Retail Rumble

Helping a retail pharmacy chain

survive extreme headwinds

Full Case Series - Fall 2023, Case 5

Published October 31, 2023
www.rocketblocks.me
 How to use RocketBlocks’ cases
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 How to use RocketBlocks’ cases (continued)
3. Interviewer Guidance - When delivering this case, please follow these instructions
when sharing:
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section of the case.
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only 👀 marked in yellow. This information should help you deliver the case
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moment in the case.
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For more tips on how to be a good casing partner, visit:

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 Case outline and interviewer notes
👀 For interviewer only 👀

The case is inspired by the challenges faced by CVS, Walgreens, and other retail
pharmacies in 2023. These types of companies faced major profitability issues due to
declining prescription drug reimbursements that directly lowered their top lines,
increased operating costs, and increased competition from online players and other large
retail stores like Wal-Mart entering the pharmacy space.

In their discovery questions, the candidate will learn that many individual stores are
unprofitable, and that closing a significant amount of stores is an almost “forced”
outcome for the client. Further solutions can include an attempt to increase online sales
or to open new lines of business.

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 Question 1 - Introduction
1.1 Opening Prompt

HealthPlus, the second largest retail pharmacy chain nationally, is feeling the pinch from
a changing market landscape.

Recently, there has been a major change that has shaken up the retail pharmacy industry.
Prescription drug price reimbursements have declined by about 10%, resulting in a major
hit to the industry’s top line. This decline, combined with fierce competition from
brick-and-mortar players and online retailers have resulted in a significant decrease in
HealthPlus’ profitability.

The client is asking you to recommend how they should respond.

👀 Interviewer notes on candidate response 👀

Was the candidate’s response MECE?

Was the candidate’s response applicable to the case?

Did the candidate’s response show original thought?

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 Question 1 - Introduction (continued)
1.2 👀 For interviewer only 👀 Information to be shared if the candidate asks
What is the current financial status of HealthPlus?
HealthPlus at the moment is experiencing a significant reduction in net profit margin from 6% two years ago to just around
2% presently. The overall revenue growth has also been static, with a mere 0.5% growth last year and actual projections
suggest a possible contraction in the current year.

Further, an analysis has shown that more than 30% of all stores are unprofitable.

What is the breakdown of HealthPlus' revenue stream? Is it primarily from prescription medications, over-the-counter
products, or diversified services like healthcare provision?
The revenue of HealthPlus is broken down into roughly 70% prescription medications, 20% over-the-counter products that
they stock in their retail stores, and 10% other services such as health consultations.

Have they tried anything already to stem the tide?

HealthPlus attempted to improve profitability by cost-cutting measures which involved staff reduction and minimizing
overheads. However, these measures have not proven significantly impactful on the bottom line.

More recently, they have closed stores that were exceptionally un-profitable. HealthPlus has found that once a store becomes
unprofitable, it is almost impossible to turn it around and create a profitable location.

Can you provide more insight into the 'decreased reimbursement rates for prescription drugs'? How has this influenced
HealthPlus' profitability?
HealthPlus, like other pharmacies, operates on a reimbursement model where they buy drugs and then get reimbursed by
insurance companies. However, reimbursement rates have been falling, with a significant cut of approximately 10% last year
across all medication categories. As a majority of HealthPlus' sales come from prescription drugs, this has had a substantial
negative effect on their profit margins.

Who are the primary competitors, both brick-and-mortar and online, that are impacting HealthPlus? Can we get some
details on their market strategies?
- Major brick-and-mortar competitors include chains like CVS, Walgreens, and Wal-Mart. On the digital front, Amazon and
others are making an impact. The online players typically work by doing bulk purchasing to reduce cost and maintain
profitability, while other retailers like CVS have diversified into wellness products and even health insurance (via acquisition),
which has a higher profit margin.

Are there specific regions or markets where HealthPlus' stores are struggling more than others?
We’re seeing a nationwide drop in profitability.

How significant is HealthPlus' online presence compared to its brick-and-mortar business?

HealthPlus' online presence is marginal relative to their brick-and-mortar operations, contributing to just about 5% of total
sales. While they have an online sales portal in place, it's often criticized for its lack of user-friendly features and fails to offer
the level of convenience provided by competing online retailers.

