The Daily: The end of convenience as we know it

Audio by Marcus Johnson, Blake Droesch, and Rajiv Leventhal | Oct 31, 2024

Episode Transcript:

Marcus Johnson (00:00):

This episode is brought to you by TikTok for Business. Are you ready to rizz up your brand? Well, you're in luck. TikTok is where Discovery drives outcomes and three in four users say they will buy from a brand they've seen on TikTok's platform. You can learn more at tiktok.com/business.

Rajiv Leventhal (00:20):

The pharmacies don't have a lot of negotiating leverage and PBMs kind of present to them like these take it or leave it contracts. And if the pharmacies leave them, they could lose out on customers to another pharmacy where PBMs have more favorable contracts in place.

Marcus Johnson (00:40):

Hey gang, it's Thursday, October 31st. Rajiv, Blake and listeners happiest of Halloween's and welcome to Behind the Numbers daily, an eMarketer Podcast made possible by TikTok. I'm Marcus, today I'm joined by two folks, both senior analysts. The first one covers digital health for us and is based in New Jersey. It's Rajiv Leventhal.

Rajiv Leventhal (01:01):

Hey Marcus, thanks for having me.

Marcus Johnson (01:03):

Hey fella, of course. Thank you for being here. We're also joined by one of our senior analysts who covers the retail side of things. He's based across the water in New York City. His name is Blake Droesch.

Blake Droesch (01:14):

Hey, Marcus. Good to be here.

Marcus Johnson (01:15):

Hey fella. We start with the fact of the day. And in the spirit of the World Series, I've got one that's baseball themed, not remembering until the very start of the show that it was Halloween as well, which probably would've been more appropriate, but here we find ourselves, how did the first pitch become baseball's opening day tradition? So Blake, I know you love baseball. Rajiv, I'm not sure about you.

Rajiv Leventhal (01:39):

I do.

Marcus Johnson (01:40):

Or basketball? Oh, baseball too. Okay. I know you're a fan of basketball, but okay. So great, this is for both of you. So Amy McKeever of National Geographic explains that one of the earliest recorded instances of someone throwing a first pitch was in 1892 when then William McKinley then governor of Ohio and a future US president threw a pitch as a Minor League Baseball season opener.

(02:05):

But credit for transforming the first pitch into a true baseball tradition generally goes to President William Howard Taft on April 14th, my brother's birthday, actually, 1910, that's not the year he was born, when the Washington Nationals played the Philadelphia Athletics in their first game of the season, the nationals' manager, Jimmy McAleer came up with the idea for Taft to start the game that day according to a biography of pitcher Walter Johnson. And he made history that day by becoming the first sitting US president to throw out the ceremonial first pitch on opening day. A tradition that has been carried on by every US president except a handful, and also by celebrities and other notable folks.

Blake Droesch (02:46):

Including 50 Cent who threw out probably the worst opening pitch of all time at a Mets game a few years ago. Look it up.

Rajiv Leventhal (02:55):

There's so many celebrities and non celebrities now that are tapped for these first pitches, and so many of them were terrible.

Marcus Johnson (03:01):

Although in their defense at least they got out of their seat and went to the mound to throw it. Taft just stood up from his front row seat in the stadium and threw it from there.

Rajiv Leventhal (03:13):

Amazing.

Blake Droesch (03:13):

I respect that.

Marcus Johnson (03:14):

Yeah. Anyway, today's real topic, is this the end of convenience?

(03:28):

So this was a suggestion from Stuart who runs the team, this topic, and a good one of that. We're talking about convenience and a redefinition of the very concept. And it was based on an article [inaudible 00:03:43] by Emily Stewart, a really great article by her. She works for our sister company, Business Insider, and she was writing that, "As Walgreens and 7-Eleven falter, America is turning into a shopping wasteland." She explains that, "Pharmacies should be pretty stable businesses seeing as 7 in 10 Americans take some form of prescription medication, and that also totals up to a lot of money over $700 billion in 2023. And folks aren't just buying drugs at pharmacies, using them as convenient stores for all sorts of other groceries, seen as one of the last places where Americans go to shop in person on a regular basis."

