Store of the Future   //   May 3, 2024

What Walmart closing its health centers says about the future of retail-led health care

Five years ago, Walmart’s decision to open up health care centers appeared to be a path for growth in a sector ripe for disruption. But this week’s announcement that the big-box retailer is shutting down its health care centers and telehealth operations shows that the economics of the American health care system are a challenge for even a retail behemoth to navigate.

Walmart on Tuesday announced it will close its physical and telehealth services due to a lack of profitability. The operation had grown to 51 centers in the past five years and was on tap to hit 75 by the end of this year. Yet the company, with $648 billion in revenue for fiscal year 2024, couldn’t make the math work, saying “the challenging reimbursement environment and escalating operating costs create a lack of profitability that make the care business unsustainable for us at this time.”

There’s no shortage of retailers looking to up their health offerings as the post-pandemic public takes a greater interest in health and wellness. Meijer has a virtual nutrition coaching service in Michigan while Hy-Vee has a nutritional benefits program. But as Walmart’s recent move shows, the reality of maintaining in-person health care services at scale may not be able to become a profitable endeavor in the current health care system.

Walmart isn’t the only retailer that’s struggled to figure out how to make the math work in health care recently. CVS Health, a company that’s made major acquisitions in the health care space, including insurance giant Aetna in 2018, saw its shares drop after missing first-quarter revenue expectations and lowering its outlook for the year. Executives cited the high costs coming from the insurance industry related to its Medicare Advantage program.

Amar Singh, a senior director at Kantar who focuses on the health space, said the complexity of the health care system poses many barriers to entry for retail companies. While CVS was a first mover in the space, he said its recent earnings show that it’s still struggling to make the system work.

“To figure out the health care sector without being a health care company is going to be difficult,” he said.

Maveron investor Anarghya Vardhana said the health care industry has a morass of costs and regulations to navigate that can make it difficult for new entrants. Looking forward, acquiring startups or entering partnerships with specialty services may be an easier way for a company like Walmart to provide health care, she said.

“There are so many other ways, with M&A or partnerships, without building it yourself from scratch,” she said. “There are still clever ways to build amazing companies that can figure out who their customers are, and make the math work in delivering great care.”

In Walmart’s case, Vardhana said the company could have grown the program more slowly. Hiring many doctors and psychiatrists to staff its operations likely meant the company had high overhead costs for the new division.

“One of the inherent flaws about starting something in a massive system like this is you don’t have the cost constants and capital constraints that a startup can have,” she said.

Vardhana said while the Walmart news may have a chilling effect on short-term investments in the space from retailers and investors alike, there is no shortage of contenders for future acquisition. The space saw significant investment and M&A activity through the Covid-19 pandemic as options like telehealth became more commonplace. PwC found that health care mergers and acquisitions grew by 56% in 2021 compared to the prior year. Hims and Hers, the health and wellness platform, went public in 2021 in a $1.6 billion SPAC deal. Mental health and mindful apps like Headspace, Calm and Open all raised money in 2020 and 2021. Now, Pitchbook counts about 70 digital health “unicorns” that could potentially go public.

“The Walmarts of the world will want to, and need to, and should stay in health care,” Vardhana said. “Walmart and CVS are so well poised to do this because they have customer trust, customers are already going there, and they have such an opportunity to change the health care narrative.”

There’s ample evidence that people are looking for improvements in the American health care system. About eight in 10 Americans are dissatisfied with the cost of health care, according to the most recent surveys from Gallup. More than half say that there are major problems with the system. Just 10% of Americans rated the quality of the health care system as excellent, an all-time low going back to 2001. And one in five Americans say that cost is the most urgent health problem facing the country, with about one in 10 saying that the problem is access.

But as Walmart’s exit shows, it’s unclear whether the retail sector — which already has a burgeoning focus on health and wellness — can play a structural role in providing care.

Amazon last February acquired telehealth and office visit service One Medical for $3.9 billion. Since then, bouts of corporate restructuring and layoffs cast doubt on its future success. But the company doesn’t appear to be backing away from its health care ambitions, with CEO Andy Jassy saying at this week’s earnings call it plans to open about a dozen new Amazon Pharmacy locations by the end of the year.

For CVS’s part, the company’s deep ties to the insurance realm have hampered its overall market value. The company missed expectations in large part due to rising costs from Medicare Advantage, its privately-run health care plan for seniors.

Yet the long-term outlook includes more focus on health care delivery — in large part due to the acquisitions the company has made in recent years. CVS acquired primary care network Oak Street Health last year in a deal valued at $10.6 billion. President Mike Pykosz said at this week’s earnings call that the integration of Oak Street with CVS-owned Aetna and in-home health service Signify bodes well for better health care delivery. “There’s a lot of boots on the ground, in-market capabilities that we have to really change the health trajectory of patients, whether that be readmissions to the hospital or managing your most complex chronic patients,” he said. “And so, this is where I think a lot of that partnership plays out is in that space of getting a deeper level of impact because we have the resources, we have the programs, we have the know-how.”

Still, Kantar’s Singh sees a future for retailers playing a role in health care, largely because the demand is there. But the biggest hurdle will be how to turn a profit doing it. “Whoever does it right is going to get a lot of share coming their way,” he said. “The challenge is how to get it right.”