Alibaba Health, JD Health, or Rongguan: Who Will Become China's CVS in the Internet Era?

Since the opening of the first CVS convenience store in 1963, CVS Health has grown over the past five decades into the largest pharmacy retail giant in the United States, operating more than 10,000 stores and generating nearly $200 billion in annual sales.

Since the 1990s, CVS has expanded its store network through extensive acquisitions of pharmacy chains and entered the PBM sector to build a pharmacy ecosystem. In 2007, it further evolved from a traditional retail pharmacy chain into an integrated, innovative pharmacy-healthcare chain enterprise by acquiring MinuteClinic.

In 2018, CVS acquired Aetna, the third-largest insurance company in the United States, for $69 billion, further strengthening its capabilities to serve consumers, insurers, and corporate employers. By integrating light-touch consultations, pharmacy benefit management (PBM) and pharmaceutical services, and insurance offerings, CVS has become a one-stop comprehensive healthcare service provider.

In China, the concentration of the pharmaceutical retail market is far lower than that in the United States. Listed pharmacy chains such as Yixintang and Yifeng Pharmacy, along with large capital institutions represented by Hillhouse Capital, have been expanding their store networks through mergers and acquisitions. However, due to the highly fragmented nature of China’s pharmaceutical retail market, it is unlikely that any single company will be able to establish a market position similar to that of CVS (which accounts for over 50% of pharmaceutical retail sales) through M&A in the short term. In the internet era, whether there are alternative pathways to build a Chinese equivalent of CVS is a topic worthy of attention for industry practitioners.

Throughout CVS’s development, mergers and acquisitions (M&A) and integration have enabled it to achieve sufficient scale and coverage to effectively meet the Pharmacy Benefit Management (PBM) service demands of insurance companies and corporate employers. Its entry into the PBM and telehealth sectors has further strengthened the service capabilities and market competitiveness of its pharmacy network. In the CVS model, scale and coverage serve as the foundation; they drive service capabilities, which in turn fuel value-added services. These value-added services reinforce service capabilities and enable further M&A and integration.

Scale and coverage can be established through mergers and acquisitions, but in the internet era, they can also be built via virtual chain models. There are three essential conditions for establishing an internet-based virtual chain: first, foundational trust among industry practitioners; second, the capability to integrate internet technology platforms with business technology platforms; and third, the ability to enhance the operational performance of participants in the virtual chain.

Retail industry practitioners currently hold complex attitudes toward the entry of internet companies. On one hand, they hope to leverage these partnerships for growth; on the other, they fear being directly replaced. Without appropriate cooperation strategies, it is difficult for internet companies to win the trust of industry practitioners and thereby rapidly establish large-scale alliances.

Pharmaceutical retail is a highly regulated industry. Any technology platform provided by an internet company must comply with the relevant requirements of regulatory authorities, possess full-process drug traceability capabilities, and have the capacity to handle prescriptions in accordance with regulatory policies. More importantly, internet companies need to be well-versed in the operational logic and processes of pharmaceutical retail enterprises and able to seamlessly integrate their internet platforms with the operational systems of these retailers.

Retail pharmaceutical enterprises are currently facing challenges such as declining profit margins, rising costs, and limited service offerings. The ability of internet companies to enhance their operational efficiency is crucial for quickly attracting retail pharmacies to join their platforms.

We selected three representative internet companies in the market to analyze, one by one, the possibility of such companies establishing initial scale and coverage through a virtual chain model and creating a CVS (Convenience Store) model.

First is AliHealth. AliHealth’s vision is to “leverage big data to empower healthcare, use the internet to transform health, and provide equitable, inclusive, and accessible pharmaceutical and healthcare services to one billion people.” In fiscal year 2019, AliHealth achieved sales revenue of approximately RMB 5.1 billion, of which RMB 4.2 billion came from self-operated pharmaceutical sales, nearly RMB 700 million from platform-based business, and RMB 130 million from consumer healthcare services. This indicates that AliHealth’s core business remains pharmaceutical e-commerce, primarily through its online self-operated model.

AliHealth has made strategic offline investments in chain pharmacies such as Huaren Health and Shandong Shuyu Pingmin to explore the integration of offline and online operations. Currently, there is no significant evidence of AliHealth engaging in large-scale offline store openings or mergers and acquisitions, nor has deeper technical platform integration and service enhancement with its strategic partners been observed. In terms of empowering pharmacies, Alibaba primarily collaborates with Ele.me to provide “urgent medication delivery” services, with no notable deeper empowerment in areas such as telemedicine, prescription circulation, or insurance. Furthermore, no major developments have been seen in AliHealth’s expansion within the internet hospital sector.

Currently, the collaboration between AliHealth and pharmacies is primarily focused on channeling online consumer traffic, with partners consisting mainly of large pharmaceutical retail chains. In the future, if AliHealth seeks to establish deeper technological integration with more retail enterprises, a key determining factor will be whether its consumer-centric DNA can effectively serve the operational platforms of pharmacy partners.

AliHealth enjoys a distinct advantage in consumer-facing (C-end) traffic; however, this has somewhat raised questions about its determination and capability to expand into offline operations. It remains to be seen whether AliHealth will continue to leverage its online traffic to develop other internet-based health services or accelerate its strategy of virtual integration in the offline sector.

