Drugstores
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Industry Overview
The US drugstores industry includes about 20,000 companies with combined annual revenue of about $200 billion. Large companies include Walgreens, CVS Caremark, and Rite Aid. The industry is concentrated: the 50 largest companies generate about 70 percent of revenue.
Pharmacy locations inside discount stores such as Wal-Mart and grocery stores such as Kroger are competitors and are not included in the overall drugstore industry numbers. They are covered in the Discount Stores and Grocery Stores and Supermarkets profiles.
Competitive Landscape
Demand is driven by the aging of the US population and advances in medical treatment. 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 location or special merchandising.
Products, Operations & Technology
Drugstores sell two types of products: prescription drugs, and "front-store" products, including over-the-counter (OTC) drugs, health and beauty aids, greeting cards, photo-finishing services, and general merchandise. Prescription drugs draw customers to the store, and stores focus their efforts on the number of new prescriptions they fill. The larger drugstore chains typically generate about two-thirds of their sales from prescriptions, while front-end items account for about a third of sales. The number of front-end items has increased in recent years, as stores have started to offer a wider variety of items to customers.
The operations of drugstores 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 generally 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. Traditional chain drugstores make up 40 percent of the market; independent drugstores, 18 percent, and mail order, 20 percent.
Drugstore 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.
Computer and other technology is becoming more important in dispensing prescription drugs, driven by demands of large third-party payers and the greater likelihood of errors or drug interactions as the number of drugs increases. Computer systems point out potential drug side effects or drug interactions and aid in billing; pill-counting machines are more accurate than humans; and 24-hour telephone lines and Web sites allow customers to refill prescriptions automatically. Electronic prescriptions eliminate problems with reading doctors' handwriting, allow pharmacies to search databases for drug interactions, and let them bill third-party payers electronically. These improvements allow drugstores to use pharmacists' time more efficiently.
