Drug Stores
Description
Companies in this industry sell prescription drugs, over-the-counter medications, health and beauty, and general merchandise from physical retail locations as well as online stores. Major companies include CVS Health and Walgreens (all based in the US), along with AS Watson Group (Hong Kong), Boots (UK), China Nepstar (China), Dm-Drogerie Markt and Rossmann (both based in Germany), Jean Coutu and Shoppers Drug Mart (both based in Canada), and Matsumoto Kiyoshi (Japan).
Annual worldwide revenue for pharmaceutical market is expected to reach $1.2 trillion by the end of 2025, and is expected to grow to $1.5 trillion by 2029, according to Statista.
The US drug stores industry includes about 45,000 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $270 billion.
COMPETITIVE LANDSCAPE
The evolving US health care system and growing competition from online and other retail channels are rapidly transforming the retail pharmacy business. Independent pharmacies, many in rural and low-income areas, are closing. As a result, CVS and Walgreen dominate the US chain drug store industry, especially in big cities. Other major players include Walmart, which ranks among the top five US retail pharmacies by prescription revenue, and grocery-giant Kroger. In a move that further consolidated the market, Walgreen in 2018 won a hard-fought battle with federal regulators to acquire about 1,650 stores from Rite Aid. Walgreen currently has about 8,500 locations in the US. Walgreen also operates Duane Reade drugstores. Diminished Rite Aid ranks 7th in prescription revenue, behind Walmart and Kroger.
As scale becomes increasingly important to success in the drug store business, retail pharmacy chains, including Walgreen and CVS, have spent the past decade bulking up to become integrated pharmacy health care companies by acquiring pharmacy benefits management companies, drug wholesalers, specialty pharmacy companies, walk-in clinics, and other health care-related businesses.
Online pharmacies are growing in reach and popularity, particularly for the refilling of maintenance medications. Amazon already sells OTC medications and medical supplies and equipment online in the US, as well as pharmaceuticals in Japan (with approval from a pharmacist). Despite the complexities and regulatory hurdles to online drug sales, Amazon is making inroads into the online pharmacy market, having acquired the online pharmacy PillPack in 2018. In India, online players are vying for a larger share of the country's fragmented pharmacy market amid an e-commerce boom.
Demand is driven by aging populations in developed nations such as the US and Canada, growth in emerging economies, awareness of health issues, advances in medical treatment, and longer lifespans. Considered essential retailers, drug stores are among the few retailers that remain open during the coronavirus pandemic. After an initial surge in sales in early March as consumers stocked up on prescription drugs and other health essentials, sales slumped as people stayed at home. The profitability of individual companies depends on access to medical insurance groups. Large companies have economies of scale in purchasing and in access to large groups of customers. Small companies can compete effectively through convenient locations or special merchandising. The US industry is concentrated: the four largest companies generate nearly 70% of revenue.
Drug stores that also sell general merchandise compete with grocery and convenience stores, discount department stores, dollar stores, warehouse clubs, and other retailers.
PRODUCTS, OPERATIONS & TECHNOLOGY
Drug stores sell mostly prescriptions at more than 75% of the industry's revenue, followed by nonprescription medicines and cosmetics and fragrances at about 5%. Prescription drugs draw customers to the store, and stores focus their efforts on the number of new prescriptions they fill. The larger drug store chains typically generate about three-quarters of their sales from prescriptions; front-end items account for a quarter. While the number of front-store items has increased in recent years, as stores have started to offer a wider variety of items to customers, including groceries and beer and wine, front-store sales as a percentage of total sales has declined as pharmacies fill more prescriptions. The loss of tobacco sales at CVS has also crimped front-store sales.
The operations of drug stores focus on merchandising (which items to stock), advertising, inventory management, billing, and personnel management. Many stores are freestanding, contain about 12,000 square feet, and often include a drive-through window to more easily accommodate customers. Most pharmacies also offer free shipping of prescriptions to customers who want prescriptions mailed to them.
Drug store chains generally buy drugs and other products directly from manufacturers or large wholesalers like AmerisourceBergen, Cardinal Health, and McKesson, and distribute them to their stores through a warehouse system. Independent stores usually buy from a local distributor or may participate in buying co-ops that purchase from manufacturers. Imports of pharmaceutical products to the US come primarily from China, India, and Mexico.
