Is a drugstore still a drugstore if it can’t make money by selling drugs? That’s a question facing the dominant names in the drugstore sector, as summarized in a recent announcement by Walgreens that it was not earning sufficient profits on generic drug sales; even as sales continue to increase, the chain’s profits keep dropping.
This development is largely a result of the pressures from pharmacy management companies, which seek to reduce the payouts to the provider when clients obtain generic drugs. These firms work to lower prices throughout the supply chain, including the wholesale prices of generic versions of popular drugs but also the retail prices that they will reimburse when the drugstores dispense those medications.
In response, Walgreens has acknowledged its goal to revamp its business and profit models. Rather than relying on sales of drugs, which has long been its primary revenue source, it aims to become a whole-health provider, with service centers in stores designed to help people manage chronic issues such as hypertension or diabetes. Its main competitor CVS is following a similar strategic plan, seeking to become the first line of health care provision that consumers can seek when experiencing nonemergency conditions.
Shifting trends in consumer behavior mean that simultaneously, drugstores are selling fewer tobacco products, such that retail sales overall have fallen as well. At CVS, which removed tobacco products altogether, those sales have disappeared.
Discussion Questions:
- What strategic profit model ratios are affected by Walgreens’ current situation?
- What strategic initiatives can it employ to improve its financial performance?
- How might those initiatives influence specific strategic profit model ratios?
Source: Sharon Terlep and Aisha Al-Muslim, The Wall Street Journal, June 27, 2019