(04:18):

Ms. Stewart goes on to note, "That despite these advantages, even pharmacy chains are struggling to survive in the current environment." She points to a few examples. One, Walgreens recently announcing it'll be closing over 1,000 stores. That's about 14% of its physical footprint over the next three years. Saying that, "25% of its outlets weren't profitable." Rival CVS, which has shut hundreds of stores in recent years, about 10% of its stores said it would soon cut 3,000 jobs. And last example here is another competitor, Rite Aid, closed a bunch of stores after filing for Chapter 11 late last year. So Rajiv, we'll start with you. We're playing blame pie and we've asked you to create a pie chart of reasons, three max, why mega pharmacies are struggling so much.

Rajiv Leventhal (05:02):

Yeah, so you gave me the option to include three, but I think I only need two. There's two really big reasons, two main categories for why this is happening and one is on the consumer side and one is on the backend pharmacy side. So I'm assigning 70% blame to the consumer side, which has to do with-

Marcus Johnson (05:20):

I knew it was them.

Rajiv Leventhal (05:21):

... which has to do with consumer buying preferences are shifting and the in-store customer experience is just getting worse, and those two things are kind of attached at the hip. So for one, many people are turning to online merchants for their everyday convenience items. And this has really made it difficult for pharmacy chains to turn enough of a profit at the front of the store. They're experiencing lesser foot traffic. And related to this, the customer experience is getting worse. As I mentioned, more and more products are being locked up behind glass in response to in-store theft and we're kind of seeing how this is leading to a reduction in sales. Because of this unsatisfactory experience consumers either... Or don't follow through with the purchase when something is locked up or they just turn to another option.

(06:10):

These pharmacies, you have to remember, Marcus, these pharmacies brought in a lot of foot traffic during the pandemic due to vaccines and tests being administered in drug stores, also that some of them were even offering medical services. So consumers would pick up front of the store items while getting a vaccine or a COVID test, but that's not the case anymore, obviously demand for those COVID related services has significantly waned. So that's leading to lesser traffic in the front of those stores. And when you have so many of these stores, you mentioned Walgreens and CVS and Rite Aid, so many of them are located on top of each other in many communities across the US. So it's tough for all of them to be profitable. So Walgreens said about 25% of our 8,000 plus US physical stores are unprofitable and we're going to close down a bunch of them.

Marcus Johnson (07:01):

So wait, so 70% for the consumer and 30% for?

Rajiv Leventhal (07:06):

So 30% will be on the back end pharmacy side, and that's related to falling reimbursement rates for dispensing prescription drugs. So just to catch you up quick, pharmacies usually buy their medications from either the manufacturer directly or from a wholesaler, and then they get reimbursed by Pharmacy Benefit Managers, or PBMs. The problem is that three PBMs in the US handle about 80% of prescription volume and they have massive influence over not only prescription drug pricing for what the consumers pay, but also the different contracts among the different players in the pharmaceutical supply chain, whether that's health insurers or employers or the pharmacies that dispense the medications. The PBMs just have enormous influence over how those companies are rebated or how the pharmacies are reimbursed.

(07:58):

So PBMs essentially set these reimbursement rates and in some cases the pharmacies, actually even the big chains, they get paid less when they dispense a medication than it costs to keep the medication in stock. So this is a very significant operational challenge, and you might ask why pharmacies accept these lower payment rates? Well, because three PBMs control so much of the market, the pharmacies don't have a lot of negotiating leverage and PBMs kind of present to them these take it or leave it contracts, and if the pharmacies leave then they could lose out on customers to another pharmacy where PBMs have more favorable contracts in place. So CVS, just as one quick note, has a little bit of a leg up in this area because one of the big three PBMs is actually owned by CVS's parent company, CVS Health. So they're on both sides of the business there. But it's-

Marcus Johnson (08:51):

That's Caremark, right?

Rajiv Leventhal (08:52):

Yeah, it's Caremark. Yeah. So yeah, I mean it's affecting though of all sizes.

