Inside This Issue - Opinion
A world where products go to consumers emerging
June 15th, 2014
by Vishwa Chandra, Raj Kumar & Bob O’Meara
“ 'Twas the night before Black Friday …” No, this isn’t the start to another fairy tale, but rather the time when Amazon threw down the gauntlet, announcing it was working on a drone delivery program. Many have called this one of the best-orchestrated PR events. It brought to the forefront the next delivery frontier — fast, targeted, affordable and, potentially, via unmanned automated delivery, right to our doorstep.
Whether through drones or unmanned vehicles there is disruption coming to home delivery — if not within the next five years, surely within the next 10. With the expansion of last-mile delivery solutions (for example, Instacart, DoorDash and Uber), the concept is already not far from reality.
This article — the third in a yearlong series of disruptor articles — is focused on the implications for the community pharmacy industry from a world in which:
• Next-day or even same-day delivery is ancient history.
• Last-mile delivery takes place on demand … within an hour … is secure … is cost effective for the retailer . ..and is affordable for the consumer.
• The store becomes an integrated distribution point and a pickup point — in other words, a world where products go to consumers versus consumers going to products.
How would this come to life? Imagine a world where Laura, a busy mother of twins, realizes that she is out of fever medicine for her sick two-year-old. She has just put her children to bed, but worries that when they wake up she will need to have the medicine on hand. In today’s world she would either gather her children and dash to the community pharmacy a mile away, delaying her children’s nap and wasting the better part of an hour, or make an SOS call to her spouse.
However, in the future being imagined, with a few clicks of her phone she can request delivery and know that the medicine will arrive before her children wake up. Her local community pharmacy loads her order onto a self-driven car. As the car leaves it texts Laura with an estimated delivery time. She is able to see progress on her phone (much like Uber lets you do today) and receives a discrete notification when the car reaches her house, at which point she dashes outside to retrieve the product. And all in less than 30 minutes.
This is not so far from reality. In today’s world drones are already being tested for all types of commercial purposes. While FAA approval is still some time away, the willingness to allow testing sites across the country and the increased demand from industry shows that it is inevitable. Lost in this is the rapid advancement in unmanned and self-driven vehicles. Google’s self-driven vehicles are becoming more reliable by the day, and artificial intelligence robots are able to perform a greater number of tasks that once required human intervention. California has driverless car testing rules, and more states are to follow.
The implications for community pharmacy from such a model could be disastrous, with convenience no longer centering on store location. Such a capability could have the same impact as digital streaming had on movie rental stores or e-readers and e-commerce had on bookstores. It could make community pharmacy, and the brands that go with it, the next Blockbuster Video or Borders Books.
Community pharmacies have built their value proposition on their extensive footprint and a core concept of convenience — convenient locations, easy access, great merchandising and easy-to-shop store layouts. To provide this convenience pharmacy retailers built a footprint of thousands of stores, on the prime corners, with ease of access at a cost of billions of dollars. To enhance this investment, the industry is moving aggressively into mobile and e-commerce to increase convenience and increase customer relevance with loyalty and mass customization. The primary purpose is to bring relevant product close to where customers live, work and play.
The drive for convenience has come at a cost for community pharmacies — in terms of both capital and operating costs.
Building and maintaining such a large number of locations requires significant capital and has been a priority investment for both community pharmacy and other retailers pushing smaller formats. CVS/pharmacy, Walgreen Co. and Rite Aid Corp., with over 20,000 stores among them, have over $100 billion invested in capital (assuming $5 million a store). Beyond store footprint, the associated investment in capital for transportation, distribution, and inventory to fill shelves across multiple locations (especially for slow-moving products) is significant.
In addition, delivering this promise of convenience and servicing all these locations drives up the cost to serve, and thus prices for customers. Multiple smaller locations require partial truck delivery (higher cost-per-mile deliveries), more break packs (higher cost per case) and more labor across stores.
There are three threats to community pharmacy:
• Traditional retailers who have not had to invest in expensive real estate.
• E-commerce players who are actively building out their networks.
