Thursday, September 18, 2003

Industry brief: U.S. drug store chains Major chain drug stores have been popping up in the US like mushrooms after a spring rainstorm. Every suburban highway now sports a major drug supercenter, often less than a mile apart from the competition. Meanwhile, local, neighborhood pharmacies are dropping fast or at least barely surviving. At the center of the drug superstores is a pharmacy department. But much more space is dedicated to variety of other products: beauty and health aids, non-perishable food and candy, household cleaning products, magazines, greeting cards, photo developing and film, hosiery, Christmas decorations, and much more. Taking their cue from supermarkets and mass retailers like Wal-Mart, the big national drug chains have built bigger and bigger stores, creating a "shopping experience," in which getting prescriptions filled or picking up some aspirin is only a part. These chains have enormous advantages over the mom-and-pop pharmacies and even over the small chains. They can offer longer opening hours and more parking, making them convenient for shoppers. They allow shoppers to combine several shopping tasks at once while waiting for their prescription to be filled. They can stock a larger inventory of drugs, so they can easily meet most demands. But most of all, they have the advantages of an oligopsony. They have a seat at the table. They can negotiate face-to-face with the big drug manufacturers and other suppliers to get the best discounts. They can assert pressure over the major health insurance companies in terms of both discounts and speed of reimbursement. They can work with the Pharmacy Benefit Management (PBM) oligopoly to maintain their margins. That's all on top of efficiencies in administration, accounting and distribution. One of the biggest moneymakers or the drug chains is private label non-prescription drugs, such as pain relievers, eye drops, antacids and skins creams. The big threat comes form the competition matrix. We've already shown how, while the big four big chains, have grown, other stores, including supermarkets and Wal-Mart have encroached on the sale of both prescription and non-prescription drugs. The other threat comes from online and mail-order pharmacies, which have a small but growing segment of the market. For that reason, as well as the current policies in the Federal Trade Comission (FTC), the drug giants need fear no antitrust action. However, as recently 1997, the FTC forced CVS to divest a number of Revco stores before it could acquire that chain, The FTC alleged that "the $3.7 billion merger would have created a 4,000 store chain that would have violated federal antitrust laws by allowing the firm to raise prices for pharmacy services to health insurance companies and other third-party payors." Ironically, both CVS and Walgreen now do have over 4,000 stores. In fact, the current FTC chief, Timothy Murtis is on record praising oligopolization in the industry. Muris criticized the agency's failure to appropriately consider merger efficiency claims in an article, "The Government and Merger Efficiencies: Still Hostile After All These Years." He wrote: "Pharmacy chain merger benefits include distribution synergies, reducing overhead, capital raising costs, promotion, managerial and administrative efficiencies. All of these deserve much more careful analysis by the FTC." (From Drug Store News, September 24, 2001) . Table: Major US Drug Store Chains Company Stores (approx.) Annualsales (billions) Growth rate (sales) Walgreen 4,000 $28.8 16% CVS 4,100 $24.1 8.7% RiteAid 3,400 $15.8 4.2% Eckerd 2,700 $14.6 5.7% The two real giants in the industry are Walgreen and CVS. CVS has acquired som.com, an online pharmacy, to cover its flanks. It also owns PharmaCare Management, a Pharmacy Benefit Management (PBM) company, not one of the bigger ones. It also has special ProCare locations that stress for handling prescriptions for complex, long-term care cases. Walgreen has stuck closer to its core busienss, having grown mostly without major acquistions (it plans to build another 3,000 stores by 2010). Number three, Rite-Aid, is slowly recovering from fraudulent overstatement of results and a wholesale management shakeup. It also had to sell of its PCS Health Systems division, one of the biggest PBM companies. Number four is Eckerd, which is a division of J.C. Penny. Unfortunately, it is struggling as badly as its parent. It also operates the Genovese drug chain in New York, and has its own on-line pharmacy. Other drug chains are small and usually regional. Osco, a division of Albertson's supermarket chain, owns 550 stores; Longs, a West Coast chain, has 370 stores; Brooks Drugs, in New England has 330 stores, Duane Reade, a New York area chain, has around 239 locations; Kerr Drug (Carolinas) counts 150 locations. And there are many casualties. Phar-Mor, Revco, and Big B were swallowed up recently. Snyders Drug (a Midwestern chain) recently declared bankruptcy, and close to 77 Drug Emporium pharmacies which it had acquired when that company went bankrupt. Now it is in danger of having to sell its other stores. With Rite-Aid still shaky, Eckerd slowly sinking, and small chains falling as well, look to see Walgreen and CVS expand even further. 6:08:27 PM

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