69-Price Competition in a Falling Price Environment
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 have 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.
All 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.
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 in digital pharmacy savings card 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 cost effective pharmaceuticals to its customers.
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