Amazon’s threat to Rx is real but not insurmountable

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Amazon has spent the last few years methodically entering the retail pharmacy market. Powered by their day one attitude, over 100 million Prime households in the U.S., and a penchant for disrupting large, inefficient industries, Amazon is well positioned to disrupt and gain significant share of the U.S. pharmacy business. Doing this will further strengthen their relationships with their customers, putting increased competitive pressure on traditional retailers and increasing their purchasing power with manufacturers.

Tom Furphy

Over the years, incumbent companies in industries that Amazon has disrupted have doubted Amazon’s ability to navigate complex industries. However, history shows that Amazon is adept at learning new industries, reimagining the customer value proposition and developing disruptive businesses. It is therefore critical that retailers and manufacturers in the pharmacy business recognize Amazon’s threat as real, understand the competitive implications and develop a strategic response.

Setting the foundation

Amazon’s acquisition of Pill Pack, followed by the launch of Amazon Pharmacy and the Prime pharmacy discount program are the foundational building blocks for this transformative business. In Pill Pack, Amazon obtained a consumer-focused business with a novel method to solve customer needs, licenses to ship pharmacy products throughout the U.S. and connections with major insurers. They then announced in 2020 the launch of the Amazon Pharmacy retail business with the tagline “Save time, save money, stay healthy.” The company works with a full complement of insurance plans and also supports a lower-price cash business that they tag as a benefit of Prime. In typical Amazon fashion, the site is easy to shop by either condition or by the name of the drug, and delivery is convenient. Additionally, Amazon is now embedded in over 60,000 non-Amazon retail pharmacies through its Prime discount program, enabling Prime members to receive added value at competitive retailers. These moves alone mount a formidable attack on incumbent retail pharmacies.

On top of the move into pharmacy, the company is building an impressive health care and self-care ecosystem. Amazon Care is a digital health platform currently available to Amazon employees throughout the U.S. and poised to be offered next to Prime members. Add to this Amazon Alexa’s developer tool set, which enables voice skills to be developed that are HIPAA compliant, plus the AWS work at massive scale with clinical data and analysis means Amazon is building an intelligent ecosystem to serve a broad range of their customers’ needs.

Further, Amazon is well positioned to become a pharmacy benefit manager. In line with the famous Jeff Bezos quote “Your margin is my opportunity,” the company preys on industries built upon false or manufactured economics where intermediaries add cost and pocket profit that could be passed on to the end customer. With intermediary costs removed, Amazon could offer their PBM at near zero profit due to the synergy with Prime and its overall business model.

Amazon’s customer value proposition will be further enhanced as they roll out more retail locations. 2021 is seeing a significant expansion in physical retail, primarily in grocery via the Amazon Fresh banner. The stores are well merchandised, staffed with friendly and knowledgeable associates, and are loaded with potentially game-changing technology — such as smart carts and Just Walk Out technology that now integrates directly with your Amazon account via the store code in your Amazon app. Check your Amazon app and you will find a link to your code in the top navigation bar. One has to wonder if they will open or acquire retail pharmacy locations next.

Contending with the health/retail flywheel

The pharmacy retail businesses, the health care/self-care platform and PBM will be able to work together with Prime, the core retail platform and physical stores to give customers holistic prescription, health care and retail solutions interchangeably, enabling cross-promotion of regimens and products to address a full range of customer needs. This creates a powerful flywheel effect that will further penetrate households and take additional share from incumbent retailers. The strategy stands to accelerate the already $60 billion CPG business that is shifting massive profit dollars away from traditional retailers toward Amazon today.

Altogether, this should compel retailers to respond now. Before being put into reactionary mode by Amazon, retailers should take a fresh look at their pharmacy, health care, self-care and PBM initiatives. They should ask if they are delivering quality products and service at competitive prices and if they are making customers’ lives easier. It is critical to be as efficient as possible, without business practices that increase cost structure and drive false economics. And it is vital to create synergies between the health and retail sides of the business.

Of course, retailers must also nail the fundamentals of good retailing — clean stores, good in-stocks, great merchandising and services, all supported by helpful and knowledgeable staff. They must serve a meaningful range of purchase occasions. Not necessarily all of them, but enough that customers think of them first and often. Across quick fill-in, on-demand delivery, stock-up, delivery and special occasions, customers want to rely on fewer retailers to cover more of their needs.

With more than half of the products that households need being predictable and repetitive, it is critical to offer customer-facing auto-replenishment to help take care of the tasks of shopping for routinely purchased items. Amazon offers Subscribe & Save, where customers have converted to the service in droves. Today the program drives almost 40% of CPG sales there, growing almost 40% annually. These are sales that are set to autopilot, locked in, and kept away from competition. Retailers need an answer for this, or they will continue to give away 1% or more of market share annually to the Subscribe & Save program.

Fortunately, proven auto-replenishment solutions are available today which integrate to existing e-commerce platforms. The best solutions combine the best elements of a traditional subscription program but amplify the performance via significant machine learning and improved customer management tools. Retailers and brands that embrace a modern auto-replenishment program stand to yield similar or better results versus Amazon and further strengthen their customer relationships at a time when it is as critical as ever. The solution is currently rolling out to some of the largest retailers in the U.S. who realize that early movers stand to benefit the most.

Given the annuity and compounding nature of auto-replenishment, waiting to start while others ramp up is penalizing. Best-in-class auto-replenishment solution providers, such as Replenium, offer a simple path to spinning up a basic version of auto-replenishment quickly, enabling retailers to offer customers a range of products with all the basic functionality to sign up, set replenishment intervals and easily schedule for pick up or delivery.

Retailers should offer a full range of products via auto-replenishment to defend their share. Currently Amazon only offers traditional center-store products on Subscribe & Save, via parcel delivery. They do not offer the program within Prime Now and Fresh. Therefore, they do not offer many higher-volume grocery categories nor perimeter categories such as dairy and frozen. This creates a significant near-term opportunity for retailers to grow volume in these areas that will retain customers before Amazon has a chance to reach them for these products.

Upon launch, retailers should heartily promote auto-replenishment to their customers, including pharmacy customers, to activate their own flywheel. Every customer should receive program marketing that compels them to sign up for even just one replenishment item. Once they start, the platform will recommend additional products so they can quickly put more items onto the program. As they do that, they will move more of their volume over to the retailer. This will cement the retailer-customer relationship, provide enduring value and keep the customers from leaving.

As the retailer flywheel spins, they can cross-promote synergies between pharmacy, health care, self-care and auto-replenishment that help customer simplify, be healthier, and save time and money. This is one of the most customer-centric things retailers can do now, which can thwart the Amazon threat and result in improved retention, customer value and overall retail profitability.

Tom Furphy is chief executive officer and managing director of Consumer Equity Partners, chairman of ideoclick Inc., and CEO of Replenium.


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