Healthcare reform will be a double-edged sword, boosting sales but hurting profit
Los Angeles, CA (PRWEB) August 01, 2013
While sales have been resilient since the recession, the Pharmacies and Drug Stores industry has yet to achieve historically strong growth. Industry revenue is expected to increase at an annualized rate of 1.6% to $247.7 billion in the five years to 2013. “Prescription drug purchases are less sensitive to changes in consumer income than other products because they are often purchased out of necessity,” says IBISWorld industry analyst Anna Son. Furthermore, as the economy strengthened in 2011, falling unemployment and rising personal disposable income nudged the industry's pharmaceutical and front-end sales (i.e. goods other than medicines). In 2013, the recent flu outbreak further bolstered pharmacy trips and same-store sales, contributing to a 2.0% revenue increase.
Strong demand for prescription drugs has spurred external competition for the Pharmacies and Drug Stores industry. “In response to mounting competition from mail-order retailers and supercenters, industry operators have been emphasizing convenience factors, such as longer store hours and drive-through locations, to lure and maintain customers,” says Son. Popularity of in-store clinics that provide basic healthcare services help generate more foot traffic and increase prescription drug and front-end sales. In the five years to 2013, profit is expected to remain flat due to increased negotiating power of third-party payers, which have significantly influenced pricing. In turn, pressure from third-party payers limits pharmacies' profitability; the rising use of generic prescription drugs, which carry higher margins for pharmacies, will partially offset this circumstance, however.
The industry is primarily an evolving duopoly, with major players Walgreens and CVS dominating the industry. This trend is expected to continue, and these two companies are the primary beneficiaries of ongoing consolidation. The top three industry players (i.e. Walgreens, CVS and Rite Aid) generate more than half of total industry revenue. As these major players grow in size, it becomes more difficult for potential entrants and independents to compete with the resources and brand recognition of these companies.
During the five years to 2018, an aging baby boomer generation, further drug developments and healthcare reform will underpin revenue growth and intensify competition as companies continue to eye the upsurge in prescription drug sales. While the volume of pharmaceutical sales will likely increase as more people gain coverage under healthcare reform, the government is expected to initiate cost-cutting measures, which adversely affect profit margins. Industry consolidation is already underway to combat forecast pricing pressures. Pharmacy benefit managers (i.e. third-party administrators of prescription drug programs) have redirected sales to mail-order pharmacies, which can carry lower prices.
For more information, visit IBISWorld’s Pharmacies and Drug Stores in the US industry report page.
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IBISWorld industry Report Key Topics
Pharmacies and drug stores retail a range of prescription and over-the-counter medications, health and beauty items, toiletries and consumable goods directly to consumers on a walk-in basis. Industry companies may also provide basic health and photo processing services. The industry includes retail stores with a pharmacy but excludes mail-order retailers, hospitals and clinics.
Key External Drivers
Industry Life Cycle
Products & Markets
Products & Services
Globalization & Trade
Market Share Concentration
Key Success Factors
Cost Structure Benchmarks
Barriers to Entry
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