How has HealthPlus' profit margin compared to industry averages over the past few years?
The downturn in prescription reimbursements has affected all players in the space. Major competitors have responded by
closing stores and opening new revenue streams in other ventures.
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 Question 1 - Sample Response
1 Sample Response
Approach to this prompt: Given the information provided, a good answer to this question would involve a multi-pronged
approach to address HealthPlus' challenges. The categories should included recommendations for revenue increase and
cost reduction.

Sample response to this prompt:

HealthPlus is facing significant challenges due to declining prescription drug reimbursements, fierce competition, and a
significant number of unprofitable stores. To address these challenges, I recommend the following strategies:

1. Revenue Diversification: HealthPlus should consider expanding its over-the-counter product offerings and other services
such as health consultations. This could involve identifying high-margin products or services that are in demand and
promoting these offerings in their stores and online.

2. Digital Transformation: Given the increasing competition from online retailers, HealthPlus needs to improve its online
presence. This could involve investing in improving the user experience on their online sales portal to make it more
user-friendly and convenient. They could also explore other digital channels such as mobile apps or social media to reach
more customers.

3. Store Optimization and Closure: Given that a significant number of HealthPlus' stores are unprofitable, they need to
consider whether to close these stores or find ways to make them profitable. This could involve conducting a detailed
analysis of each store to identify the reasons for their unprofitability and then implementing targeted strategies to address
these issues. If a store is found to be irreversibly unprofitable, it may be best to close it to prevent further losses. This
strategy should be implemented in a phased manner, starting with the most unprofitable stores first.

By implementing these strategies, HealthPlus can diversify its revenue streams, optimize costs, improve its online presence,
and increase the profitability of its stores, thereby improving its overall profitability.

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 Question 2 - Analysis
2.1 Analysis
Your partner on the case wants to start by creating an overview document describing the
decline in profitability for the client. A Vice President at the client has shared the data on
the following page.

What are your takeaways?

👀 Interviewer notes on candidate response 👀

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Question 2 - Data

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 Question 2.1 - Analysis
2.1 Sample Response
The data contains several important points that can help guide the case:

● The number of profitable stores has decreased from 188 to 129 over 5 years. That’s a reduction
of 30%. As a % of total stores that has gone from ~90% of stores to ~70% of stores profitable.

● The decline in profitability is happening across all regions. While some markets appear to be
performing better (e.g., market D has a higher profit 5 years ago and today), the trend of declining
profitability and declining amount of profitable stores is seen in all regions.

● The decline in profitability is largely driven by a decline in revenue. Consistent with the prompt,
top line revenue reductions look to be the major driver of declining profitability for HealthPlus.
Revenue is down ~20% across these five regions.

● HealthPlus has already begun closing stores. There are fewer stores in operation today across
all regions than were open 5 years ago.

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 Question 2.2 - Gut Checking
2.2 Gut checking
The partner wants to make sure they have a handle on the “per store” implications of the
data.

What was the change in average profit per store from 5 years ago to today?

Can you estimate how much money each unprofitable store is losing today?

👀 Interviewer notes on candidate response 👀

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 Question 2.2 - Gut Checking
2.2 Sample Response
Average profit per store
● 5 Years ago:
○ $116.5M profit divided by 212 stores.
○ Rounding 212 stores → 200, we can evaluate $116.5M / 200 stores.
○ This is the same as ( $116.5M / 2 ) / (100)
○ ~$58M/100 = $580k.
○ Our initial rounding undercounted the number of stores so we can refine our calculation to
be ~$550k per store
● Today
○ -$142.6M profit divided by 190 stores
○ Rounding 190 stores → 200, we can evaluate -$142.6M / 200 stores
○ This is the same as (-$142.6M / 2) / (100)
○ -$71.3M/100 = -$713k
○ Our initial rounding overcounted the number of stores, so we can refine our calculation to
be ~-$750k per store

Loss per unprofitable stores

● We know that there are ~60 unprofitable stores today (190-129)
● We know that the total loss is -$142.6M
● The unprofitable stores need to be losing at least that much money PLUS an amount equal to
however much profit is being generated from the profitable stores
● -$142.6M/60 = -$2.4M per store. Each unprofitable store is losing at least $2.4M on average
● From there, the average amount lost per store depends on the total profit from the profitable
stores
● For example, if each profitable store is making $1M in profit, that is $130M in profit, which would
need to be completely matched by the unprofitable stores to get the same outcome
○ $130M/60 unprofitable stores = $2.1M in losses
○ Combined with the the original $2.4M in losses = $3.5M in losses per unprofitable store

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 Question 3 - Closing time
The client has already begun closing stores (the data shows that there are ~30 fewer
stores today than there were 5 years ago).

