Introduction The US drugstore retail sector has seen consolidation and several collaborations between traditional players and retailers in other sectors. In this report, we cover the following subjects:

• Key themes in the sector.
• Sector momentum in the US.
• Sector size, growth and market shares of key retailers.
• Outlook for the US drugstore retail sector.

Themes We’re Watching We are seeing several themes across this broadly consolidated sector. Synergies from Consolidation and Collaboration Market leaders CVS Health (CVS) and Walgreens Boots Alliance (Walgreens) have actively engaged in acquisitions, mergers and alliances to bolster their position in the sector. While CVS’s strategy has been diversification, Walgreens’ has been fortifying its position. We discussed these two companies in detail in CVS and Walgreens—Head to Head. CVS has broadened its range of offerings beyond health pharmacies. In November 2018 CVS completed the acquisition of US healthcare benefits and insurance company Aetna. CVS also acquired pharmacy and long-term care services company Omnicare in 2015. Walgreens’ notable alliances and acquisitions include a ten-year deal with drug wholesale firm AmerisourceBergen to leverage the company’s global drug supply chain and distribution efficiency, and a partnership with pharmacy benefit manager Prime Therapeutics to create specialty pharmacy and mail services company AllianceRx Walgreens Prime. Walgreens’ also purchased 1,932 stores and other assets from drugstore chain Rite Aid in 2018 after an attempted merger fell apart amid scrutiny by US anti-trust authorities. We expect stiffened competition and more innovative offerings as a result of the synergies resulting from these mergers and alliances. New Players in Healthcare As consumer trends evolve, newer players are entering the drugstore and healthcare space.  Amazon has been making more serious moves into healthcare. Amazon, JP Morgan Chase and Berkshire Hathaway Health partnered in January 2018 to form a healthcare venture to develop innovations that improve healthcare for the nearly one million of their employees who get health insurance from the three companies. If the innovations are successful, the venture will make these innovations available to other companies. Just a week after the three companies appointed Dr. Atul Gawande as CEO of the venture in June, Amazon announced the acquisition of online pharmacy PillPack for a reported $1 billion. PillPack’s acquisition gives Amazon access to the online pharmacy’s drug licenses across all 50 states in the US, accreditations from recognized trade bodies, all the major PBMs’ networks and PharmacyOS, a proprietary pharmacy management system. Amazon has not been the only outsider making incursions into the drugstore retail sector. Grocery retailer Albertsons acquired MedCart Specialty Pharmacy in 2017 to strengthen its pharmacy services. Albertsons hoped to make further inroads into the drugstore retail sector by merging with Rite Aid and acquiring stores that were not purchased by Walgreens. But this deal fell apart too as Albertsons failed to convince Rite Aid shareholders that the deal will not undervalue the drugstore retailer. Pharmacists and Pharmacies Filling the Gap for Primary Care In the US, pharmacists are a crucial link in the healthcare supply chain. Pharmacists have the academic training to conduct health and wellness screenings and provide some preventative care as well as advice on healthy lifestyles, and can carry out some tasks beyond dispensing prescription medication. In the US, there is roughly one pharmacist for every 1,000 people – the same ratio as primary care physicians. Pharmacists could fill the gap in filling some basic healthcare services, and already are by providing services such as inoculations. This may sound easier to implement in theory than it is in practicality, due to regulations on what pharmacists are allowed to do. Pharmacists are not recognized as providers of healthcare across the board. One remedy is to obtain provider status, but the process for doing so is multilayered and complicated. Pharmacists are excluded from sections of the Social Security Act, which dictates pharmacists’ eligibility to receive payment from public healthcare plans such as Medicare Part B. Some state and private healthcare plans use this as a reason to exclude pharmacists, which also narrows the care that pharmacists can provide (although in some cases patients can choose to pay out of pocket). As pharmacy laws and statutes vary by state, identifying a comprehensive resolution is challenging. For example, some state health plans will not pay pharmacists for many healthcare tasks, although they are allowed to counsel patients, while other states prohibit pharmacists from performing tasks beyond dispensing prescription medications and educating patients on their use. For example, patients in Oregon and California can get contraceptives from a pharmacist after getting a blood pressure check and filling out a questionnaire, but in most states, patients have to see a doctor and get a prescription. The Role of the Drugstore in an Age of Wellness With far easier access to a pharmacist than to their primary care physician, consumers will look more towards pharmacies and pharmacists for general health and wellness – a trend that is already gaining ground. In 2017, mass market retailers held a 66% share of the market for vitamins, minerals and supplements in the US, while specialty stores accounted for 12% and e-commerce accounted for 19%, according to data from consumer analytics firm TABS Analytics. Drugstores have the potential to become the go-to destination for wellness products and capture market share from e-commerce and mass market retailers as they have an edge over those competitors: Access to patient data, established relationships with suppliers and greater expertise healthcare. [caption id="attachment_79375" align="aligncenter" width="580"] Source: TABS Analytics[/caption]   Adapting Drugstore Retail to Changing Demographics Shopping has transformed from being merely an errand on a to-do list to an experiential journey. With a growing preference for e-commerce and shoppers spoiled for choice, bringing customers into stores has become more challenging than ever. Two demographic groups wielding considerable spending power are senior consumers (those aged 65 and over) and millennials (those born between 1980 and 2000). Senior citizens now account for 16% of the total US population – but that figure will jump to 20% in 2030, according to the United Nations. Seniors exercise considerable clout as consumers, particularly in the healthcare category: Almost one-quarter of all spending by younger seniors (those under 75) is in retail. And within retail, US seniors spend heavily on functional items such as healthcare and housekeeping supplies. Drugstores retailers are well-placed to cater to these consumers and market leaders CVS and Walgreens have already adapted elements of store design to cater them. Sector Momentum Sector Size and Growth The US drugstore sector was worth $233 billion in 2017, according to data from Euromonitor International. It is estimated to have grown 2.1% to $238 billion in 2018. Between 2013 and 2017, the sector saw a CAGR of 3.0% and over the years from 2018 to 2023, the market is expected to grow faster, at 4.1%. [caption id="attachment_79376" align="aligncenter" width="800"] Source: Euromonitor International/Coresight Research[/caption] Headwinds and Tailwinds Sector Headwinds

