Pharmacy Potential

Grocers should consider this a time for caution.

Pharmacy has been an important growth area for the supermarket industry over the past 40 years, especially as a component of the food-drug combination store format.

It fits well with the fashionable “whole health” proposition for food retailers. Two supermarket chains — Publix and Kroger — are among the top five pharmacy retailers nationwide for customer satisfaction, at first and third place, respectively (Source: Market Force Information).

However, as PG’s Meg Major warned in her October 2013 “Last Word” column, it’s long been imperative for supermarkets to be extremely selective in opening new pharmacies. Today, however, a good location for a food store can fast become a profit-draining loser when an in-store pharmacy’s in the mix.

Among the primary reasons for the change in this once-promising department:

• ➤ Rampant drug chain expansion over the past 10 to 20 years. There are now more than 20,000 pharmacies operated by CVS, Rite Aid and Walgreens, with one at almost every intersection in the country (along with a bank and a mattress store).
• ➤ Rapidly declining gross margins and the associated dominance of generic drugs.
• ➤ Declining rates of use and a reduced overall growth rate in the national prescription market since 2007.
• ➤ The proliferation of preferred network providers, and the changes and uncertainties resulting from the enactment of the Affordable Care Act.
• ➤ The rapid rise of mail-order and Internet prescription sales at the expense of brick-and-mortar retailers, from a 23 percent market share in 2007 to an estimated 27 percent share in 2012 (see chart below).

Pharmacies’ ‘Silent Killer’

In what’s now a low-growth market, rising mail-order/Internet sales have been the “silent killer” for many supermarket pharmacies, whose share has steadily eroded over the past five years (see market share chart). The average grocery store pharmacy is now averaging only $25,000 in weekly prescription sales versus the chain drug norm of $110,000 and mass merchants’ $60,000. Inevitably, increasing numbers of supermarket pharmacies will continue to close, especially those in relatively low-volume stores (i.e., less than $300,000 in total weekly sales).

Under what circumstances, therefore, should a new pharmacy open?

First, only if the retailer has the relevant pharmacy infrastructure, insurance provider alliances and skill sets, such as those possessed by Giant Eagle, H-E-B, Jewel-Osco, Kroger, Publix and Wegmans.

Second, if the retailer can generate sufficient traffic and sales for a profitable pharmacy to “feed off,” as is the case with Costco, Walmart and Target.

Third, and most importantly, only after a thorough and impartial market analysis has been conducted — not a “free” study conducted, for example, by a pharmacy services vendor that has a vested interest in seeing an in-store pharmacy open. The market analysis needs to be based on the supermarket operator’s existing pharmacy performances relative to competition and the unique demographic drivers that produce significant variations in the levels of prescription demand in local markets.