Marcus Johnson (08:56):

So CVS has one, so a PBM, so that helps them. Walgreens, this article was noting they tried to push back against Express Scripts, a major PBM, to try to get more from prescriptions and they gave in and lost about $4 billion trying to fight them. So that didn't work at all. And Douglas Hoey, the CEO of National Community Pharmacists Association representing independent pharmacies were saying the pharmacy really doesn't have any negotiating leverage because the PBM says, "Look, pharmacy, if you don't give us everything that we want, we're not going to allow patients to get their drug benefit at your pharmacy."

Rajiv Leventhal (09:29):

These PBMs are really kind of seen as the evil middlemen in the pharmaceutical supply chain and it's unfortunate they have so much power because what their business practices are doing are driving up costs for patients and forcing a lot of smaller, I know we're talking about the big pharmacy chains, but their lower reimbursement rates force a lot of these really small independent pharmacies to go out of practice.

Marcus Johnson (09:50):

Yeah. Yeah, well it seems like a lot. It's nearly a third of community pharmacies, so they're considering closing according to the recent National Community Pharmacists Association Survey.

Rajiv Leventhal (10:01):

Yeah, and if they can't justify the cost of dispensing these medications, what's the point of even being open for some of them? And then you get into a whole issue of pharmacy deserts where some areas of the country there's not adequate enough access to a pharmacy.

Marcus Johnson (10:14):

Yeah. Yeah, I mean even the bigger guys are closing. "Nearly 3,000 drug stores, including the big folks have shut since 2019," that's according to RetailStats. And there will still be a lot of pharmacies left. CVS says, even after it shakes things up, "85% of Americans will still live within 10 miles of a CVS pharmacy." However, to your point about pharmacy deserts, we've talked about this number before and I saw it cited in one of your articles recently, "40 million people," that's over 10% of Americans, "already live in pharmacy deserts," according to KFF Health News.

(10:44):

Really quickly before we move on to 7-Eleven, another flavor of convenience, aside from some of these pharmacies. We talked about, I was trying to list all the different kind of competitors that are attacking pharmacies from different size. One of them is other pharmacies, as you mentioned, there is just too many stores that are sitting on top of each other, too many pharmacies sitting on top of other pharmacies for them to be profitable. The other ones I've got down here, Amazon, because you were noting that Amazon Pharmacy, they're expanding same-day prescription drug delivery, [inaudible 00:11:14] half of the US by next year. And then also big box folks like Walmart, Walmart pharmacy customers, you also noting in an article that they can now add prescription medication to same-day delivery orders.

(11:27):

And so folks, as well as the discount retailers, Dollar General, folks like that where people can buy some of the groceries they would've bought inside of these pharmacies, they will get them there. So the pharmacy side of things, it's moving online and that is reducing the need for folks to go into the pharmacy in the first place, which reduces the need for them to buy stuff whilst they're in the store, so that's another angle that they're being attacked from.

Rajiv Leventhal (11:51):

Yeah, that's exactly right. And Amazon, of course is the online giant here. Consumers, even just looking at medications, consumers are becoming more open to using online pharmacy services. And although this hasn't taken off, I'd say, like online sales in other industries, I think enough folks have tried an online pharmacy at some point to carve into the in-store pharmacy business a little bit. And when we talk about the convenience factor later, I think this is going to be where legacy players have to go and that's kind of ramping up their digital offerings to offset for the store closure.

Marcus Johnson (12:25):

Yeah. There were some numbers on how many people have tried this, tried to buy or bought prescription drugs online. 34% of Americans have used an online pharmacy to buy prescription drugs, and that includes over 60% of young people, 18 to 84 year according to M3 MI and Kantar.

Rajiv Leventhal (12:43):

One quick note that I've found in my research, Amazon, Amazon doesn't talk about their pharmacy business a lot in calls, but they recently said that the worsening experience in drug stores related to items being locked up and cabinets and everything, that has actually led to a boost in Amazon Pharmacy's business because fewer people are going into those stores.

