Pharmacy Avoids Retail Sales Plunge

Beep, Beep! Here’s a reason to be cheerful about the pharmacy industry’s prospects for 2009.

Total retail sales plunged off a cliff by 5.1% in the fourth quarter last year -- the biggest drop in a generation.

Guess what?

Pharmacy sales defied this overall retail trend and actually grew by 4.1% in Q4:2008 compared to Q4:2007 – despite the consumer meltdown, the slowing prescription market, $4 generics, etc.

The chart below compares year-over-year changes in quarterly retail sales at Pharmacies and Drug Stores (NAICS 44611) to Total Retail Sales (NAICS 44) using data collected by the Bureau of the Census. My calculation of “Total Retail Sales” excludes (a) motor vehicle and parts dealers and (b) Pharmacies and drug stores.As you can see, there was no statistical relationship between pharmacy sales and overall retail sales over the past six years. The measured correlation was negative (-13%) for this 24 quarter period. Note that this nine-point performance gap is entirely consistent with the historical evidence that I show in Will the economy hurt drug stores?

Gosh, pretty soon we’ll all have to start taking Despondex!

Want another implication of the fact that pharmacy is an “uncorrelated" retail sector? Even a poorly managed pharmacy has a better chance of surviving the recession that the average well-run retail store.

BONUS fun fact: Paul Julian provided the Road Runner's "Beep Beep" sound. (source)

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A few technical comments for my uber-geek readers:

• The monthly retail sales data come from the Census Bureau’s Monthly Retail Trade and Food Services series. These government-collected data provide the most complete picture of revenues at all drug stores, not just the big public companies.
• I aggregated monthly data (without seasonal adjustment) to calendar quarters.
• The government's pharmacy retail sales data exclude non-pharmacy dependent retail formats, such as supermarkets or mass merchants, and also combine prescription and front-end sales.

The statistical correlation relates the *change* in sales at pharmacies to the *change* in retail sales. Why? If you correlate the actual dollar value of sales, then the correlation is artificially inflated because there is a common time trend a.k.a. a unit root. In other words, retail sales of all kinds tend to grow over time, so correlations of dollar sales levels often just show the correlation of the time trend. Taking the first difference (change in sales) removes the time trend and exposes the true relationship.