As you can see in the chart below, drugstores’ gross margins reached 24.6%—their highest levels in eight years. Meanwhile, the industry’s gross profit dollars grew to a record $58.2 billion.
These impartial data show that the drugstore industry continues to do well, despite its many competitive challenges. The data also contrast with the perspective of the industry’s doom-and-gloomsters. YMMV.
PHARMACY PROFIT PRIMER
A drugstore’s revenues come from prescription drugs, over-the-counter products, vitamins, cosmetics, groceries, and other merchandise. Chain drugstores generate 30% to 40% of their revenue from non-prescription, front-end items. Independent drugstores generate less than 10% of their revenues from non-prescription sales.
Gross profit equals a pharmacy’s revenues minus the costs of products (net of discounts and returns) bought from a manufacturer or a wholesaler. Gross profit measures the portion of revenues available for operating expenses and operating profit. To be profitable, a pharmacy’s gross profits must exceed its operating expenses.
Gross margin expresses gross profit as a percentage of revenues.
THE FACTS
In 2013 (the most recent year available), the drugstore industry’s overall average gross margin, as reported by the U.S. Census Bureau, was 24.6%. This is the highest gross margin since 2006. See the chart below.
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Observations:
- The chart above is consistent with pharmacy owner surveys showing that overall gross profit margins for independent drugstores have remained stable—ranging from 22% to 24% over the past 10 years. The 2013 increase is consistent with surveys conducted by the National Community Pharmacists Association (NCPA), as I discuss in Profits Up Again for Independent Pharmacy Owners.
- The government profit data help explain smaller pharmacies' resilience. According to the latest NCPA Digest, the total number of independent community pharmacies has remained pretty stable: 23,064 in 2010; 23,106 in 2011; 23,029 in 2012; and 22,814 in 2013. The appeal of pharmacy ownership clearly hasn't dimmed. When one door closes, another opens.
- Public company retail drugstore gross margins are higher, averaging 28% to 30%. These public chain figures include higher gross margin front-end products and reflect slightly better drug acquisition costs. There could also be some accounting-related differences.
- The chart above shows a trend break in 2006. Gross margins averaged 26.0% from 1993 to 2005, and averaged 24.0% from 2006 through 2013. I attribute this one-time decline to (1) the launch of such retail discount generic programs as Walmart’s $4 program, (2) retail price competition for mail business, and (3) Medicare Part D’s launch, which shifted seniors from higher-profit cash-pay prescriptions to lower profit, third-party-paid prescriptions.
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In a future post, I'll examine the drugstore industry’s recent revenue rebound.
NOTES FOR NERDS
NAICS (North American Industry Classification System) is the standard used by federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. Pharmacies and drugstores are classified in NAICS 446110. The U.S. Census Bureau reports gross profit and margin data annually as part of its Annual Retail Trade Report.
A few comments:
- The charts above do not show prescription gross margins or profits. The Census drugstore data include retail revenues and gross profits from both prescription and non-prescription products. For my estimates of prescription profits, see Chapter 7 of the 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies
- NAICS 446110 excludes non-drugstore retail outlets (supermarkets and mass merchants) and mail pharmacies.
- The Census Bureau defines gross profit to be "Sales minus Purchases," i.e., cost of goods. This definition may not correspond precisely to definitions used in public company accounting reports, although I believe it's close.
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