If, like me, you think that the quote from Heraclitus, “The only thing constant is change,” would be a gross understatement to describe the next few years for chain drug, read on.

Steven Robins

If, on the other hand, you are neither fascinated nor concerned with the external uncertainties of the country right now and the strategies of the largest chain drug operators to be something other than retailers doesn’t get you fussed, congratulations. You have reached a higher plane than me, and I ask you to please tell me your method of achieving your Zen.

The long-term, broader integrated health care offerings

Let’s start with the changing business composition at some of the largest retailers. Walgreens, Walmart, CVS and others have stated objectives that surpass the current definition of a chain pharmacy or even a traditional retailer.

The list of initiatives is long, but the most consistent trend is towards much broader health care businesses. For example, in the first quarter, the CVS Retail Pharmacy/LTC business unit was third in operating income behind their pharmacy benefits manager and insurance/benefits business. Telemedicine options, enhanced clinical services/locations, managed care arrangements and partnerships with primary care operators are expanding. Walgreens is investing in building out a clinical recruiting and execution business that would put them in the early and middle stages of drug development. Drugs they will later carry in their stores for patients they may have helped recruit. This specific initiative also carries with it that interesting juxtaposition that the customer in their recruiting business will be the same Rx and O-T-C companies that, on the retail side, they will be negotiating with as the customer.

These operators may succeed in managing their customers’ (and patients’) data security and privacy required by several regulatory bodies. However, as a group, there will inevitably be an increasing number of policy conflicts that need to be reconciled at the national associations level. Associations, because many chain drug operators are members of more than one trade association. They will also need to balance their total enterprise with the narrower goals of some of their partners.

All of this while driving growth in an uncertain economic and political environment.

Some of these initiatives and alliances will succeed, while others will fail. Either way, they will challenge the enterprise to maintain their focus on the retail businesses at the corporate level. Any decreased focus will create opportunities for smaller chains and pure e-commerce competitors to gain share in the short term to midterm.

If you don’t think these initiatives will result in significant changes to the retail business, think about other related industries where the value equation shifted. If someone had told you in 2014 that Johnson & Johnson would stop selling consumer products in the next decade, would you have believed them?

The short term — more familiar territory with a twist

In the short term, the most prominent retailers all claim to understand the challenges well. For example, reading through quarterly earnings call transcripts of several of the biggest chains, they delineated a consistent collection of current headwinds in their U.S. operations. Specifically, they cite a decreasing number of vaccinations year on year, labor costs, low consumer confidence, and shifting consumer buying decisions consistent with fears of a recession. Interestingly, supply challenges were not as prominent in these discussions, and most of these chains indicated they were in a good inventory position.

On this last point, I wonder, how do you know your baseline?

Isn’t it a challenge to correctly forecast inventory needs after a 24-month period of disrupted demand and supply patterns? I can tell you that several of our clients at the New England Consulting Group are putting in long hours to reestablish normalized baseline forecasts in O-T-C, VMHS, beauty and CPG. Further, packaging and ingredient supplies seem better, but still wobbly.

Not surprisingly, given the consistency in the identified headwinds, many of the immediate and executional solutions sound very similar. Specifically, operators plan to increase private label offerings and drive more omnichannel sales through their loyalty programs. Most of these programs have grown dramatically during COVID (Walgreens now has over 100 million members, and CVS CarePass grew more than 25% in the last quarter.)

Given the economy and marketplace, both require new insights and strong execution to achieve their objectives.

Private label expansion

Private label brands typically grow during recessionary periods. I agree. However, what could be different this time is several years of merchandising with heavy reliance on large purchases/high rewards (BOGO, BOGO 50, bonus loyalty dollars with multiple purchases) in critical categories. The long stretch of prosperity we experienced allowed many retailers to ignore the new or less frequent category buyers. As a result, smaller SKUs, essential when managing a tighter budget to a specific amount, are underrepresented in several commodity O-T-C/HBA categories in drug and mass. If the recession is severe, smaller sizes will become a more significant percentage of the mix.

Omnichannel/loyalty

While digital transactions will likely increase, improved supply chains and a return to more traditional school and work traffic patterns in the fall will likely increase in-store traffic, moderated somewhat by gas prices. Further, for premium memberships, there may be contraction if a recession becomes a sustained reality and shoppers must manage all of their subscriptions to make ends meet.

In summary, the next few years will be incredibly dynamic on the ground, every day, and over time. Revenue streams and alliances will continue to shift, and new combinations will emerge. However, I am hopeful (but not confident yet) that the continued attempt to increase patient access to health care will benefit the industry and the customer.

Steven Robins is managing partner and principal at the New England Consulting Group. He can be contacted at [email protected].