Pharmaceutical innovation that offers new treatments for a range of maladies together with a greater number of people with medical insurance have lifted prescription drug spending 9 percent over the past year. During the same time period, the number of insured Americans rose 1.8 percent to more than 289 million. Combined with nearly half of all citizens taking at least one prescription drug, health and personal care stores stand to benefit as these trends persist over the coming year.
Drug store performance has been robust over the past year, with the sector generating 6 percent retail sales growth, achieving the strongest performance of any brick-and-mortar retail segment. In addition, the sector has grown from 5.9 percent of retail sales in January 2000 to 7.6 percent at the end of 2016, indicating that operators are garnering a larger share of consumer spending as well. The sector’s prospects remain bright, bolstered by the aging of the U.S. population. Individuals over 65 comprise an estimated 15.1 percent of the population as of the first quarter of this year, which is forecast to rise to nearly 19 percent by 2025.
While pharmacy services remain a core piece of the drug store business model, CVS, Walgreens and Rite Aid have adapted their product mixes to compete more aggressively with internet-based prescription drug vendors. The expanded product selection at these retailers, covering a variety of necessity-based items such as cosmetics, food and over-the-counter medicines, is increasing store traffic and driving higher revenues. In addition, operators have developed a variety of store formats and sizes in order to take advantage of both suburban and under-retailed urban neighborhoods. CVS has also moved toward providing a broad suite of healthcare services directly to consumers, with the number of in-house clinics doubling since 2010 to nearly 1,100 locations nationally. Walgreens is adopting a similar approach, offering preventive health services and assessment for a number of chronic health conditions at more than 300 locations nationwide.
Backed by investment-grade credit ratings, CVS and Walgreens hold leading market share in the segment. While Rite Aid currently remains a stand-alone entity, a pending merger with Walgreens could consolidate the industry with two leading competitors. The Federal Trade Commission has yet to rule on the proposed merger.
A combination of excellent credit ratings and lease terms that can exceed two decades for new stores has generated tremendous demand for net-leased drug store properties. As a result, buyer competition for the assets typically prompts closed transactions range from the mid-4 to mid-5 percent band for new leases, while extension above the range is likely for shorter lease terms and less trafficked locations