This will likely be the only time I ever agree with FTC chairwoman Lina Khan. In a scathing 71-page report issued on July 9, the Federal agency blasted the role of Pharmacy Benefit Managers (PBMs), charging the powerful middlemen with attempting to manipulate the drug supply chain supply chain to enrichen themselves at the expense of smaller independent pharmacies and, ultimately, U.S. consumers. That sounds like anticompetitive behavior and if you ask dozens of supermarket and drug chain executives (except for those at CVS, which owns both drug stores and a pharmacy benefits management company) they’d agree that’s exactly how PBMs operate.
At this point, there’s only the scorched earth report to analyze, but it’s almost certain a lawsuit will soon follow. The primary targets are the three largest PBMs – Optum RX (owned by UnitedHealth Group), Express Scripts (owned by Cigna) and Caremark (owned by CVS Health).
The focus of the report (and likely the lawsuit) will be on the business practices of the “big 3,” which reportedly handle nearly 80 percent of all prescriptions in the U.S.
The responses from the PBMs were expected, as reflected in this statement from a spokesman for CVS Health: “Any suggestions from the FTC about policies that limit the use of PBM negotiating tools would instead reward the pharmaceutical industry, leaving American businesses and patients at the mercy of the prices drugmakers set.”
And that comment is correct as a standalone sentence. Without some type of third-party leverage, pharmaceutical manufacturers would force even higher prices than what they offer in the US. Which has the highest prescription drug prices in the world.
But what was not said was that that retailers are getting hammered as the PBMs continue to squeeze their margins by adding fees and costs to lower their reimbursements.
The costs of two of America’s most prescribed drugs – insulin and glucagon-like peptides-1 (GLP-1) – are expected to be closely scrutinized by the FTC. Both drugs are dispensed for diabetes care and control: for type-1 diabetes (insulin) and type-2 diabetes (GLP-1). Both are costly to both retailers and consumers.
The difference between the two is that type-1 diabetics need insulin to survive while type-2 diabetics can improve their health with medication and can gain improvements in lifestyle.
And the popularity of GLP-1 drugs seems to have created a nationwide frenzy to lose weight, be it for health reasons or for improving body image.
And that’s where the PBMs seem to have widened their lane. I’ve been talking to dozens of retailers about this situation for the better part of a year. At first, some were concerned that the decrease in appetites would mean lower sales; and indeed, a handful of retailers have noted they’ve seen diminishing volume in some categories where carbohydrates and high calorie values are significant.
But as GLP-1s have dynamically grown in usage, the net loss at the cash register becomes more pronounced.
“The power of PBMs has become more powerful over the past decade. We could live with the 20 percent margins that they provided in 2014. By 2019, those margins were cut in half, simply by arbitrary decisions,” said one retailer based in the Mid-Atlantic region. “Margins have continued to drop as the PBMs take more for themselves and give less to us and our customers. However, the GLP-1 situation, as it stands now, is unsustainable. We lose $30-40 per order and we’re filling thousands of orders weekly.”
The vulnerability of pharmacies caused by financial pressures is easy to measure. Ten years ago, there were 80,000 pharmacies in the U.S. (free-standing or in-store). Five years ago, that number dropped to 55,000 and now the current number of places where consumers can get prescriptions filled is estimated at 40,000.
Over the past few years, major retailers such as Target and ShopRite have closed a significant number of pharmacies in their stores. And the big three drug chain – CVS, Walgreens and Rite Aid – have also closed thousands of freestanding locations.
The prospect of losing millions of dollars a year from selling one class of drugs is only going to make retailers think even harder about closing pharmacies/pharmacy departments or to consider not selling GLP-1 prescriptions to their customers.
Since Congress is too weak to battle Big Pharma and its powerful lobby, it’s going to be up to Lina Khan to do the heavy lifting.
And who woulda thunk that?
Local Notes
NYC-based Gristedes Supermarkets agreed to pay a $400,000 penalty and invest an additional $13.5 million to improve its refrigeration equipment, according to the United States Attorney’s office for the Southern District of New York. The privately-held urban retailer did not admit any wrongdoing but said it would upgrade the refrigeration equipment in its 17 Manhattan supermarkets after the Feds said that Gristedes emitted more than 40,000 pounds of refrigerants into the atmosphere.