Annual worldwide revenue for pharmaceutical market is expected to reach $1.2 trillion by the end of 2025, and is expected to grow to $1.5 trillion by 2029, according to Statista.
The US drug stores industry includes about 45,000 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $270 billion.
COMPETITIVE LANDSCAPE
The evolving US health care system and growing competition from online and other retail channels are rapidly transforming the retail pharmacy business. Independent pharmacies, many in rural and low-income areas, are closing. As a result, CVS and Walgreen dominate the US chain drug store industry, especially in big cities. Other major players include Walmart, which ranks among the top five US retail pharmacies by prescription revenue, and grocery-giant Kroger. In a move that further consolidated the market, Walgreen in 2018 won a hard-fought battle with federal regulators to acquire about 1,650 stores from Rite Aid. Walgreen currently has about 8,500 locations in the US. Walgreen also operates Duane Reade drugstores. Diminished Rite Aid ranks 7th in prescription revenue, behind Walmart and Kroger.
As scale becomes increasingly important to success in the drug store business, retail pharmacy chains, including Walgreen and CVS, have spent the past decade bulking up to become integrated pharmacy health care companies by acquiring pharmacy benefits management companies, drug wholesalers, specialty pharmacy companies, walk-in clinics, and other health care-related businesses.
Online pharmacies are growing in reach and popularity, particularly for the refilling of maintenance medications. Amazon already sells OTC medications and medical supplies and equipment online in the US, as well as pharmaceuticals in Japan (with approval from a pharmacist). Despite the complexities and regulatory hurdles to online drug sales, Amazon is making inroads into the online pharmacy market, having acquired the online pharmacy PillPack in 2018. In India, online players are vying for a larger share of the country's fragmented pharmacy market amid an e-commerce boom.
Demand is driven by aging populations in developed nations such as the US and Canada, growth in emerging economies, awareness of health issues, advances in medical treatment, and longer lifespans. Considered essential retailers, drug stores are among the few retailers that remain open during the coronavirus pandemic. After an initial surge in sales in early March as consumers stocked up on prescription drugs and other health essentials, sales slumped as people stayed at home. The profitability of individual companies depends on access to medical insurance groups. Large companies have economies of scale in purchasing and in access to large groups of customers. Small companies can compete effectively through convenient locations or special merchandising. The US industry is concentrated: the four largest companies generate nearly 70% of revenue.
Drug stores that also sell general merchandise compete with grocery and convenience stores, discount department stores, dollar stores, warehouse clubs, and other retailers.
PRODUCTS, OPERATIONS & TECHNOLOGY
Drug stores sell mostly prescriptions at more than 75% of the industry's revenue, followed by nonprescription medicines and cosmetics and fragrances at about 5%. Prescription drugs draw customers to the store, and stores focus their efforts on the number of new prescriptions they fill. The larger drug store chains typically generate about three-quarters of their sales from prescriptions; front-end items account for a quarter. While the number of front-store items has increased in recent years, as stores have started to offer a wider variety of items to customers, including groceries and beer and wine, front-store sales as a percentage of total sales has declined as pharmacies fill more prescriptions. The loss of tobacco sales at CVS has also crimped front-store sales.
The operations of drug stores focus on merchandising (which items to stock), advertising, inventory management, billing, and personnel management. Many stores are freestanding, contain about 12,000 square feet, and often include a drive-through window to more easily accommodate customers. Most pharmacies also offer free shipping of prescriptions to customers who want prescriptions mailed to them.
Drug store chains generally buy drugs and other products directly from manufacturers or large wholesalers like AmerisourceBergen, Cardinal Health, and McKesson, and distribute them to their stores through a warehouse system. Independent stores usually buy from a local distributor or may participate in buying co-ops that purchase from manufacturers. Imports of pharmaceutical products to the US come primarily from China, India, and Mexico.
Table of Contents
- Industry Overview
- Quarterly Industry Update
- Business Challenges
- Business Trends
- Industry Opportunities
- Call Preparation Questions
- Financial Information
- Industry Forecast
- Web Links and Acronyms
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