JD Health bears the significant mission of the “Deepening Industry Presence, Reinvigorating JD” strategy. Initially, it chose not to engage in head-to-head competition with AliHealth’s advantageous platform-based businesses, but instead concentrated its efforts on its self-operated business, namely “JD Pharmacy.”

After two years of integration and incubation, JD Pharmacy has experienced rapid business growth, with revenue approaching RMB 10 billion, surpassing traditional established chains such as Laobaixing Pharmacy to become the largest omnichannel retail pharmaceutical entity. This remarkable progress, underpinned by JD’s brand reputation and customer trust in its self-operated businesses, along with its high-speed development over the past two years, has positioned JD Health as a significant force in the “pharmaceutical sales” industry that cannot be overlooked. Traditional pharmaceutical manufacturers, including GSK and Chia Tai Tianqing, have chosen to enter into strategic partnerships with this emerging giant, while many other pharmaceutical companies are also strengthening their ties with JD Health.

Meanwhile, JD Health has concentrated its efforts on B2B operations by launching its own wholesale platform, “Yaojingcai.” Leveraging its established industry reputation and JD’s two core strengths—digital technology and logistics—the company has extended its reach to third-party end users, including prefecture- and city-level distributors and small and medium-sized pharmacies. In its first year of operation, the platform ranked among the industry leaders.

The procurement advantages accumulated by Yaojingcai are being translated into stronger negotiating leverage with upstream manufacturers. During this period, these more price-competitive products are gradually winning over small and medium-sized distributors and retailers. The fact that this business unit is led by management trainees from JD’s Huangpu program underscores its strategic importance, and JD plans to make overwhelming investments in this sector over the next three years.

According to its senior executives, the core of the industrial internet is B2B. If this segment is well executed, it will form an independent, large-scale offline network, serving as one of the new customer acquisition sources for JD Health and as dedicated forward warehouses for JD Health.

At present, to better develop its core business, JD.com has adopted a consistent strategy of not shying away from asset-heavy operations or long-term commitments. Meanwhile, its self-built internet healthcare platform is gradually integrating with offline hospitals.

The third company is Rongguang E-commerce. As a representative enterprise in the pharmaceutical B2B sector, Rongguang E-commerce achieved a platform GMV exceeding RMB 100 billion in 2018, with over 250,000 retail pharmacies conducting transactions online. Due to its focus on the pharmaceutical B2B field, Rongguang E-commerce enjoys high trust within the industry. It is also well-versed in the enterprise services market and possesses the capability to effectively integrate internet technology platforms with the operational platforms of retail enterprises.

Data shows that since deploying its pharmacy SaaS system in 2017, Rongguang E-commerce has acquired nearly 20,000 pharmacy users. Coupled with its previously established supply chain direct-connection network system, this has formed a foundational digital infrastructure and digital assets on the supply side. Rongguang E-commerce currently adopts an S2B2C model, enhancing efficiency for all parties by facilitating the internet-driven transformation and upgrading of pharmaceutical distribution and retail enterprises within the supply chain. Furthermore, it provides internet-based business tools to retail enterprises and integrates third-party services, such as finance and logistics, to serve local consumers.

In terms of integrated services, Rongguang E-commerce has already taken initiatives in the fields of internet hospitals and insurance. It has launched the “Feijia Pharmacy” model in certain regions, particularly in third- and fourth-tier cities, collaborating with pharmacies to explore areas such as product introduction, centralized procurement, brand building, digitalized user management, integrated inventory, supply chain finance, and the introduction of third-party services.

From this perspective, Rongguang E-commerce possesses a broader foundation for industry collaboration. Its online merchants are predominantly small and medium-sized pharmacy chains and independent pharmacies or clinics, which face constraints in their individual development capabilities and thus have a strong desire to form alliances for growth. Its experience in B2B services enables it to effectively integrate internet service platforms with retail-side operational platforms. The substantial procurement volume generated through its B2B transactions can provide cost advantages to enterprises participating in virtual chain collaborations. In the future, if it can effectively integrate services such as insurance and telemedicine, while leveraging the warehousing and distribution capabilities of its business partners, Rongguang E-commerce will emerge as a noteworthy participant in the establishment of virtual pharmacy chains.

In the Internet era, who will ultimately emerge as China’s CVS? The answer remains unclear at this stage, with both traditional offline enterprises and Internet companies actively exploring various paths. Among the three Internet companies we have selected, AliHealth boasts a significant advantage in consumer-facing (C-end) traffic; JD Health features a more comprehensive industrial layout that includes medical services and pharmaceutical B2B operations; while Rongguang E-commerce seeks to leverage its leading infrastructure in the pharmaceutical B2B sector to drive retail enterprises toward new retail transformation.

As the policy separating pharmaceutical prescribing from dispensing is further advanced, China’s pharmaceutical retail market will continue to expand, creating an urgent consumer demand for one-stop healthcare service providers similar to CVS. We believe that multiple successful business models may emerge within China’s market context; however, regardless of the specific model, sufficient scale and coverage, robust technological support, and comprehensive integrated business service capabilities are essential prerequisites for becoming the Chinese equivalent of CVS.