four of those really, really well from a technology-supported perspective, and we aren’t there all the way yet,” he said. Executing e-commerce “requires a lot of systems talking to other systems,” he said, so that consumers have an accurate view of product availability while they shop online, for example.
As the company continues to invest in its omnichannel experience, it also ties into improvements in its digital loyalty initiatives, Wentworth said.
“Consumers respond fairly aggressively to well- designed loyalty programs,” he said. “Walgreens actually had the best one back when they launched it, and we’ve kind of gotten away from investing in that.” Jeremy Faulks, VP of pharmacy operations at Thrifty White, said the company also is responding to the rise of digital pharmacy start-ups. offering delivery, cash pricing and specific services tailored to disease states.
“We do our best to combat this with similar offerings of our own, as well as continuing to double-down on the patient-pharmacist relationship,” Faulks said. “Overall, we believe our unique mix of in-person interactions, clinical services and local relationships will continue to differentiate us from the others and allow us to be a valued partner ins creating better patient outcomes.”
He said the efforts to revive the positive trajectory at Walgreens—following a fiscal year in which the company posted a net loss of $3.1 billion—was “not a 12-month turnaround story.” Any initiatives the company undertakes, whether to expand or contract certain elements of its business, may take “time and thoughtful planning,” he said.
One of the key components of the strategic review will be the direction of the company’s approach to its physical retail stores, which currently number some 8,600 U.S. locations. It has closed hundreds of stores in the last few years, and last year said it would close another 150 by the end of fiscal 2024 in August.
“We need to get the footprint right,” said Wentworth. “We need to look at the fleet not based on what it’s doing today, but what we need it to do in five years, given our services aspirations and then reverse-engineer what that footprint should look like.”
Last year the company also said it would close about 60 Village MD clinics, after that company, in which Walgreens owns a majority stake, acquired another clinic operator, Summit Health+CityMD. Walgreens also acquired CareCentrix, a home care provider, and recently said it plans to retain another recent acquisition, specialty pharmacy Shields Health Solutions.
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Anderson said Walgreens is focusing more on driving profitability after building up its revenues in recent years. “For many companies that have been high-growth since COVID, now you are seeing a transition to focus on profitability,” she said.
Keonhee Kim, an equity analyst with Morningstar Research Services, agreed that Walgreens’ biggest challenges have revolved around building up scale and identifying the core markets in which it wants to operate. Former CEO Rosalind Brewer built up the business through acquisitions, and the company’s efforts to drive profits from these businesses has been slower than expected, he said.
“Now with the new CEO, we expect Walgreens to focus more on core markets, which comes with closure of non-core locations, and right cost structure which will help with reaching its EBITDA targets,” he said.
CVS also in Early Stages of Integration
Rival CVS Health, meanwhile, in addition to operating a PBM, a health insurance company and the MinuteClinic enterprise, also has fortified its roster of health solutions providers, including home healthcare provider Signify Health and elderly care specialist Oak Street Health.
Speaking at the 42nd Annual JP Morgan Healthcare Conference in January, Karen Lynch, president and CEO, CVS Health, said the businesses will all work together to improve patient care.
“Our pharmacies, our retail health locations, our Oak Street clinics and our in-home capabilities will uniquely position us to deliver care in a coordinated way where people want to receive their health care,” she said. “What does that do? Well, it enhances our customer engagement. It lowers the total cost of health care, and it improves overall health outcomes.”
Other retail pharmacy companies, both large and small, have also expanded into related businesses, including Amazon, which has acquired One Medical, a provider of membership-based primary care, and Walmart, which has opened more than 50 in-store Walmart Health Center clinics in five states and plans to open several more this year. Many regional chains and independents have also been pursuing strategies to expand their suites of healthcare services.
At Thrifty White, for example, the company is focused on streamlining operations, building efficiencies and increasing capacity for its pharmacies to become involved in broader clinical services and patient care activities, said Jeremy Faulks, VP of pharmacy operations, Thrifty White.
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“We believe pharmacy can fill a vital need in the healthcare ecosystem, both for access and delivery of care,” he said. “Our secret sauce includes leveraging focused patient engagement and delivering clinical interventions within workflow to improve outcomes and reduce the cost of care.”
The retailer is focused on rolling out new clinical services throughout 2024, including Chronic Disease Management for diabetes, remote patient monitoring, remote therapy monitoring, and Social Determinants of Health (SDOH) management by pharmacy-based community health workers.
