The 2024 US Pharmacy Retail environment is fiercely competitive.

It requires tenacity, relentless focus on customer value, maintaining sustainable margins, and creating competitive differentiation.

By Jeffrey Cohen,
Investment Advisor Principal with US Advanced Computing Infrastructure, Inc.
Registered Illinois Investment Advisory firm, US Federal contractor, and Information Technology consultant.
Highland Park, Illinois
+1.312.515.7333
New clients welcome.

Conclusion: It is unclear to us whether the five large pharmacy retail companies (some are divisions of larger, vertically integrated companies) will all successfully evolve to achieve sustainable profitability, or whether further consolidation is required. Pharma is a large, growing sector in the US economy. However, retail pharmacy has become intensely competitive and more like a 'black sheep' of the healthcare system whose value is under-appreciated. Pharmacy retailers need to be ruthless and tenacious in creating customer differentiation, delivering customer satisfaction, and maintaining profitability in the face of technological and business model changes and elevated inflation.

We list major 2024 retail trends that impact retail or 'community' pharmacies below.

2024 Retail Trends, briefly:
1. There are ~1,000 fewer pharmacies, and another ~1,000 closing in 2025 across five large pharmacy companies. This is an oligopoly and it is cutting capacity.
2. In October, 2024 all products in the pharmacy store (front, middle and pharmacy) grew sales more slowly than US personal consumption expenditures (PCE) overall, except Alcohol, Spirits. October was a month of slowing growth in items, and services, sold in retail pharmacies.
3. Promotions and pricing competition is fierce, including loyalty programs, coupons, national CPG promotions, and delivery.
4. There is a acceleration of growth in healthcare services purchased from hospitals and nursing homes (both non-profit and for-profit).
5. The Administration's focus on reducing end-consumer drug prices (e.g., $35 insulin cap) has severely reduced the 'perceived value' and 'market price' of pharmacy and pharmacist services, while the Opioid epidemic lawsuits has increased the expectation of 'pharmacist oversight' and 'policing' of prescriptions. This lowers prices and raises labor costs (and legal costs).
6. The industry supply chain, from drug discovery, manufacturing, distribution, warehousing and logistics, and dispensing has reduced the percent of value earned in dispensing...while Amazon and other large eCommerce retailers reinforce that message (that dispensing live-saving medicines costs the same as selling toys).
7. Inflation has hurt the perceived value of convenience from shopping at pharmacies vs. grocery stores, discount stores, or big-box general merchandise chains. Pharmacies are lowering gross margins to bring back convenience shoppers.
8. According to one study, people may be more healthy in 2024, relative to the Pandemic/COVID growth in health care capacity. People don't have to go to a pharmacy for immediate care or diagnostics when their doctors or hospitals are available (and likely less expensive after insurance).
9. The US Government has policies to drive prescription drug prices lower, pressuring pharmacy margins, without offsetting payments for services to maintain margins.
10. Retail theft is becoming more common-place, and pharmacists and 'non-security' pharmacy employees are not supposed to act like "Rambo" or "Barnie Fife." Shrink destroys both margins and inventory system integrity, which hurts consumer service levels (e.g., in-stocks).
11. Pharmaceutical sales have been growing for decades, with blockbuster >$1B drugs commonplace. Companies like JNJ, Roche, Merck, Pfizer, Abbvie, Sanofi, AstraZeneca, Novartis, Bristol-Myers Squib, and GSK. According to Fierce Pharma, 2023 revenues for the pharma sector exceeded US $1.6 trillion. At the same time, generic drugs and substitute drugs are seeing price deflation, which limits pharmacy revenues.
12. This is a large and growing industry. According to the Drug Channels Institute, 2023 total prescription dispensing revenue was $621 billion, excluding COVID-19 vaccines, with growth driven by weight-loss drugs.
13. Pharmacy Benefit Managers (PBMs) exert significant profit pressure on retail pharmacy. These 'middle men' cannot be avoided, and must be negotiated with.
14. The big three Pharmacy retailers now employ a significant number of doctors and doctor practices and offer non-hospital medical services.
15. The big three Pharmacy retailers have all finalized their Opioid legal settlements.
16. Another step in the supply chain between drug manufacturer and pharmacy dispensary is the pharmaceutical wholesaler, who also earns a profit margin. They are key to ensuring safe and legal drugs make it through the supply chain.
17. Pharmacy retailers also deal with insurers, as those companies can direct customers (policy holders) to certain pharmacy brands by changing the reimbursement and co-pay levels. We have seen this with our own insurance, and can verify it is material to choice.
18. Labor force challenges. Pharmacy jobs are in-store, typically have a high percentage of part time, temporary workers, and require long hours and holiday coverage. Pharmacy workers in the store (and in the pharmacy) come into contact with those who are sick, and often contagious. Labor inflation will be reflected here quickly, else stores will not be properly staffed, or will see unsustainable turnover. We trust our pharmacists and pharmacy staff and we expect to recognize them (and them to recognize us).
19. The world has shifted to eCommerce. I read an analyst say that Walmart now sells 18% of its sales revenue online, and of course Amazon, Wayfair, Temu, eBay, grocery stores (with delivery) and the rest of the online sellers keep on growing. For brick & mortar retailers who face additional costs like renting and operating actual stores and parking lots, customer-facing labor, shrink, inventory obsolescence, interest expense, and the need to get it all 'just right' every day, they cannot charge more than they or others do online. That customer arbitrage (online vs. in-store) reduces margins.

In summary, what does this all mean for pharmacy profit margins? It is unclear whether the five remaining pharmacy companies will evolve to become more profitable, shrink to reduce excess industry capacity, or further consolidate.

Here is a list of US community pharmacy companies:
CVS Health
Kroger
Rite Aid Corp (BK)
UnitedHealth Group (UHG)
Walgreens Boots Alliance
and all those independents...

Thank you for reading this initial analysis. If you would like to learn more, we are accepting new clients. Please review our brochure and give us a call at +1.312.515.7333, and ask for Jeffrey Cohen.