The US retail pharmacy landscape faces saturated retail locations, ongoing labor shortages, inflationary pressure, and a leveling-off of generic drug penetration. To effectively compete in this environment, all types of retail pharmacies can strive to better understand and adapt to changing consumer preferences. McKinsey conducted a consumer survey of more than 1,000 people in the United States to gain insight into these preferences. This article lays out how the retail pharmacy landscape has changed over the years, how consumer preferences have evolved, and how different types of retail pharmacies may respond as a result.
How the US retail pharmacy landscape has evolved
Over the past two decades, the retail pharmacy landscape—defined as pharmacies that dispense prescription medication—has evolved substantially. We break down the sector into four types of retail pharmacies: retail chains, regional pharmacies such as mass retail and grocers, independent pharmacies, and mail-order and online pharmacies (Exhibit 1).
Retail chains are the largest and most prevalent of the four pharmacy types, representing a third of stores and about a third of prescription revenues in 2021. On a per-store basis, retail chains dispense approximately 138,000 prescriptions annually—about 50 percent more than grocers, the next largest prescription dispensers per retail location. Industry consolidation and gains in efficiency through economies of scale help account for this difference. For example, from 2010 to 2021, CVS and Walgreens acquired a total of nearly 5,000 pharmacy locations, including CVS acquisitions of 1,700 Target pharmacies and Walgreens acquisitions of 1,900 Rite Aid pharmacies. However, the consolidation wave may have already peaked; these organizations are now shifting their focus to improving operating margins. To that end, the companies have announced plans to reduce their footprint. For example, in 2019, Walgreens said it would close 200 US stores; in late 2021, CVS announced that it would “reduce store density in certain locations” and close 900 stores by 2024. As part of this strategic shift, national chains have also begun to explore growth opportunities in adjacencies such as healthcare services, primary care, and vaccinations.
The evolution of national chains has, in turn, put pressure on other retail pharmacy types such as regional pharmacies. This group can be further segmented into two types: grocers (supermarkets that also have a pharmacy) and mass retail (large consumer goods retailers that also have a pharmacy). In 2021, regional pharmacies represented around 30 percent of stores and 15 percent of prescription revenue. On a per-store basis, mass retail and grocers fill 91,000 prescriptions per pharmacy per year on average.
Grocers have experienced variable performance over the past few years. Larger grocers have grown through acquisition, and smaller ones have increasingly been acquired by national chains or larger grocers. For mass retail pharmacies, economies of scale based on brand name and size have enabled them to negotiate incentive-based networks and narrow networks with health plans, pharmacy benefit managers (PBMs), and independent employers, increasing traffic to their stores.
In contrast to the growth in national chains, the number of independent pharmacies has decreased by nearly 50 percent since 1980, leveling off at about 20,000 locations since 2000. Independent pharmacies fill about 48,000 prescriptions per pharmacy per year. Those that remain have stayed viable through effective collaboration with other independents and wholesalers. This cooperation has taken the form of administrative, operational, and other business management support from wholesalers, pharmacy service administrative organizations, and group-purchasing organizations.
For the fourth type of retail pharmacy, mail-order and online pharmacies, overall penetration for nonspecialty drugs is low compared with penetration for specialty drugs. In 2021, these organizations accounted for less than 10 percent of total US prescriptions, but they are gaining traction. Historically, mail-order pharmacies were defined as PBM-owned processing facilities that filled maintenance medications centrally. In the past 15 years, a number of direct-to-consumer online pharmacies unaffiliated with PBMs have been established, with this segment receiving more than $3 billion in funding to date. In parallel, traditional players such as retail chains have also moved to more omnichannel—physical, online, and mail—options. For example, Walgreens has its own mail-order pharmacy, offers same-day delivery from 8,000 stores, and provides prescription fulfillment through its phone app.
Shifting consumer preferences will shape the next era of growth
In this evolving environment, retail pharmacies can work to ensure they understand and meet consumers’ needs so they are a preferred destination. The McKinsey survey of more than 1,000 US consumers can help us understand current consumer needs and what may be changing. Four key insights emerged (Table 1).
In this evolving environment, retail pharmacies can work to ensure they understand and meet consumers’ needs so they are a preferred destination.
1. Current pharmacies have high consumer satisfaction
More than two-thirds of survey respondents report satisfaction with their primary retail pharmacy and would recommend it to a friend or colleague. Respondents selected insurance coverage and proximity to home as the top two criteria when selecting a retail pharmacy (Exhibit 2). At the same time, nearly a third of respondents have switched their preferred retail pharmacy in the past five years for one of two reasons: changing insurance coverage or a changing place of residence.
2. Retail chains remain most common primary pharmacy type
According to the survey, retail chains remain the most popular type of primary retail pharmacy, with 47 percent of respondents selecting it. However, the likelihood of respondents reporting a retail chain as their primary pharmacy decreased as the number of monthly medications increased (Exhibit 3).