Marcus Johnson (13:04):

So we've been talking about Walgreens closing a bunch of stores, CBS has already closed a bunch of stores, Rite Aid filing for Chapter 11 and all those pharmacies, people look at them as convenience stores, but there's another convenience store which is also struggling in terms of brick and mortar, at least. Our Rachel Wolff was noting in early October that 7-Eleven will shutter nearly 450 underperforming stores, roughly 3% of its North American footprint as it adjusts its operations to account for consumers shifting preferences and behaviors in the convenience store category. Blake, I've asked you to create a pie chart, similar to Rajiv, but a pie chart of reasons, three max, why 7-Eleven, another type of convenience store is struggling.

Blake Droesch (13:45):

Yeah. So we're going to transition from talking about life-saving pharmaceuticals to cigarettes and junk food, so this is more of the space. It might feel a little abrupt, but it'll make sense in a moment. So, I'm sorry, Marcus, I'm usually a rule follower, but I have four factors, I hope that's okay.

(14:08):

So 40% is just the economy and inflation. And I think right off of the bat, that's a big chunk of it. If you look at a lot of the big brands' CPGs, their sales are struggling. A lot of the snacks and other junk foods, discretionary purchases, people are cutting back. And when they're indulging, they're probably buying them in bulk to save money from a Costco, Target or Walmart. And there's the typical mother knows best adage of, we've got plenty of food at home, why do we need to stop off at the convenience store for a pack of Oreos? And that's a big thing. That's a big part of it. I'd say another 15% is that cigarettes are stalled at state minimums to get people into the store and that was always a major tactic for convenience stores to drive foot traffic, cigarettes and other tobacco products. People aren't smoking as much as they used to, tobacco usage is down in general, that's another long-term impact.

Marcus Johnson (15:11):

Quickly to just support that point, because I went and looked for some numbers because I was kind of surprised by that explanation, that being one of the reasons. So I went and looked and a steady decline of cigarette smoking in the US. In last 10 years, the share of US adult smoking has fallen from 17% to less than 12% according to the American Lung Association. That's about 17 million fewer smokers over the last 10 years.

Blake Droesch (15:39):

Nicotine use has not subsided as drastically. There are a lot of vaping, other types of smokeless alternatives that convenience stores still use to get traffic into the store. But when you think about just the sheer percentage of Americans that were regular smokers back in a previous generation, that has a significant impact on how a convenience store operates. The other 15% is digital. Obviously there are a lot of digital convenience options, Gopuff, Uber, DoorDash, et cetera. But within the food and beverage category that e-commerce penetration is still pretty low, less than 10%. So even though it is an impact, I'd still only give it about 15%. The other 30, and this is what I want to spend the most time talking about because it's really the most important factor is that consumers eating habits have changed drastically over a long period of time. And a store like 7-Eleven hasn't really kept up with those trends.

(16:46):

People are eating healthier and when they indulge, they still do indulge, but they're looking for something a little bit higher quality than a packaged cookie or a candy bar. So these were trends that were happening over a long period of time, and I think the spike in inflation, people cutting back on discretionary purchases have really brought it to the surface and that has had an outsized impact on convenience stores, but it's still something that a company like 7-Eleven is going to have to get in front of and they can't just wait for the economy to improve and people being more willing to spend on snacks and other types of junk foods. I'll give you just one example, if you're familiar with the cookie chain Crumbl, have you heard of them?

Marcus Johnson (17:33):

Mm-hmm. Crumbl Cookies.

Blake Droesch (17:33):

So know it's not necessarily a gourmet cookie, but it's a little bit more than something that, a Mrs. Fields cookie that you would get packaged in a 7-Eleven. These Crumbl cookies, they're a relatively new brand, they have 860 stores across the US. So they're one of the fastest growing QSRs. And this is the type of product that 7-Eleven is now competing with, not just in major metropolitan areas but across the country. So I bring that up, because I just think it's a good example of, consumers, yes, they're eating healthier, but they still like to indulge, but they have more options than ever when they want to go spend that extra $5 on something sweet.

