71-Price Competition in a Falling Price Environment

Even a competitor who tends to dominate industries it enters has its own weaknesses. In this blog, the market had a competitor who tended to roll over competition. It did not succeed here because other competitors in the industry went around it to gain share with the industry’s Very Large customers and offer services the intimidating competitor could not offer.

Posted 1/12/09

The fight is on in retail pharmacy. It started with Wal-Mart. In 2006, Wal-Mart introduced a $4 generic prescription for a one month supply of hundreds of unbranded drugs. This move attracted a lot of buzz and new customer volume.

There are three major players in the retail drug prescription business: Walgreen, CVS and Rite Aid. Each of these companies has responded with their own drug plan. Walgreen started its Prescription Savings Club, which provides discounts on generics and five thousand branded medications, and rebates on Walgreen-branded products. CVS introduced a ninety-day supply of more than four hundred generic drugs for $9.99, and a 10% discount at the company’s store-based clinics. Rite Aid rolled out a national program offering a prescription savings card covering hundreds of generic drugs at $8.99 for a thirty-day supply, or $15.99 for a ninety-day supply, plus discounts on branded drugs. All three of these major pharmacy competitors claimed that their programs have attracted new business to their drug stores. Still, they are feeling more margin pressure in what used to be a very profitable business. (See the Symptom and Implication, “Customers are more price sensitive” on StrategyStreet.com.)

It is worth noting several observations about this market evolution:

Wal-Mart, as the leader, started the discounting program. This is unusual. Most market leaders would rather sit on profits from high prices than discount to attract more customers. In Wal-Mart’s case, however, the additional customers it attracts from monthly prescriptions brings with it other purchases.

All three of the major players focused their sales efforts on customers who could buy a large number of pills at one time. The pricing the companies offered were “bundled” products, containing thirty or ninety day supplies, more than the average prescription would normally cover.

None of the three major players matched Wal-Mart’s low price. These companies believe that they can charge a premium for their more Convenient locations.

Products and prices vary among the three largest competitors. This is an industry where comparison shopping is still developing. Most customers buy locally and do not spend a great deal of time trying to fine tune the price they pay by going shopping at numerous competitors.

The three major competitors gained volume in this business. The losers, from a volume point of view, have been the independent pharmacies and the regional drug store chains. (See the Symptom and Implication, “As large competitors match low prices, other competitors face difficulties” on StrategyStreet.com.) Most of these share-losing companies did not go along with the low prices for bundled generic products.

These pricing battles are taking place in the uninsured customer market. The insured customers tend to purchase through mail-order programs, such as those offered by Caremark, Medco and Express Scripts, where prices are already lower.

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Update 2022:

Walmart, which launched $4 generic prescriptions in 2006, has a long track record of improving the affordability of medications and innovating in consumer healthcare.  In 2022, Walmart had Pharmacy locations nationwide.  The company offers its Walmart Wellness App, which enables customers to track and manage their medications and other healthcare needs.  It also recently acquired a multispecialty telehealth provider, MeMD, to enable the company to provide access to virtual care across the nation, including urgent, behavioral and primary care.  The company has also innovated services such as quarterly Wellness Days where customers can get vaccines and check their cholesterol, A1C and blood pressure.  To reduce its diabetic customers’ cost of insulin the company introduced a private brand of insulin offering customers significant price savings.

In 2021, Walmart introduced Walmart + Rx for less offering even greater discounts on prescriptions to members.  This membership program costs $12.95 per month.  This program is a digital pharmacy savings card usable at 4000 participating Walmart pharmacies nationwide.  The program offers major discounts on thousands of prescriptions.  The discount can be as much is 85% off but company estimates that average savings are closer to 65%.  The program also offers 6 select prescriptions for no cost at all.

The drug prescription business is a highly fragmented market.  In 2021, the top 10 pharmacies ranked by prescription drug market share: CVS 24.5%, Walgreens Boots 18%, CIGNA 10.9%, UnitedHealth 6.8%, Walmart 4.5%, Kroger 3%, Rite Aid 2.4%, Humana 1.8%, Albertsons 1.1%, and Publix 1%.  The top 10 account for a little under 70% of the total market.  The top 4 companies are all pharmacy benefit managers.  Walmart continues as the largest retail pharmacy in the US.  The company has partnered with McKesson Corporation for many years to provide pharmaceuticals cost effectively to its customers.

Walmart has been innovative both in its pricing and its product innovation approaches to reduce its customers’ cost of maintaining wellness. A final customer, such as a consumer, purchasing from an intermediary, such as Walmart, incurs four generic costs. HERE is a description of these costs and examples of product innovations that reduce these four generic costs.  You can use our many product innovation concepts and examples to brainstorm innovations for your own company.

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Update 2/26

The retail prescription dispensing industry is a large fragmented industry with slow growth and intense financial pressure. The industry annually dispenses $683 billion worth of drugs and pharmaceuticals. The industry remains highly fragmented as the top five competitors (CVS, Walgreens-Boots Alliance, Cigna, United Health and Walmart) control approximately 53% of total market share. In the average US market, the top four competitors control 70 to 75% of total market share. Until the last few years, the market has grown slowly, less than 5% per year. The advent of weight loss drugs ramped up that growth rate.

Most competitors in the industry are under significant financial strain. The opioid crisis contributed significantly to this financial challenge to the industry. Most of the large retail drug companies faced multibillion-dollar settlements with the national opioid settlement framework. Pricing pressures magnified this strain. The companies receive very low, commodity prices on generic Price Leader drugs (a trend initiated by Walmart, as noted above). The government pressures on medical reimbursements further reduce their margins. Finally, there is intense pricing pressure as the industry’s largest players compete for the business of the industry’s Very Large customers.

Industry competitors have responded to these margin pressures to make the most of their individual strengths. Most of he larger players, including CVS< Walgreens, Cigna and UnitedHealth, set out to integrate their businesses vertically. They gained control of PBMs, retail pharmacies, insurance companies, mail order services and contracts for specialty drugs. This vertical integration enabled the most capable companies to negotiate from strength with manufacturers and wholesalers and become preferred providers or large employers (Very Large customers) and move product and service pricing around their total offerings to improve their margins. No company can lead its industry without strong positions with industry’s Very Large customers. The leaders covered all the Price Points in the market. In 2025, the majority of specialty products (Performance Leader products) flow through these vertically integrated platforms, enhancing their owners’ margins. Meanwhile, some of the smaller competitors in the industry, including some of the top grocers, expanded their retail drug distribution efforts, relying on their one stop shop benefit (Convenience), loyalty points (Function), and limited clinical services (Function). These companies have gained a small amount of share, as have some of the emerging online players such as Amazon pharmacies.

Against this industry backdrop, let’s look at how specific competitors have fared in this environment. Four companies appeared in the previous blogs: CVS, Walmart, Walgreens and Rite Aid. Only one of these companies has gained share, CVS. CVS was one of the leading companies in the effort to integrate vertically and improve its relationships with the industry’s Very Large customers. Walmart has continued its every day low pricing approach to its drug retail business, but it has not attempted significant vertical integration. It remains of force in the industry, but its market share is falling slightly as the large integrated firms gain share. It uses its retail drug business as just one of the many services it offers. Walgreens has been less aggressive, and less successful, in its efforts at vertical integration. Its market share also is declining slowly. Finally, Rite Aid has almost faded away. Throughout the years, it has suffered the most from financial challenges and has not been able to keep pace in any aspect of the retail drug business. It declared bankruptcy and is still working through that process.

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