We’ve got more scofflaw news, this time about Walmart locally. The Bentonville, AR-based merchant has agreed to a $1.64 million settlement with the state of New Jersey after being accused of illegal pricing practices at its 64 Garden State locations. The state’s Department of Weights and Measures accused Walmart of using deception to make it difficult for shoppers to make price comparisons with other retailers. While not admitting any wrongdoing, Walmart said it would improve associate training.
Huntington Station, NY (Suffolk County) is the site of the newest Whole Foods Market which opened on July 17. The 43,916 square foot store is the natural and organics retailer’s seventh location for the upscale retail food division of Amazon on Long Island. Another upscale merchant, DeCicco & Sons, will enter Connecticut for the first time after agreeing to open a store in site of the old Stop & Shop location in Greenwich (which closed in 2023). The 20,000 square foot unit is expected to open next summer. DeCicco’s also has another new store under construction in tranquil Sleepy Hollow, NY. The family-owned retailer’s 11th supermarket should open late this year or early in 2025. The 30,000 square foot perishables-oriented supermarket will be part of a 70-acre mixed use development located along the Hudson River.
Another independent retailer benefiting from Stop & Shop’s store closures (this time from the batch of 32 supermarkets recently announced) is Uncle Giuseppe’s which will open its 12th store at the soon-to-be-closed Stoppie site in Greenvale (Nassau County), NY. That 52,000 square foot unit is expected to open in Q1 2026.
Big Y opened the first (almost) former Amazon Fresh unit in the region when it cut the ribbon on a new store in Brookfield, CT last month. The 40,000 square foot location was one of dozens that the directionless retailer had planned to open but pulled the plug on in 2022 due to poor sales throughout the entire AF fleet. A similar situation will occur this fall when Big Y opens a new (almost) former AF unit in tony Westport, CT. Another new and larger Big Y store also opened late last month in Middletown, CT. That 52,000 square foot store was built “from the ground up” and is unaffiliated from Amazon.
BJ’s has confirmed it will build a new club unit in Hanover Township, NJ that is slated to open early next year, marking the Marlborough, MA-based retailer’s 25th store in the Garden State.
Some changes at Costco and Sam’s Club worth mentioning. At Costco, the nation’s largest club store operator will increase its membership fees for the first time in seven years. Basic membership rates will move from $60 to $65 annually and executive members will now pay $130 annually, a $10 increase. Costco is also raising the maximum reward amount from $1,000 annually to $1,250. Last year, Costco’s membership revenue was $4.7 billion, an 8 percent increase from 2022. That’s upfront cash, which gives Costco a lot of flexibility in its pricing strategy. (Impressive as that is, it’s not even close to the $40 billion upfront haul that Amazon rakes in from its “Prime” subscribers). At Sam’s Club, its upper tier club members will no longer be eligible for free shipping on orders under $50 after August 18. The Bentonville, AR unit of Walmart will begin charging those “Plus” members who pay a $110 a year subscription fee $8 to ship orders
The Acosta Group announced on July 16 that it has completed the acquisition of rival national food broker Crossmark from WIS International. The Jacksonville, FL-based agency said that both Crossmark and its Product Connections digital marketing subsidiary will continue to operate as separate brands within the Acosta Group.
We have a couple of obits to report, both notable executives and colorful personalities in our business. Mike Wilson, former VP of sales for Georgia-Pacific who grew the paper brand’s share in the 80s and 90s, passed away last month in Alpharetta, GA. During his heyday (and my youth), I spent many hours with Mike (often in a room with dim lights) and there was no better storyteller than the man from Tyrone, PA (a place that’s hard to find on a map). But Mike was much more than funny and entertaining – he was a helluva salesman – one who knew the paper business inside-out and arguably made more top-to-top calls than any supplier during his long career which began at Scott Paper (where his broker also worked). Street-smart, intuitive, profane and a person who made an impression on you with his talent and photographic memory, my condolences go out to his wife Linda and the entire Wilson family
Also leaving us this month was Bill Sumas, 77, chairman of Village Super Markets, Wakefern’s second largest member. Bill carried on the family tradition of service, joining the company started by his father Perry and uncle Nick in 1937. His sense of humor was drier than dust and he always loved to talk about the business. Many times, when talking to Bill when we were both relaxed, I thought I’d see if he could provide some insight into the cryptic manner in which Wakefern sometimes operated. Once he caught wind that I might be straying outside the margins and, almost instinctively, Bill would say, “Don’t ask me, I’m only the real estate guy. I don’t know very much.” A wonderful person with a real zest for life and a slightly different perspective, Bill Sumas was appreciated and will be remembered by many.
