Sunday, September 10, 2006

Supermarkets, RFID, and Wholesalers

The Food Marketing Institute just released their latest annual survey of supermarket pharmacies. (See the Drug Topics summary.) The data shed light on the changing retail pharmacy market, especially margins and RFID use.

First, some context:

  • Supermarkets made up 12% of 2005 retail pharmacy sales dollars.
  • Supermarkets dispensed 470 million prescriptions in 2005, which is up 170%since 1992. For comparison, mass merchants (like Wal-Mart and Costco) dispensed only 365 million prescriptions, up only 96% since 1992.
  • The biggest supermarkets with pharmacies -- Kroger, Supervalu, Safeway, and Albertsons – equal more than half of all supermarket pharmacy spending.
The FMI data come from 46 food stores operating 4,742 pharmacies, which is about half of the 9,800 supermarket pharmacies in the US. Here are few factlets from the survey:

  1. Pharmacy contributes 9% of total store sales, which is about double the percent of sales from 8 years ago. The industry average mix (of stores with and without pharmacy) is 3% of sales.
  2. The “median of the average gross margin” for the pharmacy department was 19.6%. I find this interesting because chain pharmacies do not release any information about pharmacy margins which I presume to be roughly comparable.
  3. No companies are using RFID at a store level, suggesting that we have a long way to go before this technology has any impact on supply chain security. Only 4.9% plan to implement the technology in the pharmacy. I remain skeptical about the uptake of RFID at the pharmacy level, even though it could be an important way to stop counterfeiting on the demand-side.
  4. The ongoing strength of supermarket pharmacy is good news for chain-oriented drug wholesalers such as Cardinal Health and McKesson. According to IMS channel data, supermarkets are much less likely to get bulk/warehouse deliveries from wholesalers than chain pharmacy. As I point out in my post about the Rite-Aid-Brooks/Eckerd deal, wholesalers have become dangerously dependent on low-margin deliveries to the warehouses of large retail pharmacy chains. Even supermarkets with good self-warehousing networks rely more on direct-store delivery since pharmacy is a minority of sales.

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