The new year will be a time of testing for drug stores, as a confluence of forces call into question their function in the marketplace and long-term viability. At the same time that the economics of health care continue to weigh heavily on pharmacy margins, drug store operators must learn how to compete more effectively for the allegiance of front-end consumers who have an unprecedented number of options when it comes to satisfying their shopping needs. How the following five issues are resolved will go a long way toward determining what the future looks like for members of the trade class:
• DIR fees. Direct and indirect remuneration, the policy under Medicare that allows PBMs to retroactively claw back money from pharmacies that fail to meet often ill-defined criteria, threaten to put some stores, particularly independents, out of business. The National Association of Chain Drug Stores and its allies have made some headway in the quest for legislative relief. The Senate Finance Committee, led by chairman Chuck Grassley (R., Iowa) and ranking member Ron Wyden (D., Ore.), is working on a bill that would address the problem. The big question is, can legislation be passed and implemented in time to prevent significant disruptions in the pharmacy care that patients across the country rely on. If not, it may be time for pharmacy advocates to consider seeking a solution in federal court.
• Store closings. The right-sizing of the drug store industry continues apace. Some retailers, including industry leaders CVS Health and Walgreens Boots Alliance, have shuttered a relatively small number of stores, in a bid to maximize efficiency in a market that has long been viewed as oversaturated. The ongoing store rationalization by the big players is accompanied by the involuntary sale or closure of many small chains and independents. The National Community Pharmacists Association reports that 5% of pharmacies in this country have gone out of business during the past three years. A recent survey by the group found that almost 60% of its members think it is somewhat or very likely that they will have to close their doors within the next 24 months. It seems clear that, for one reason or another, the drug store landscape will look very different a decade from now than it does today.
• Technology. Digital devices and other advanced systems have made a profound impact on drug stores and their competitors. Today consumers have been empowered to an unprecedented degree by the information personal computers and cell phones put at their fingertips. At the same time, the boom in e-commerce has resulted in an omnichannel world where drug stores are asked to compete on multiple fronts simultaneously. To remain relevant, members of the trade class must fully embrace the technological revolution. WBA is showing the way. Through partnerships with Microsoft; Verily, Google’s sister company; and other technology providers, WBA is developing capabilities that will enable it to interact with customers whenever, wherever and however they choose. If they haven’t already done so, other retailers need to follow suit, and do so quickly.
• The front end. Nonpharmacy sales are increasingly hard to come by. Part of the reason stems from the erosion of drug stores’ convenience advantage as more consumers take advantage of omnichannel services. More important is the deficit members of the trade class confront in terms of price. As a general rule, nonpromotional prices for front-end merchandise at drug stores are considerably higher than those at many of their brick-and-mortar rivals and e-commerce companies. Drug stores must figure out how to become more competitive when it comes to the price/value equation if they want to be a place consumers look to for more than health care.
• Evolution of the format. Drug store operators are all too familiar with the challenges that lie ahead, and the best of them are responding by rethinking what the trade class should stand for, and what things it can do more effectively than other retail formats. The CVS HealthHUB, which aims to transform the drug store into a neighborhood health care center, is the most dramatic result to date of that process, but, as reported in stories elsewhere in this issue, companies like WBA and Shoppers Drug Mart are also committed to modifying the way they go to market in order to stay in sync with evolving consumer preferences. If they are successful in that endeavor, there is every reason to believe that drug stores will remain a potent force in both health care and retailing.