The online retail giant moved into the roughly $800 billion U.S. grocery market in June by buying Whole Foods Market Inc. Drugs, a $450 billion industry in the U.S., are likewise most often sold from brick-and-mortar stores. Shoppers filling prescriptions frequently pick up toiletries, beauty supplies and dish soap—all retail items Amazon already sells. And the distribution chain for drugs has lots of middlemen whose markups Amazon can seek to undercut.
No wonder shares of drugstore chains CVS Health Corp. and Walgreens Boots Alliance Inc. have dropped sharply since analyst speculation about Amazon entering the pharmacy business intensified last month. On Monday, CVS Health said it would begin same-day delivery in several cities in early 2018, an apparent defensive move. Amazon has never commented on its pharmacy ambitions.
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Drugs, which are light and don’t require in-person selection, “are a perfect match” for Amazon, said SSR Health analyst Richard Evans in a recent report.
Here are six ways the retailer could overturn the American pharmacy market.
1. Use its shipping power to destroy rivals
Amazon has a massive logistics operation and could easily start its own mail-based drug-delivery business, cutting out drugstores and distributors in the process.
Drug delivery would also add to the value of Amazon Prime membership. Customers who pay the $99-per-year price for Prime membership are its most loyal customers, and Amazon is constantly looking for ways to increase the value of membership to keep shoppers from using competitors. The company launched its two-hour delivery service, Prime Now, in 2014 with inventory that overlaps with the convenience items found in drug stores.
Amazon has a big emphasis on replenishment. It helps parents keep homes stocked with diapers and wipes and sells Dash buttons so you can reorder laundry detergent with the push of a button mounted to your washer. Drugs are an additional replenishment product that Amazon can use to go deeper into its customers’ lives—taking business away from traditional retailers such as CVS, Walgreens, and Wal-Mart Stores Inc.
2. Become the ultimate buyer of cheap generics
There’s no reason the e-commerce behemoth couldn’t use its buying power to offer customers cut-rate generics for cash, which would appeal to uninsured patients and those on high-deductible plans. In generics especially, there are numerous markups along the way that Amazon could eliminate or pare back to capture market share.
To gain access to the far larger market of insured patients, Amazon could cut deals with insurers that aren’t already heavily focused on mail drug delivery. This could include Humana Inc., Anthem Inc., Cigna Corp., and even UnitedHealth Group Inc., according to the recent analyst note by SSR Health’s Evans. Amazon could also makes drug discount deals directly with large employers, Leerink Partners analyst David Larsen said in a report on Oct. 31.