Why CVS is closing its pharmacies, despite Amazon’s plans

It’s no secret that everyone and their mom is going online to shop. But when we talked to Jon Aronson, CEO of Pharmacyclics (the company that makes the leukemia drug Imbruvica) back in May, he told us that traditional retail was a big part of his business model. The company was set to close a huge number of pharmacies in August, and now we know why. CVS announced on Friday it is closing 900 fewer locations than originally expected, but not because of online retailers like Amazon: it’s because its acquisition of Aetna, the health insurance giant, “moved the needle” on that front, by substantially increasing its revenues.

So why the big change in strategy? Big Pharmacy is still fighting a cancer that is consuming the industry as a whole. Whether it’s offering home delivery of prescriptions or establishing drugstores inside its own branded and generic stores, the fact is that there are just too many of them. A wide range of drugstores exists with varying prices, and the industry is left with less and less profit margins to wring out of their pharmacies. According to a study by J.D. Power, which found that retail pharmacy margins were down to 2.7% in 2016 from 7.5% in 2012. J.D. Power also found that while bigger drugstores are still more profitable, discount pharmacy chains are the fastest growing segment, increasing their market share by 11.5% between 2014 and 2016. These chains include Walgreens, Rite Aid, and even BHG (the discount pharmacy owned by CVS) and recently acquired Rite Aid (which could be seen as an indicator that Big Pharmacy is also looking to cut its losses in the independent market).

Meanwhile, traditional pharmacies are fighting a talent war with chains like Walgreens, Costco, and Target, which are teaching thousands of new pharmacist managers how to conduct business in ever-present Big Data, more mobile doctors, and the ability to remotely manage medication themselves as well as sell internet-accessible online prescriptions. The list of competitors has only grown, as is more and more evident in the dramatic change in behavior among consumers, who now prefer to browse and ask questions of their pharmacists than seek their prescriptions or research side effects for their new medication. These demands are so demanding that a very talented staff has become in and of itself a competitive advantage. While the number of CVS’s employees is reduced, its corporate-facing staff will have a much larger presence online (and in CVS’s stores, through personalized relationship managers), especially since more prescriptions are now managed online. Overall, CVS’s plans for integrating its old CVS Caremark and Aetna businesses, which will bring much better insurance integration, could also be the deciding factor.

In an unusual turn, many of CVS’s bad press about closures was related to how many jobs it will cut as a result. The company has acknowledged that it is short of filling existing positions and tells employees to call 800-423-4CVS to find out whether there are opportunities for them at other CVS locations or not.

In addition to the loss of jobs, there could be concerns about privacy and personal data security, as well as ongoing investigations into the company after it was found that customers had left payment information on pizza boxes in its parking lots. And while the company is doing its best to emphasize that these are all future jobs, if these revelations are any indication, many employees will likely be too busy managing their own patients and customers to even show up for the walk-in service.

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