Source: PaxForex Premium Analytics Portal, Fundamental Insight

Amazon continues to attract attention, setting sales records and opening new lines of business. The tech giant is gradually turning attention to the healthcare sector.

Several years ago, the company acquired PillPack, which helps shoppers keep track of their prescriptions by pre-sorting them and delivering them right to their homes. Then, at the end of 2020, the company built on that and officially launched its Amazon Pharmacy business, which allows Prime members to save up to 80 percent on generic drugs.

However, an even bigger move by the company may be on the horizon. And it could make drug retailers like Walgreens even more nervous.

According to a Business Insider report published last month, multiple sources allege that the tech company is considering launching physical retail pharmacies. Amazon has not confirmed this information, and sources say that even if it does, it could be more than a year before a meaningful rollout takes place. Presumably, the company is considering creating stand-alone stores and possibly even placing them inside its Whole Foods stores. If the company decides to take that step, it would put Amazon in even more direct competition not only with pharmacy retailers but also with Walmart, which has pharmacies inside its stores. 

Amazon has bestowed previously that it is not afraid to enter a new sector for growth opportunities, such as when it acquired Whole Foods in 2017. Adding new services in addition to existing offerings is something the tech company's customers and investors are used to.

But entering the pharmacy retail business won't be easy. Unless Amazon is going to acquire an existing company, it will take time for it to become a major competitor. And even then, the business won't be extremely profitable: Walgreens hasn't posted a profit margin of more than 4% in any of its last five fiscal years. Its gross margin is very thin and is usually about 20% of revenues.

Both Walgreens and CVS are also remodeling their stores in an attempt to attract more customers. CVS is turning its stores into HealthHubs, which helps patients with chronic diseases, including diabetes. It also offers wellness rooms, yoga, and other health-related products in its stores. Walgreens is going a step further and is going to open doctor's offices in many of its stores. In 2020, the company announced that it would invest $1 billion in VillageMD to open up to 700 primary care clinics within five years.

For Amazon to get involved in the medical business, where margins are tight and resources may be required even more than they were a few years ago, before all this restructuring began, could make the move an undesirable one for the technology company. While having physical branches may attract more customers and improve delivery speeds, this strategy may show high-priced and not even successful, at least in the short term.

If Amazon does launch physical stores, it may be several years before it can wrest significant market share from the big players in the sector. And even if it does, it is still no guarantee that it will head to significant revenue growth for the company. Revenue from Amazon's physical stores, which includes Whole Foods, totaled just $16.2 billion last year, or 4.2 percent of the company's total sales. And sales in that segment were down $1 billion from the $17.2 billion Amazon reported in 2018. Numerator's data also suggest that the company hasn't tapped much of the market. For the year ended March 31, Amazon and Whole Foods combined accounted for only 2.6 percent of grocery spending share in the U.S. 

That's why entering the physical pharmacy market shouldn't inspire Amazon shareholders, nor should it excite you if you have Walgreens or CVS stock in your portfolio. While it is an attractive opportunity for Amazon, there are still doubts that the company will pursue it aggressively and that it will become a major part of Amazon's business, given the low margins and challenges the company will face. Investors should be aware of this at this point, but it should not determine any investment decisions, especially since there are much better growth opportunities.

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Alternative scenario:

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