3. Use of alternative channels is small, but awareness is growing
Despite longstanding PBM mail-order, local-delivery, and (more recently) online options, these alternatives to visiting a brick-and-mortar pharmacy to pick up prescriptions still have relatively low market penetration. Forty-five percent of respondents have never used a mail-order or online pharmacy, and only 13 percent consider a mail-order or online pharmacy to be their primary pharmacy. However, the survey results suggest growing awareness and acceptance of these alternative channels. Forty-four percent of consumers who use a mail-order or home delivery service reported choosing these services over other delivery options more often than they did two or three years ago. Among respondents who are not currently using these services but are willing to consider switching, convenience and price are reported as the top motivating factors.
4. Consumers welcome the expanding role of retail pharmacies
Consumers of all backgrounds appear to welcome all types of retail pharmacies taking on a broader role that encompasses more than prescription dispensing, a trend that is reflected in their spending patterns. At their primary retail pharmacies, consumers reported purchasing a variety of non-prescription-medication products beyond over-the-counter products (48 percent), including food and grocery (36 percent), beauty products (32 percent), and household items (30 percent). Consumers also said they were interested in accessing a broader range of healthcare service offerings in their retail pharmacies, with about four in ten expressing interest in common-illness treatment, whole-health fusion, and other health services, including primary care, dental, lab work, and X-rays.
The implications of evolving consumer preferences
At its most basic level, drug dispensing—filling a prescription accurately and on time—could be considered a commodity service. But given evolving consumer preferences, each type of pharmacy—retail chains, regional pharmacies such as mass retail and grocers, independent pharmacies, and mail-order and online pharmacies—can seek to meet these needs through different methods. Long-term success can be achieved in one of two ways: creating a differentiated experience for the consumer or offering a differentiated set of products and services. This section explores some key questions and opportunities tailored to the unique strengths of each type of retail pharmacy (Table 2).
Retail chains can consider creating more-personalized experiences to attract high-touch consumers with whom independent pharmacies have traditionally held an advantage. Additionally, retail chains can consider new ways to use their scale to offer a differentiated set of services. Two opportunities—omnichannel engagement and healthcare services—show particular promise.
First, as behavior changes sparked by COVID-19 continue beyond the pandemic, consumers will continue to demand digital and omnichannel solutions that allow them to receive pharmacy care when and where they need it most (for example, home delivery, same-day delivery, and on-demand pharmacist support). Retail chains, given their geographical reach and ability to invest in these capabilities, are well positioned to satisfy this demand.
Second, retail chains can best respond to consumer interest in accessing a broad set of healthcare services in the retail pharmacy setting. Retail chains have the balance sheet to build in-house capabilities (for example, to provide primary care and treat common illnesses) or forge at-scale partnerships with external vendors to provide those services.
Regional pharmacies such as mass retail and grocers can consider ways to differentiate themselves based on another factor: integration into daily life. Because they are already embedded into the flow of consumers’ daily lives, these pharmacies can seek to satisfy consumer wellness needs (for example, for healthy foods and over-the-counter supplements) in an integrated way with pharmacy services.
More specifically, mass retail and grocers could be well positioned to become a one-stop shop for all things related to health, creating front- and back-of-store synergies for certain treatment categories. For example, a diabetic consumer may need a full spectrum of products, including prescription drugs, a tailored diet, glucose meters, glucose test strips, eye vitamins, dry-mouth treatments, and skin care products. The mass retail or grocer that can seamlessly fulfill these needs in one location could deliver outsize value to the consumer.
In contrast to the national chains and regional pharmacies, independent pharmacies can bolster their position by further personalizing care, especially for high-touch consumers. They can consider, for example, approaches to satisfy the particular needs of patients with complex chronic conditions or deepen the relationship between pharmacist and patient with personalized services.
While their smaller scale may have traditionally been seen as a challenge, independent pharmacies can also consider satisfying unmet needs in rural or other areas where there is lower penetration by national chains.
Mail-order and online pharmacies
Online pharmacies seeking to disrupt the market can pursue strategies that reinforce their natural benefits (speed and convenience) with their corresponding target demographic (convenience seekers). But they can also work to bridge some of the potential gaps in consumer experience caused by their lower-touch approach. Mail-order and online pharmacies may consider ways to create a more personalized experience that preserves some of the benefits of an in-person experience. For example, video telehealth visits with remote pharmacists could help establish a personal connection to complement the benefits of convenience in the absence of face-to-face consultations.
As the retail pharmacy landscape evolves, different types of pharmacies must seek new ways to meet consumer needs to remain differentiated and relevant. While certain overall trends, including the demand for convenience and the benefits of personalization, are relevant to all types of retail pharmacies, the specific strategy to become a “pharmacy of the future” will vary for each type. There is no one-size-fits-all approach.