Report: Drug Stores Need Prescription for Change

COLUMBUS, Ohio - While drug stores posted strong sales results in 2001 with growth driven by the booming prescription business and moderate inflation, high sales growth has not translated into high profits for the sector, and the industry is faced with challenging issues, according to a new report from global consulting and market research firm Retail Forward.

Industry sales have grown at a feverish pace of 9.9 percent annually over the last five years. Retail Forward's five-year forecast calls for sales to grow at a rate of 5.7 percent annually, or 3.1 percent after adjusting for inflation. This is half of the real growth rate achieved during the last five years -- reflecting limited expansion opportunities, a slowdown in new drug introductions, and tough competition for both the prescription business and the front end.

"Drug stores need a prescription for change," said Sandy Skrovan, vice president of Retail Forward and author of the report, entitled "Drug Channel Industry Outlook."

Some of the challenges the drug retail industry faces, according to the report, include:

-- Profits are under pressure. Margins are getting squeezed at both ends of the business.

-- Market-level cracks are forming. After a sustained regimen of expansion, major players are now embarking on a diet of strategic retrenchment and redeployment.

-- The front-end still needs a facelift. New programs are helping build some momentum in 2002, as anemic front-end same store sales edged up to 4.1 percent for the four market leaders.

-- Pharmacy has carried the business, but is under attack. While pharmacy now generates nearly 60 percent of drug store sales, Retail Forward consumer surveys indicate share of consumer preference for drug stores as the place to buy prescription drugs most often is on the decline.

"Change is inevitable if today's leading drug chains want to retain healthy market positions," Skrovan comments. "Progressive players are reevaluating their businesses, taking steps to realign and reinvigorate in order to better serve the needs of the increasingly aging and ailing American consumer."

Leading drug stores are looking for the right prescription for what ails them and taking strategic steps in asset redeployment, customer intensification to retain and attract key customer segments, strategic alliances, and sophisticated technologies to better manage the business.
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