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Should pharmacy industry worry about Amazon?

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After Whole Foods buy, e-tail giant could have a drug chain in its sights

What would happen to your business if, tomorrow, Amazon bought a major chain like CVS Pharmacy, Walgreens or Rite Aid?

Not so long ago, if you put this question to an executive in the chain drug store industry, the response might have been “Well, that’s not going to happen.” But now that Amazon has announced plans to snap up Whole Foods Market Inc. for $13.7 billion, everyone in the business is paying closer attention.

When Amazon broke the big news about Whole Foods on June 16, shares of CVS, Walgreens and Rite Aid fell amid fears prescription drugs could indeed be next. After all, Amazon had already started testing a one-hour delivery service for nonprescription items from Seattle’s Bartell Drugs and had, according to CNBC, made a major hire and held high-level meetings focused on the topic.

Gregg Lipman_CBX

Gregg Lipman, CBX

Should the $465 billion prescription drug industry worry about Amazon? As William S. Burroughs once said, “A paranoid is just someone who knows the facts.”

And the fact is, for a great many Americans, obtaining prescription medications feels like a shadowy process that is out of their hands. Just think of the ecosystem involved: It includes the government, Big Pharma, insurance companies, Big Drug Retail, doctors, caregivers and — lastly — patients. The latter group has neither powerful unions nor armies of blue-chip lobbyists to stick up for its interests and demand transparency and ­fairness.

Prescription drug distribution is an insider’s game in which the middlemen between patient and caregiver hold all the cards. Whoever captures the biggest share of consumers and drug orders wields the most leverage; whoever wields the most leverage stands to win by lowering costs to consumers and/or creating margin for distributors.

This is why Big Drug Retail has flocked to mail order distribution. According to Morgan Stanley, mail orders accounted for about $106 billion of total U.S. prescription drug sales last year. It all sounds like Prime territory (pun intended) for disruption by Amazon.

Interestingly, though, mail order sales are actually dropping a bit, according to Morgan Stanley. Why? As the analysts see it, it’s because many people actually want to stand at the counter and talk to their pharmacists. A face-to-face connection with a trusted expert is something people crave, especially when it comes to prescription drugs.

So isn’t this bad news for Amazon? You would think so. Already, the e-commerce giant is partnering with Merck & Co. to find out whether Amazon Echo (the voice-activated, Wi-Fi-connected speaker) can function as an in-home advocate for diabetes patients. I don’t know about you, but I find the idea of turning to a voice-activated speaker in my kitchen for help with a serious medical condition to be disconcertingly impersonal. If one day you get your medicines delivered by a scary-looking robotic drone, that might be convenient, but what sacrifice will have been made?

It’s the same record playing over and over — the loss of human connection.

On paper, then, Amazon’s low-cost, fast-delivery model certainly is ripe for taking on pharmaceutical sales and going head-to-head with the national chains. Yet human connections are actually as important to your health as what you eat or how much you exercise. Humans evolved in tribes, and they desperately need to be with other people.

A few years ago, those of us who love print books and neighborhood bookstores thought Amazon and the Amazon Kindle would be the death knell for these pleasures. Now there’s a growing resurgence of people who enjoy — or even require — the experience of being in a cozy, well-caffeinated bookstore. These bibliophiles want to browse, discover serendipitous titles and commune with the expert staff.

In terms of competing with Amazon, then, the playbook is pretty clear: Brick-and-mortar pharmacies need to continually emphasize the human connection in creative and authentic ways. They need to stress how their customers can consult in person with friendly and knowledgeable pharmacists regarding what the doctor has prescribed (as well as any complementary over-the-counter drugs to safely augment the prescription).

Pharmacies need to hammer home how they are already, quite literally, in the neighborhood. Why do you need a drone terrifying your dog when you can already get your prescription in minutes — whether it’s a one-time prescription or a maintenance drug you forgot to refill — from the drug store down the block?

Naturally, the industry should continue to invest in walk-in clinics. They give patients something Amazon cannot offer — the chance to see a professional, talk about the symptoms they or a family member are experiencing, and then walk out with the right prescription/O-T-C drugs to make them feel better. By contrast, the Internet, with its tendency to induce information overwhelm, almost never provides such reassurance in the face of vulnerability and ­uncertainty.

But here’s what should give you pause: Amazon understands all of this, too. The value of brick-and-mortar real estate and the human connection are certainly part of the reason founder Jeff Bezos is opening bookstores in major cities across the country. This is why he went after Whole Foods and why he could very well have a national drug store chain in his sights already.

In light of the Whole Foods deal, I suppose acquiring a drug chain isn’t the only option for Bezos. It’s at least possible to imagine Amazon adding pharmacies to some of its 460 Whole Foods stores.

However, there are big barriers here: Prescription drugs are not exactly consonant with the organic and natural Whole Foods brand, space is limited in many Whole Foods stores, and pharmacists’ salaries are substantial. On the other hand, pharmacies have long been a standard part of the U.S. grocery store model. Adding them to Whole Foods would give customers the ability to have both a human connection and the low cost and convenience for which Amazon is so famous.

On the convenience side, you can imagine kitchens across America echoing with Amazon Echo requests: “Alexa, order me a cup of mac and cheese from the Whole Foods hot bar, along with a refill of prescription number 654321 … and also some Ben & Jerry’s Caramel Sutra.” On the human side, you could also imagine a mom visiting with the in-store pharmacist at Amazon-Whole Foods to ask a few questions about those insect bites Johnny got at camp. After that, she could stop at a click-and-collect station in the parking lot to pick up the groceries she ordered online via Amazon Fresh.

It could be a powerful combination if handled correctly.

If Amazon tries to break into the prescription drug business without leveraging brick-and-mortar real estate in a major way, it’s certainly true that Bezos & Co. will have an Achilles heel of sorts — a steep learning curve with respect to forming a meaningful human connection with customers. But Amazon learns fast. The traditional drug business needs to keep doing all it can to elevate personal connections with patients — through 24/7 phone lines, nurses on call, best-in-class store design, innovative and brand-building private label packaging, and hiring pharmacists with real compassion and terrific social skills.

The motto here: Leverage your strengths, innovate where you can — and hope for the best.

Gregg Lipman is managing partner at CBX, a New York-based brand agency and retail environments consultancy. He can be reached at gregg@cbx.com.


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