• The industry is likely to face continuing reimbursement pressure. Major drugstore retailers have seen declining reimbursement rates as insurance companies have engaged in aggressive price cutting and expanded preferred pharmacy networks. Federal and state programs aim to limit government healthcare spending and third-party payers also constantly seek to reduce costs.
• As e-commerce continues to make inroads into physical retail across sectors, we expect the drugstore sector as well to see declining store traffic.

Sector Tailwinds

• More generic drugs coming onto the market will benefit the industry as generic drugs tend to deliver higher margins than branded drugs.
• Consumers’ increasing interest in wellness products and therapies and beauty’s growing relevance could provide new opportunities for pharmacies to expand their service offerings outside traditional areas.
• A growing senior population will fuel the demand for prescriptions. On average, only about 12% of US adults use five or more prescription drugs in a month, according to the Centers for Disease Control and Prevention. But some 40% of US seniors (those ages 65 and over), tend to use five or more prescription drugs on a regular basis, according to research published in the Journal of the American Medical Association.

Competitive Landscape Market Shares

• Market share: The US drugstore sector has consolidated, and now just three players (Walgreens, CVS and Rite Aid) control over three-quarters of the market.
• Walgreens holds 35%, CVS 31% and Rite Aid 11% of the market, while others make up 23% of the market.

[caption id="attachment_79377" align="aligncenter" width="580"] Source: Euromonitor International[/caption]   Company Summaries [caption id="attachment_79378" align="aligncenter" width="800"] Source: Company reports[/caption]   Innovators and Disruptors One of the biggest disruptions to legacy US drugstores comes from online-only pharmacies and drug retailers. Amazon’s purchase of online pharmacy company PillPack for a reported $1 billion enables the e-commerce leader to enter the prescription drug industry for the first time. PillPack provides scheduled monthly deliveries and emergency overnight deliveries, for no delivery charge. With its ability to leverage Amazon’s logistics network, PillPack can develop its delivery services even further. Amazon already offers over-the-counter drugs, such as ibuprofen, for lower prices than CVS and Walgreens, so retailers will have to adapt quickly to avoid being challenged in the prescription medication market. To increase store traffic and tap into the beauty segment, retailers are introducing innovative store concepts that position them as destinations of beauty. CVS has expanded and redesigned its beauty department to present it as a shop-in-shop, called BeautyIRL, with a fresh look and additional products and services, such as:

• A Korean beauty section.
• A “Now Trending” wall that features popular brands.
• An accessories section for handbags and jewelry.
• A bath cart displaying bath bombs and other bath products made to look like sweet treats.
• A “Mini Must-Have” section for customers to put together their own bag of mini beauty products.

Sector Outlook As federal and state programs continue to work toward curbing government healthcare spending and as insurance companies and pharmacy benefits managers seek to reduce costs, reimbursement pressures are likely to continue growing in the US The convenience and cost-effectiveness of online retail will continue to gain ground in the drugstore sector and legacy retailers will need to innovate to maintain market share. CVS has already made moves in this direction by establishing its BeautyIRL concept to tap into the popular and high-potential beauty category. We anticipate more retailers will position themselves as beauty and wellness destinations.