Marcus Johnson (18:23):

Yeah, and their foot traffic's down as a result of all of this, 7-Eleven traffic falling 7% in August, and it's been declining every month since Q2 of 2023. So it's been a long time now. Rachel Wolff was making that point. Part of that foot traffic issue is commuting, folks aren't commuting as much as they were before. I went and looked, if you just Google Maps where the 7-Elevens are in New York, Philly, Boston, Chicago, they're all where people work typically. So that's definitely having an effect on them.

(18:57):

So the question becomes, all right, so what do they do? And it seems as though 7-Eleven strategy for their new model of convenience, so to speak, is to open new stores. They're closing 450, but they recently noted they're going to be opening 500, so a similar number of new format locations across the US in the next three years. It's a larger store called the new standard. And they have, to what Blake was saying, not just a contemporary design, a larger product assortment of improved food and beverage offerings as well, as well as in-store restaurants. Blake, do you see this as being the new model of convenience that can work with 7-Eleven?

Blake Droesch (19:33):

I think execution is going to have everything to do with it. I mean, they're going to need to tap into these sort of evolved consumer eating habits in order to appeal to their audience in the long term. Because in my opinion, there's a lot of wasted real estate inside of these stores. I think what 7-Eleven really needs to do is leverage their consumer insights. So a lot of the times you're operating these stores that are serving multiple purposes, maybe people who are in a pinch or getting a meal there, more often they're getting their morning coffee or picking up a snack at some point during the day. I would imagine that what they're really going to need to focus on is running the numbers and finding out how can we best allocate our resources and our real estate inside the store to actually cater to the people that are driving the most revenue.

(20:34):

And so if you're dedicating a ton of money and resources to a dine in section of the store and nobody's using it and you're not going to lose margins, then that's going to be a massive waste of real estate. And it could be something more simple to just getting rid of the stale hot dogs that are sitting there rotating all day and putting something more interesting in like fresh cookies-

Marcus Johnson (21:01):

A Crumbl Cookie..

Blake Droesch (21:01):

... or something like that. Yeah, so I'm serious. So I think it's paying attention to consumer trends, looking at what your customers are already doing and just iterating on that.

Marcus Johnson (21:11):

Yeah, the early signs seem to be positive, at least. "Daily sales at the average new standard store, 13% higher in the first half of this year compared to the rest of 7-Elevens's existing portfolio," Rachel was noting. Rajiv, how about for you? What does the new model of convenience look like for pharmacies going forward?

Rajiv Leventhal (21:30):

Yeah, I think you mentioned the smaller format stores. I think we might see some of that. I think we already are seeing some of that from Walgreens. You need to think about how you can ramp up your digital offerings, one-stop shop apps where consumers can order medications and other items into one order like we just recently saw with Walmart, as you mentioned, with same day home delivery. So this is already happening in some cases. Even as retail pharmacy stores close, many close, this is obviously not going to disappear. There're simply too big of a market, when you look at the aging population and the need for medications, older patients regularly take multiple medications. You think about four of the five top companies in the US in terms of revenue are in the prescription drug business, except for Apple's the only one that's not. So they just kind of have to figure out how to improve the customer experience by creating some sort of a hybrid world where consumers will be less reliant on in-store shopping, but for most it will still be an option just mixed with that digital component.

Marcus Johnson (22:38):

Yeah. And it seems like maybe people won't go in as much for their prescription drugs. I mean, it's not like they're going to switch to being online all of a sudden overnight. A lot of people still do go into stores for their prescription drugs. Actually, I've got some data here from that same survey or same source, M3 MI Kantar Media, where US adults purchased their prescription medications in April, 88% in-store pharmacy versus 34% online.

Rajiv Leventhal (23:05):

Yeah, and there's a lack of awareness among many consumers of online pharmacy services, even though a third have said that they've used it at one point. People who stick to their brick and mortar pharmacies to pick up their medications, over half of them never even heard of online pharmacy services according to-

Marcus Johnson (23:05):

Oh, interesting.

Rajiv Leventhal (23:22):

... a recent survey that we recently covered. And I think there is a little bit of a friction point issue here too, where a lot of people don't want to go through the hassle of changing their pharmacy, even if it's asking their doctor to transfer their medication to somewhere else. A lot of people just kind of stick to what they know as long as the experience is satisfactory, and that's going to be the big advantage, I think, for these pharmacies to make sure that they're providing that good customer experience.

