News hit Wednesday that Amazon.com Inc (NASDAQ:AMZN) is hiring and preparing to enter the $300 billion pharmacy benefit management (PBM) space. That could be a big blow to CVS Health Corp (NYSE:CVS) and Express Scripts Holding Company (NASDAQ:ESRX), whose PBM business created $31.2 billion and $23.6 billion, respectively, in last quarter revenue alone. Express Scripts and CVS are a duopoly in this industry of delivering drugs to an American population that consumes more than four billion prescriptions each year.
As usual, Amazon.com Inc (NASDAQ:AMZN) has failed to comment. Furthermore, Amazon hasn’t given us any reason to believe that entering the PBM business is its intent other than hiring people from the pharmacy industry. What we do know is that Amazon CEO is usually two steps ahead when it comes to speculation and expectations.
For example, many speculated for a while that Amazon.com would aim to build its own fleet of trucks to compete with the FedEx and UPS’s of the world. Then, late last year, we learned Amazon was developing an app to essentially let trucks bid on jobs, thereby becoming a broker.
We also thought Amazon Fresh was the company’s end game for food delivery, and some speculated that retail grocery was possible. However, no one expected AmazonGo, a retail approach for groceries without cash registers that could end up being the next big thing for Jeff Bezos.
The bottom line is that Bezos and Amazon tend to surpass our expectations and our wildest dreams, even with their overall growth. That’s why I doubt Amazon.com Inc (NASDAQ:AMZN) aims to become the third wheel of PBM.
How Amazon could cause big problems for retail pharmacy giants
Instead, I think Amazon.com will do what it has been doing over the last decade: Help small retailers gain an edge over industry juggernauts.
With Amazon.com’s e-commerce initiatives, there are 10s of thousands of retailers with seller pages who have grown their business via Amazon. Of course, Under Armour and Michael Kors have Amazon.com pages, but so do small retailers that would otherwise by local. One could argue that Amazon.com Inc (NASDAQ:AMZN) is using the same strategy with its logistics initiative, with the app I spoke of. The small trucking companies can’t possibly compete with FedEx and UPS on a consistent basis, but from time to time they can undercut prices depending on the route and what’s being shipped.
That said, Drug Channels Institute figures that Walgreens, CVS, Rite Aid, and Wal-Mart control less than 40% of the retail pharmacy industry. However, Metro Market Studies and Barclays found that in top markets like New York, LA, Chicago, Dallas, and Houston, the top three retail pharmacies in each respective city dominated at least 65% of the drug store market share. In some instances, up to 80% belonged to three providers.
There are two observations from this data.
First, about 25% to 30% of metropolitan drug store market share is up for grabs. Second, small cities and rural areas are dominated by mom and pop drug stores. The industry giants have focused all their energy on big cities and metro areas.
With that said, there’s not much that Amazon.com Inc (NASDAQ:AMZN) can do to help CVS and Walgreens Boots Alliance (NASDAQ:WBA). However, its drug delivery and logistics services could work magic for the mom and pop drug stores. With the right services and coordination, Amazon.com could give these small stores an edge they did not previously have, increasing their delivery times and decreasing their costs to compete with Walgreens and CVS. Consequently, the process would gain market share for Amazon.com Inc (NASDAQ:AMZN), allowing it to consolidate much of a very fragmented industry. If that happens, Amazon could very quickly move in on the big markets and become a major headache for the likes of CVS and Walgreens Boots Alliance (NASDAQ:WBA).
In retrospect, that’s what Amazon.com Inc (NASDAQ:AMZN) has been doing in books, e-commerce, Web services, and will do in logistics. Why should PBM and retail pharmacy be any different?