In the face of industry headwinds, pharmacies can work to make the most of their distinct advantages to meet shifting consumer needs.
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. 1 McKinsey surveyed 1,004 US adults from November 19 to December 12, 2021, to better understand consumer preferences and expectations of retail pharmacies; these preferences are expected to be relatively consistent in 2022 and 2023. 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.
This article is a collaborative effort by Alok Ladsariya, Alec McLeod, Garam Noh, Nikhil Sahni, and BJ Tevelow, representing views from McKinsey’s Healthcare Practice.
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. 2 Adam J. Fein, The 2022 economic report on U.S. pharmacies and pharmacy benefit managers, Drug Channels Institute, March 2022. Note: Mail order is not included in retail chain prescription revenue figures although some chains own mail-order facilities; these estimates account for the number of days of medication supply. 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. 3 Adam J. Fein, The 2022 economic report on U.S. pharmacies and pharmacy benefit managers, Drug Channels Institute, March 2022. Note: Mail order is not included in retail chain prescription revenue figures although some chains own mail-order facilities; these estimates account for the number of days of medication supply. 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. 4 Michael Dabaie and Sharon Terlep, “CVS to close 900 stores over three years,” Wall Street Journal, November 18, 2021. 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. 5 Total prescription revenues include specialty revenues; The 2022 economic report, March 2022. 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. 6 Adam J. Fein, “Walmart’s booming preferred network models,” Drug Channels, August 25, 2011.
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. 7 The 2022 economic report, March 2022; “NCPA releases 2021 digest report,” National Community Pharmacists Association (NCPA), October 11, 2021. Independent pharmacies fill about 48,000 prescriptions per pharmacy per year. 8 The 2022 economic report, March 2022. 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, 9 However, because a substantial portion of the prescriptions are specialty, mail-order and online pharmacies represent 37 percent of overall prescription revenues. 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. 10 The 2022 economic report, March 2022. 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. 11 “Walgreens launches nationwide rollout of same-day delivery with Instacart,” Walgreens, February 23, 2021.
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). 12 These insights are generalized, and we recognize they may differ when cut by different segments, such as geographic location, number of prescriptions, and insurance.