• Nontraditional competitors looking to capture a greater share of the market.
The initial threat to community pharmacies comes from traditional retail competitors (supermarkets and mass merchants) that carry a broader assortment than community pharmacies and offer those products at a more competitive price. These retailers can now get into the convenience business without investing in additional stores, while gaining enhanced leverage from their existing footprint and labor investments. One can expect to see a section of the local Walmart Supercenter or Costco parking lot converted into a mini drone port that leverages existing online ordering and in-store pickup capabilities.
The threat is not just from traditional competitors — large e-commerce players are already building their network of distribution centers from which such deliveries can be made. In the near future Amazon and eBay will both have a network of DCs where they can be within “drone distance” of the majority of the population. On the plus side, smaller e-commerce players who are not able to build a network will suddenly appear to be slow (even in today’s world, next-day delivery is already outdated).
Finally, there is the potential of a significant threat from new entrants who are looking to disrupt the market and suddenly do not face the capital hurdle of having to open thousands of stores to be relevant. A single warehouse could serve an entire metropolitan area, lowering the cost to enter a market. Companies like Door Dash have raised tens of millions of dollars and have declared an intention to disrupt final-mile delivery.
Shoppers have traditionally been willing to pay the higher price for this convenience. However, in a world where last-mile delivery is fast, targeted, and affordable, a number of other retailers with better economics can get into the convenience business, leaving outdated and overpriced community pharmacies irrelevant.
Don’t throw in the towel
While the future of home delivery does pose significant risks to community pharmacy, we do believe pharmacy retailers can mitigate this risk by being proactive and adapting to the future before the future forces them to adapt.
There is no other sector that knows the convenience shopper better. Currently, footfall is driven by either the pull from the pharmacy or the location of the store. In addition, while loyalty cards have offered some degree of customization there is still a heavy reliance on broad merchandising (TPRs and flyers, for example) to drive sales.
The secret sauce is integrating the delivery within an hour into the existing retail operations, in the same way that pharmacy retailers are already integrating e-commerce, loyalty, mobile payments and health clinics into their core retail footprint.
Going forward with the ability to take the product to the customer, community pharmacies will not be constrained by their existing footprint and can proactively engage with customers on a personal one-on-one basis. A customized storefront, with customized promotions, not only will trigger basket expansion but will allow for community pharmacies to capture incremental sales from other channels — grocery, for example. Mirroring the insights from loyalty programs with the capability to deliver product via unmanned vehicles will make this possible.
In addition, this strategy allows the actual store to be focused on holding and serving the core assortment that is fast-turning and broadly relevant. Noncore products, if requested by a customer in a store, can be waiting for them when they arrive home. The productivity impact and resulting reduced cost to serve will allow community pharmacies to be price competitive with other players.
On the pharmacy side this allows community pharmacies to provide a hybrid solution to customers who would like to receive prescriptions at home yet maintain the flexibility of going to the store for the social trip. However, to enable this, the important role and relationship of the pharmacist needs to be maintained even if in a virtual form.
To prepare for this, community pharmacies must be doing a number of things today:
• Build the ability to integrate rapid, convenient delivery into their core retail operations.
• Be at the forefront of partnering with technology companies and innovators to ensure an understanding of future technology and what capabilities are needed internally to take advantage of them.
• Start testing programs that fundamentally alter the home delivery model, including drones and unmanned vehicles, to understand their potential and prepare for the inevitable.
• Build into innovation models and scenario planning activity the elements of “product-to-consumer” strategies.
Understanding that it is not a question of if but when, community pharmacies need to proactively embrace the future and understand how they would operationalize such a capability and fully leverage their assets. This will serve to strengthen their competitive position.
BOB O'MEARA is a partner with A.T. Kearney and focuses on the retail pharmacy sector. He is based in Chicago and can be reached at email@example.com. RAJ KUMAR is a partner with A.T. Kearney and an expert in retail supply chain. He is based in New York and can be reached at firstname.lastname@example.org. VISHWA CHANDRA is a principal with A.T. Kearney. He is based in Chicago and can be reached at email@example.com.