This article was written by Joe Cahill and originally appeared in Crain’s Chicago on Business. View the full article here.
Facing obsolescence in rapidly changing health care and retail markets, the drugstore chain stubbornly clings to a brick-and-mortar strategy at the expense of digitizing the customer experience.
Not anymore. Nowadays, many people get their prescriptions by mail and buy household sundries from Amazon and other online retailers. Same-day delivery of internet orders makes a trip to the neighborhood drugstore much less convenient.
Where does that leave Walgreens’ 9,000-plus U.S. drugstores? Facing obsolescence in rapidly changing health care and retail markets. Financial results at Deerfield-based Walgreens Boots Alliance reveal the fading relevance of a nationwide brick-and-mortar fleet that once cowed competitors.
During the recently completed fiscal first quarter, pharmacy sales at stores open at least a year grew by a disappointing 2.5 percent as prescription volumes came in light. Same-store sales of “front-end” merchandise fell 0.5 percent, extending a multiyear string of quarterly declines in a category that has historically generated a big share of Walgreens’ profit.
Management attributes front-end sales woes to deemphasizing tobacco sales and purging low-margin merchandise. Still, Walgreens’ operating profit margin shrank to just under 3 percent in the quarter from just above 4 percent a year earlier.
Yet CEO Stefano Pessina continues to pursue growth strategies centered on physical stores. A couple of years ago, he paid $4.4 billion to acquire 1,932 locations former Rite Aid locations. He stocked U.S. stores with a line of in-house cosmetics popular in the company’s U.K. outlets. He’s adding in-store clinics in hopes of turning Walgreens stores into “neighborhood health destinations.” Even his partnerships with insurance companies are predicated in part on the expectation that they will drive more customer traffic to stores.
It’s not hard to understand why Pessina and his lieutenants may be reluctant to acknowledge the waning value of Walgreens stores. Walgreens has billions invested in brick-and-mortar. For decades, its sprawling network of stores created the heft to dominate markets while steamrolling smaller chains and independent pharmacies.
But numbers don’t lie. New technologies and industry transformation have weakened Walgreens stores, whether Pessina accepts it or not. Investors can read the writing on the wall. Over the past year, they’ve sent Walgreens stock down 26 percent, while shares of archrival CVS Health rose 10 percent. CVS reduced its reliance on traditional retail by building an integrated business model comprising a pharmacy benefit manager and a major health insurer.
If Pessina doesn’t change course, Walgreens could go the way of other retailers that clung too long to brick-and-mortar. Nearly all the growth in retail is going to Amazon and other online merchants, which offer customers a level of convenience they can’t get from traditional stores. A simple mouse click brings books, clothing, sporting goods, consumer electronics and a vast array of other purchases to the doorstep within a day or less.
There’s no reason to think the same approach won’t work in the retail pharmacy business. People don’t particularly enjoy driving to a store to pick up prescriptions. In fact, it’s one of the more-annoying chores of everyday life. Most would jump at the chance to order drugs online for quick delivery.
And Amazon has made clear its interest in giving pharmacy customers that chance. A shudder went through the industry a couple of years ago when the online behemoth made its first public move toward offering retail prescriptions. It’s proceeding slowly, as it often does before launching an onslaught.
But make no mistake, Walgreens’ business is ripe for digitization. Somebody is going to offer a fully digitized customer experience. Imagine getting a prescription from your doctor, entering it in your smartphone, having a quick online consultation with a pharmacist and getting the drug delivered to your house within hours.
There’s nothing far-fetched about that scenario. The big question is who will make it happen on a large scale. And there’s no reason why Walgreens shouldn’t be the one, given its strong reputation as a retail pharmacy.
“It’s still a good brand name,” says Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “I would go online and use the brand name.”
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