Trouble Ahead for Independent Pharmacies

2007 will go down as a bad year for independent pharmacies -- and they know it. Check out Federal budget plan raising alarms in Drug Store News.

I continue to believe that the Deficit Reduction Act will hammer independent pharmacies by attacking generic profits. Adding insult to injury, Wal-Mart's $4 generic program will hurt supermarkets, independents, and other discounters more than major chains such as CVS or Walgreens. (See Generic Zocor Hits $5 per Month.)

But independents and chains will soon find their paths diverging, with important implications for wholesalers.

Swimming Upstream

The NCPA continues its fear mongering with a prediction (threat?) that "access to life-saving prescription medicines" is at stake. (See Wake Up, Washington.)

I hate to mention it, but there are half as many independent pharmacies today as there were 15 years ago. No crisis yet.

Unfortunately for NCPA and its members, they are waging war with the American shopper. Like it or not, US retailing continues to become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. Consumers are fueling this trend by consolidating their purchases and shopping at fewer, larger stores. Low prices and self-service ("How can you help you?") now dominate.

Check out the floral industry (appropriate since we're coming up on Valentine's Day). Florists now sell less than one-half of all flowers purchased in the United States because supermarkets have added a floral category and Internet florists have captured a small but growing portion of the market. (As it happens, I'll be discussing these trends in a keynote address at the Wholesale Florist & Florist Supplier Association annual convention.)

Fifteen years ago, few of us anticipated a world in which shoppers would learn about new music from our home computer, buy groceries at Wal-Mart, purchase milk and eggs at a pharmacy, bank at the supermarket, and get prescriptions through the mail.

What about Wholesalers?

Drug wholesalers face a shrinking number of potential retail pharmacy or supermarket customers even as the market grows. Drug wholesalers have beaten these odds by using their information systems, logistics, and geographic coverage to stay relevant to large retailers. The current drug pricing system also helps. (See my September 2005 white paper for an analysis that wholesalers would prefer that you did not read.)

Smaller retail customers rely on wholesalers for much more than a chain -- delivery, credit, generic sourcing. The threat of disintermediation is low and the profits are generally higher for the wholesaler.

As a result, drug wholesalers are trying to help small retailers compete against the retail giants with buying programs and retail services. Fred Gebhart at Drug Topics did a nice overview of pharmacy buying groups and franchises, including programs offered by the Big 3 wholesalers. (See Pharmacy franchises: Should you join one?.) His article gives a nice overview from the perspective of an independent pharmacist. BTW, McKesson's new model apparently now has more member pharmacies than Cardinal's Medicine Shoppe franchise. (See McKesson measures Rx for taking the top spot.)

For comparison, check out United Stationers, a well-run company outside pharma that helps independent office supply stores (yes, there are still a few thousand left) compete against Staples et al.

Owning the customer provides even more security, especially if you happen to be a large-cap company with loads of cash and nothing better to do with it than buy back stock and pay down debt. Hmmm...