Your partner wants to help the client decide if any additional stores should be closed.
What factors should the client consider on a store-by-store basis to decide whether or not
to close a store?

👀 Interviewer notes on candidate response 👀

Was the candidate’s response MECE?

Was the candidate’s response applicable to the case?

Did the candidate’s response show original thought?

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 Question 3 - Sample Response
3 Sample Response
Approach to this prompt: The candidate should identify and organize a variety of factors for the client.
They absolutely must consider financial performance of the location (ideally both profitability and profit
trend line). Strong answers will consider other strategic ideas as well.

Sample response to this prompt:

When deciding whether to close a store, HealthPlus should consider the following factors:

1. Financial Performance: The most important factor to consider is the store's financial performance. If
a store is consistently unprofitable, it may be a candidate for closure. The client should also consider
the trendline of profitability - has it been keeping pace with benchmark stores or declining at a faster
rate?

2. Market Potential: HealthPlus should also consider the size and potential of the local market. If the
store is located in a small or saturated market, it may be difficult to improve its performance. On the
other hand, if the store is in a large or growing market, there may be opportunities to turn the store
around and attract more clients.

3. Proximity to other locations and efficiencies: The client should also consider how close each store is
to stores that will remain open. It is possible to pick up some efficiency by reducing the physical
footprint of two locations to one, but retaining some of the top pharmacists or staff members at the
closed stores.

By considering these factors, HealthPlus can make a more informed decision about whether to close a
store.

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 Question 4 - Which stores
The client shares the following information from Market E, on the following page. Which
stores do you recommend closing? Why?

👀 Interviewer notes on candidate response 👀

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Question 4 - Data

Store-by-store profitability in Market E

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 Question 4 - Sample Response
Sample Response
Approach to this question:

The candidate should quickly identify the six unprofitable stores as the main drivers of the overall lack of
profitability in Market E. They should further notice that stores 7, 8, and 9 are only barely profitable, at around 1%
profit margin.

A strong answer will use the framework from the introduction of the case and the response to question 3 to
inform their decision, regardless of which stores they choose.

For example, if the candidate was bullish on revenue turnarounds at each store in their initial framework, they may
believe they can increase the margins in the slightly profitable stores (and maybe even store 14 as well), and
choose to close only the last 4 stores. If, however, the candidate pushed for more of a digital presence, and
acknowledges that the overarching trend of stores is towards less profitability, they may choose to close store
7-18.

Sample answer:

Given my initial framework to push for a digital transformation, as well as the observation that profitability is
continuing to decrease, my recommendation is to close any store that is negative or low profitability. This
includes stores 7 to 18.

We may choose to keep some of the “bubble” stores - for example if they are in close proximity to some of the
closing stores or if they are in areas that are seeing a population increase.

Finally, it is worth noting that closing stores is a one-way decision. HealthPlus may choose to keep some stores
open for an experimental period, to see if they are able to either turnaround profitability and/or pickup clients from
other recently closed stores.

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 Question 5 - Synthesis
What is your recommendation to the client on what to do next, given the shift in the
market?

👀 Interviewer notes on candidate response 👀

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 Question 5 - Synthesis
Sample Response
Approach to this question:

The candidate should consolidate information and observations from throughout the case. They should be able to
come back to the original prompt (“How do we respond to the decline in revenue”), and follow through with a clear
recommendation. It is likely/probable that the candidate will recommend closing many stores across the
company’s regions.

Sample answer:

HealthPlus is facing a significant threat in the form of declining revenue due to market factors outside of their
control. In addition they are seeing increased competition from Brick and Mortar retailers like Wal-Mart, who are
not as reliant on pharmacy revenue, as well as online distributors who enjoy a lower cost structure.

While there are revenue-increasing plays HealthPlus should explore - for example digital transformation and new
product offerings - their main focus in the short term should be on reducing costs in the form of store closures.

The company is seeing a decline in per-store profitability in each of 5 regions for which we have data. Using
Market E as an illustration, they should be closing all stores that are not profitable as well as many that are only
“slightly” profitable, on the expectation that the current headwinds and trends will continue into the near future.

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