Each of the company’s pharmacies has a dedicated Clinical Suite for providing professional services, with sinks, medical equipment and comfortable seating for direct patient care activities, Faulks said. It also has trained its teams to ensure they have the skills required to provide these services.
While these companies and others rethink their healthcare services business models, Rite Aid is seeking to compete in that environment while at the same time reorganizing under Chapter 11 bankruptcy. Since filing bankruptcy in October of last year, the retailer has announced plans to shutter more than 200 stores, sold its Elixir Solutions business and unveiled plans to sell other holdings, including a partial stake in Health Dialog.
Rite Aid in October named Jeffrey S. Stein, a veteran of several corporate restructurings, as its new CEO and chief restructuring officer. Since then, the company has continued its divestitures and recently launched a new ad campaign focusing on the connections between staff and customers with the tagline “It means more.” It continues to operate more than 2,000 stores.
More Potential Acquisitions Ahead?
Aditya Kaushik, analyst at Coresight Research, said he believes additional acquisitions in the healthcare space could be strategic for retailers seeking to expand their market share or develop new capabilities quickly.
Potential acquisition targets include e-commerce and digital health companies, health clinics and urgent care centers, and independent pharmacies or regional chains.
“With the increasing trend towards online shopping and digital health services, drugstore chains may consider acquiring e-commerce platforms or digital health startups,” Kaushik told Drug Store News.
“This can help them integrate technology, expand their digital presence, and offer innovative services to customers.”
Adding more health clinics and urgent care centers to their portfolio also can help drugstores provide convenient access to healthcare services, which can enhance the drugstore value proposition and create synergy between pharmaceutical services and primary care, he said.
Reimbursement Remains a Headwind
The most pressing challenge that retail drugstores face continues to be around pharmacy reimbursement, which limits what services retailers can afford to provide in their stores, analysts said.
“We think reimbursement pressures from PBMs will continue to be a challenge,” said Kim of Morningstar, who noted that Walgreens said such pressures have been easing in recent years but are still prevalent.
Faulks said regional chains, and pharmacies in general, will continue to be under stress in 2024 from not only reduced dispensing reimbursement, but also the so-called “hangover” effect of DIR (direct and indirect remuneration) reform—higher up-front DIR fees coupled with lower patient copays, which could impact the profitability of independent pharmacies in the first half of 2024, according to the National Community Pharmacists Association.
“That said, we believe there is a role for specialized delivery of care, and pharmacies continue to be an under-utilized resource in our overstressed healthcare system,” said Faulks. “If pharmacies can make the shift to delivering clinical services and supporting disease management, vs. just dispensing prescriptions, there is huge opportunity for pharmacy to fill this need.”
Another issue for the industry is how will it react to CVS’s rollout of its CostVantage reimbursement model, said Kim.
“We will keep a close eye on this to see how the marketplace will shift over the next couple of years,” he said.
CVS is early in the rollout of CostVantage, through which it will define the drug cost and related reimbursement with PBMs and payors, using a formula based on the cost of the drug, a set markup and a fee that reflects the value of pharmacy services.
Technology and Labor
The labor pressures that boiled over in 2023 had been simmering since the COVID pandemic, when pharmacists were suddenly overwhelmed with testing and vaccination responsibilities, while also coping with new systems and procedures in their stores.
Retailers have cited the potential for technology investments that could help alleviate some of the pressures on its pharmacy workforce. Implementing technologies that streamline processes and automate repetitive tasks allows workers to focus on more value-added activities, Kaushik of Coresight said in an interview with Drug Store News.
This includes automated dispensing systems that reduce the time spent on manual counting, for example. “Eliminating these tasks allows pharmacists to focus on more important tasks instead, such as counseling patients, giving vaccinations and testing for medical conditions,” he said.
Advanced software and analytics can also optimize inventory levels, ensuring that the right stock is available when needed, minimizing waste and reducing the burden on workers to manually track inventory, said Kaushik.
In addition, digital tools such as electronic health records and medication management systems help personalize patient care by enabling pharmacists to access patient information quickly and offer tailored recommendations and medication adherence support, he said.
The challenges retail pharmacy operators face in implementing these technologies and others include the costs, as well as concerns about data security and privacy, said Kaushik. “These retailers are already cutting costs on many fronts...that could hamper their expansion in technology investment,” he said.
