Analysis: CVS, Walgreens stand to lose the most from Amazon-PillPack deal
Amazon's acquisition of PillPack is a warning shot in what is about to become a major battle within the pharmacy space. Not only has Amazon finally made a solid move into pharmacy, it has done so via an innovative supplier which helps patients manage and organize their prescription drugs.
In our view, this is only the first play in what will be an increasingly aggressive strategy by Amazon to develop a much more significant presence in the pharmacy market. This is incredibly bad news for traditional players, like Walgreens and CVS, who stand to lose the most from Amazon's determination to grow its share.
The problem for the traditional players is three-fold.
Firstly, the most loyal part of their pharmacy customer base is the older consumer. Over the next ten years, this cohort will become a much less significant part of the market and this will leave drugstores exposed to younger shoppers who are more likely to use both Amazon and remote pharmacy services. There is a significant risk that drugstores will see a real erosion in pharmacy customer share, especially in urban and suburban areas where Amazon can quickly deliver.
Secondly, both CVS and Walgreens have become particularly reliant on the pharmacy side to drive their businesses forward. Indeed, both companies - and CVS in particular - have consistently overlooked opportunities to improve and enhance their general retail propositions.
This now means that the retail side of the business is largely incapable of driving footfall into stores which could help support the prescription and pharmacy side of the business. This folly of not investing in retail will become apparent over the next few years.
Thirdly, Amazon's entry into any market will put downward pressure on prices and upward pressure on costs as others try to match its service. This will ultimately result in weaker earnings for drugstores going forward. There may be an opportunity for Walgreens to mitigate this thanks to the firepower of Boots and its potential in higher margin beauty categories, but we are far less optimistic about the prospects for CVS.
These unfavorable dynamics mean that drugstores need to rethink their futures. The addition of more services and positioning themselves as a destination for health advice and simple medical treatments are now more critical than ever. CVS has talked about this, but given Amazon's advance, action rather than chatter is now required.
It goes without saying that despite Amazon's determination, the pharmacy market is not as simple as other categories it has entered. Products and services are more complex and there are more regulations and procedures that need to be followed. It is also the case that some consumers may be reluctant to use Amazon for their health needs. Even so, we believe the market is ripe for disruption and, as it has demonstrated time and again, Amazon is just the player to pull that off.
In our view, this is only the first play in what will be an increasingly aggressive strategy by Amazon to develop a much more significant presence in the pharmacy market. This is incredibly bad news for traditional players, like Walgreens and CVS, who stand to lose the most from Amazon's determination to grow its share.
The problem for the traditional players is three-fold.
Firstly, the most loyal part of their pharmacy customer base is the older consumer. Over the next ten years, this cohort will become a much less significant part of the market and this will leave drugstores exposed to younger shoppers who are more likely to use both Amazon and remote pharmacy services. There is a significant risk that drugstores will see a real erosion in pharmacy customer share, especially in urban and suburban areas where Amazon can quickly deliver.
Secondly, both CVS and Walgreens have become particularly reliant on the pharmacy side to drive their businesses forward. Indeed, both companies - and CVS in particular - have consistently overlooked opportunities to improve and enhance their general retail propositions.
This now means that the retail side of the business is largely incapable of driving footfall into stores which could help support the prescription and pharmacy side of the business. This folly of not investing in retail will become apparent over the next few years.
Thirdly, Amazon's entry into any market will put downward pressure on prices and upward pressure on costs as others try to match its service. This will ultimately result in weaker earnings for drugstores going forward. There may be an opportunity for Walgreens to mitigate this thanks to the firepower of Boots and its potential in higher margin beauty categories, but we are far less optimistic about the prospects for CVS.
These unfavorable dynamics mean that drugstores need to rethink their futures. The addition of more services and positioning themselves as a destination for health advice and simple medical treatments are now more critical than ever. CVS has talked about this, but given Amazon's advance, action rather than chatter is now required.
It goes without saying that despite Amazon's determination, the pharmacy market is not as simple as other categories it has entered. Products and services are more complex and there are more regulations and procedures that need to be followed. It is also the case that some consumers may be reluctant to use Amazon for their health needs. Even so, we believe the market is ripe for disruption and, as it has demonstrated time and again, Amazon is just the player to pull that off.