Marcus Johnson (23:53):

You also wrote a piece, just noting, just to close out the episode, that grocery chain locations with in-store health clinics attract more shoppers than stores without healthcare services according to a report from Placer.ai. So do we think that even if people are maybe getting their prescriptions online a bit more, they're still going to go turn to those pharmacies, to those grocery locations for health clinic related services?

Rajiv Leventhal (24:18):

And I mean on the clinic side, that's really been like the whole strategic plan for in-store health clinics, whether they're in retail pharmacies or within grocery stores, it's operating them as a loss leader to try to attract foot traffic for other parts of the business. It hasn't worked at all on the retail pharmacy side. Walgreens is pretty much saying we're out of the primary care world. CVS is not that far removed, but they're not exactly profiting from their primary care investments. So yeah, I think the medical care inside pharmacy store or inside grocery store has not really worked. But yeah, I mean, again, I think we're just going to see a mix of these pharmacy chains that just had too many stores open, just have to size their business and make sure that the ones that they do keep open are delivering what consumers want.

Marcus Johnson (25:07):

What's interesting though is that our numbers are still quite high in terms of the number of Americans we think will visit a retail clinic at least once. We think a third of Americans will visit a retail clinic at least once. That's like CVS MinuteClinic, Walgreens Healthcare Clinics, etc. So that number isn't going down, even though it seems like pharmacies and grocery stores are saying that this isn't a strategy that is working for us thus far. Do you think-

Rajiv Leventhal (25:31):

It's funny though-

Marcus Johnson (25:31):

Go ahead.

Rajiv Leventhal (25:32):

Yeah, no, I was just going to say, we actually just finished our updated retail clinic forecast. I think that we are projecting a slowdown-

Marcus Johnson (25:38):

Oh, interesting, okay, okay.

Rajiv Leventhal (25:39):

... in retail clinic locations. But you're right, there's still going to be a bunch of people who do get a COVID shot or a flu shot there. But during the pandemic, they were getting comfortable with getting a vaccine there. So they're actually going there for other medical services, like low acuity type issues, common illnesses and infections. But I think that that's not happening as much as it was in the peak of the pandemic.

Marcus Johnson (26:01):

And in part because it's so hard for them to get an appointment with their primary care, and so they're turning to them for that reasons we've spoken about in the past. Well, I'll end with this from the Insider article from Ms. Stewart, she was saying, "It seems strange to mourn the demise of corporate giants like Walgreens and 7-Eleven. These, after all, are the very corporations that help decimate local businesses from the friendly neighborhood pharmacy to the five and dime. But their passing feels like it marks yet another transitional moment in American culture as the entire concept of running out to the store for a minute goes the way of music on MTV and the landline." What does it mean to have so few places left to grab the things we need? That ends today's episode. Thank you gents so much for hanging out with me today. I really appreciate it. Thank you to Rajiv.

Rajiv Leventhal (26:45):

Thanks Marcus, happy to be here.

Marcus Johnson (26:47):

Yes, sir. Thank you to Blake.

Blake Droesch (26:48):

Yeah, good to be here.

Marcus Johnson (26:50):

Thank you to Victoria who edits the show. Stuart, who runs the team and suggests topics. Sophie, who does our social media. Thanks to everyone for listening in. We hope to see you tomorrow for the Behind The Numbers weekly listen, an eMarketer podcast made possible by TikTok.

(27:12):

On November 1st, eMarketer is hosting a virtual summit. You can learn all about the top trends of 2025 with a keynote from analysts, Sarah Marzano and Evelyn Mitchell-Wolfe. Panels hosted by analysts, Kelsey Voss and Yoram Wurmser, and featuring executives from top brands. All of this starts at 11:30 A.M. Eastern on November 1st and is hosted by eMarketer's Vice President of Content Suzy Davidkhanian and senior director of client Briefings Jeremy Goldman. Use the link in the show notes to register today.