The other day, I called my local pharmacy to find out if I could still get my scheduled flu shot. I had a sinus infection and was on antibiotics. No idea why I called, I should have found a way to cancel it online. I thought I was being responsible and considerate. I was rewarded with a 71-minute wait. I know you’re thinking, why didn’t you just hang up? Because I teach a graduate class on Customer Relationship Management at Wayne State in Detroit, and I am always looking for a good story! When the pharmacist finally got on the line, she apologized and explained that she was the only one who could tell me that being on antibiotics meant that I should not come in for the flu shot. That was a broken process! That put my disruption obsessed Industrial Engineering brain into high gear.
Ripe for Disruption
Remember the guidelines for business disruption: too expensive, too complex, exclusive to population subsets, and it goes without saying, of course, not customer focused. I think it is fair to say that local pharmacies fall into that bucket. You will pay more for pretty much any product at the local pharmacy. A quick internet scan for a bottle of Dawn Platinum dish soap revealed the following:
Whoa! That’s a 30 – 50% premium for “convenience”? Their definition of convenience is outdated. Having something delivered to my front door is way more convenient than driving the car, parking the car, even if I am in the store to pick up a prescription. This is not customer value.
On top of high prices for household items, we have to consider the disintermediation from insurance companies that are partnered with pharmacy warehousing services. The last time we switched insurance, we got a significant copay discount for ordering a 90-day quantity from a pharmacy warehouse and having the prescription delivered. Now I don’t have to leave my house for dishwashing soap or prescriptions. Why would I go back to a local pharmacy? We will talk about Mark Cuban’s new project CostPlus Drug Company in the next article. That project is a doozy.
The Walmart Effect
Lastly, we have mega stores like Kroger, Walmart and Costco accelerating their participation in the health business with in-store clinics/pharmacies staffed with Nurse Practitioners and Pharmacists. These stores leverage economies of scale due to their gigantic customer base and well-oiled distribution channels. Their disintermediation plan starts with a different customer base. This base cannot afford local pharmacies. With successful diffusion, their undeniable value proposition of low cost and convenience, they will encroach on local pharmacy customers like me.
Walmart was born and raised in rural America and is famous (or infamous, if you have ever had to sell to them) for purchasing strategies that bring the best value to their customer base which includes less advantaged households. Kroger has scores of house brands that provide quality food and household products at competitive prices to lower income individuals. And they are taking that same value-based model into healthcare.
Let’s look at their value proposition in action for a common thyroid medication – Levothyroxine:
Wow! By adding healthcare to their products and services, Kroger and Walmart provide more value to their customers, more reasons to come into the store. Customers can get a flu shot when they come in for weekly groceries or pick up low-priced beer and diapers when they come in to pick up a prescription. Now we have businesses that are built on a low-cost model competing with local pharmacies that charge 30 – 100%+ more for everyday household products and prescriptions. You want a perfect disruption environment, that’s it!
In addition to the no-brainer financial advantages, both Kroger and Walmart executives evangelize a moral imperative. Bringing affordable healthcare to the most marginalized members of society. I have linked a couple of videos below where the former publisher of Modern Healthcare Magazine in Chicago, Fawn Lopez, interviews the women in charge (at the time) of the healthcare divisions of Kroger and Walmart.
In these interviews you hear not just their commitment to quality and low prices but also their commitment to democratizing healthcare for the marginalized populations in their communities. Kroger’s Colleen Lindholz talks about stepping up during the COVID pandemic with immunizations in their stores and pop-up medical teams that serve the homeless. Walmart’s former Chief Medical Officer Dr. Cheryl Pegus talks about growing up without healthcare and how Walmart wants to help ease the burden of the uninsured on society by providing pharmacy locations with low cost drugs to bring life saving drugs to the underserved in their communities. These people can’t afford local pharmacies. They do without healthcare except in emergencies when they head to the hospital.
Remember, disruption can often start with customers wanting or needing something that traditional businesses aren’t able to provide them. As the disruption makes money, it improves, and eventually it becomes appealing to the customers of the traditional products, in this case, local pharmacies. If Kroger and Walmart can provide healthcare/prescriptions at an affordable price to the millions of people who cannot afford local pharmacy prices, they will generate revenue that allows them to improve their offerings to the point where loyal local pharmacy consumers will use Walmart or Kroger instead of their local pharmacy. That’s a big problem for local pharmacies.
The Mortar and Pestle of Disruption
We are seeing the impact of these disruptive elements. Newsweek published an article in January 2024, noting that “Swathes of drug stores across the U.S. are shuttering branches, with CVS, Walgreens, Rite Aid and independent pharmacies all announcing closures over the last two years.” Some of the reasons cited for these closures were: increased costs for drugs, pharmacist burnout, opioid lawsuits. I’m sure all those reasons are valid, but it is also about “value”. Is a local pharmacy the best place to go for things we can get delivered or pick up at a grocery store for 30 – 50% less?
You are probably saying, but wait, now they have clinics at my local pharmacy, isn’t that adding more value? Sort of, but let’s think about that value proposition. Local pharmacy customers have doctors, they don’t need clinics in a local pharmacy. People who can’t afford doctors and don’t have insurance need the clinic. But clinics with local pharmacy prices are unaffordable to that customer base. Even if they were more competitive in price, there just isn’t enough value to compete with healthcare options at the local grocery store, Costco or Walmart.
What can local pharmacies do to mitigate this risk? Change their business model while they have time. Walmart and Kroger (and others) cannot roll this model out overnight. For example, Kroger has 2,256 pharmacies, Walmart has 4,800 pharmacies, while CVS alone has 9,400 locations. In the time they have, local pharmacies can drop prices on household items, incorporate EASY home delivery models and develop a customer service model that is flawless (certainly not keeping people on hold for an hour). They can mirror the business plans of their competitors but threat acknowledgement is rarely seen in disruption.
Weathering the Storm
The biggest issue local pharmacies will face is their culture and their loyal customers. People like me with good insurance and low copays, who don’t like big stores and don’t want to park in a huge parking lot to run in and pick up a prescription. If they asked me if I wanted to go into a Walmart for a flu shot, I would say no, I like my local pharmacist, he knows my name. People like me will keep them from seeing the future until it is perhaps too late.
Pharmaceutical and medical device companies, who are on the frontlines everyday themselves creating disruptive products to advance human health and eliminate suffering, surely can see the benefits of partnering with care delivery channel disrupters and adjusting their business operations to meet the demands of these new channels, and in these ways:
- Develop partnerships with the disruptors. The demand for generic drugs and affordable medical devices should steadily increase as the disruptors diffuse into communities. Since they are serving marginalized communities premium priced offerings will not work for them. Their clinics will need exam tables and sharps containers and tongue depressors and blood pressure cuffs. They will need diagnostic equipment to reduce wait times and give busy nurse practitioners a head start. Be the trusted advisor they can count on to guide them.
- Prepare for demand pressure by examining your supply chain and securing partnerships with low cost suppliers. These disruptors have an existing supply chain and trusted relationships with vendors that may have access to the new goods and services required to fuel their new endeavors. You will need to be prepared for a different discussion with Walmart than you had with CVS.
- Embrace partnerships with low cost rivals that have been biting at your ankles and chipping away at your margins. Here lies the consecutive disruption where low cost suppliers with similar value propositions displace premium cost entrenched competitors whose end user has been displaced.
In the next article we will look at a specific healthcare example and Mark Cuban’s looming threat to drug distributors.
