When CVS Health Corporation (NYSE:CVS) lost Prime Therapeutics' 22 million members to Walgreens Boots Alliance last August, I didn't think there was anything for investors to worry about over the long run. The same was true when CVS lost Tricare and its 9.4 million members to Walgreens the next month.

My rationale at the time was that contracts come and go. A solid dividend and decent growth prospects made the stock still attractive despite the losses. But with CNBC reporting that Amazon.com (NASDAQ:AMZN) is eyeing the pharmacy market, CVS Health shareholders might have something to start worrying about.

A man looks off to the side, with a worried expression.

Image source: Getty Images.

Will history repeat itself?

If anyone wonders why CVS Health and its shareholders should worry, just take a look at what Amazon has done in the past. When Amazon first launched its website in 1995, the world was a much different place than it is now. Major booksellers like Borders and Barnes & Noble (NYSE:BKS) were doing pretty well. Americans flocked to malls across the country to shop. E-commerce was in its infancy.

It's a different story today. Borders is out of business. Barnes & Noble has lost 70% of its market cap in the last 10 years. The bookseller cut out its dividend program for several years before reinstating it in 2015, but its dividend is shaky at best. Many retailers are struggling, as Americans increasingly purchase products online. And Amazon was a driving force behind these changes.

How did Amazon succeed in the e-commerce revolution, propelling its stock up a staggering 63,000% along the way? The company made online shopping simple and convenient. It provided wide selections of products. Because it didn't have investments in brick-and-mortar buildings, Amazon was able to operate with a much lower overhead than rivals. That enabled the company to offer lower prices, which attracted even more customers.

CVS Health and other retail pharmacies have to be wondering if history could repeat itself. All of the ingredients that helped Amazon conquer the book and consumer product businesses are present in the retail pharmacy business. If Amazon can make online filling of prescriptions simple and convenient plus offer a broad selection of prescription drugs at lower costs than others, there's no reason why it shouldn't be able to capture a large share of the pharmacy market.

The innovator's dilemma

In 1997, as Amazon was in the early days of its remarkable ascent, an important business book was published, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. The author, Harvard Business School's Clayton Christensen, presented an intriguing analysis of how successful companies can do nearly everything right and still lose significant market share to new, unexpected competitors.

Christensen's central argument in The Innovator's Dilemma was that it is actually the same practices that led businesses to be successful in the first place that can also result in their eventual demise. That prompts a question: What made CVS Health the successful company that it is today?

The sign outside a CVS pharmacy store.

Image source: The Motley Fool.

One compelling answer to that question is that CVS made buying prescription drugs convenient for customers. As of March 31, 2017, the company had 9,676 retail stores. Many Americans live in neighborhoods with a CVS pharmacy only five minutes away. 

Could this major factor behind CVS Health's success be part of its undoing? It's not hard to envision how it could happen. Amazon could make buying prescription drugs even more convenient for customers. Instead of driving five minutes, they could fill prescriptions in a matter of seconds while sitting in their homes.

CVS already offers customers the ability to refill prescriptions online. It even allows some prescriptions to be mailed to customers. So shouldn't the company be able to compete effectively against Amazon? Maybe, but remember that CVS Health's business model is built around getting customers into its stores. The ideal scenario for the company is that a customer goes to a CVS pharmacy to pick up a prescription drug and also spends on other products while there.

The other important consideration is that CVS Health spends a lot of money on building, buying, and maintaining its physical stores. Amazon won't have those expenses, which could allow it to offer drugs at lower prices. Christensen used the right word in the title of his book: It's a real dilemma for successful companies like CVS Health going against innovative disrupters like Amazon. 

What should investors do?

CVS Health investors could sell in anticipation that the Amazon juggernaut will conquer the retail pharmacy business just like it did the book business. However, that's probably an impulsive and premature reaction. Amazon still hasn't officially committed to entering the pharmacy market.

Even if Amazon does move forward, it could take years for the company to take significant market share away from CVS. Barnes and Noble continued to be successful up through 2006 before a tipping point was reached and the stock plummeted. A similar scenario could happen in retail pharmacy, with Amazon slowly gaining momentum as major retail pharmacies still grow revenue and earnings.

And there's always the possibility that Amazon won't knock CVS off its perch. Clayton Christensen wrote a follow-up book published in 2003 titled The Innovator's Solution: Creating and Sustaining Successful Growth. In it, he discussed how companies can embrace new disruptive innovations and avoid being disrupted themselves. If CVS Health takes the threat from Amazon seriously now, it could potentially survive and thrive over the long run. The first step, though, is to start worrying.