Establishments in this industry are engaged in the retail sale of prescription drugs, proprietary drugs, and nonprescription medicines and may also carry a number of related lines, such as cosmetics, toiletries, tobacco, and novelty merchandise. These stores are included on the basis of their usual trade designation rather than on the stricter interpretation of the commodities handled. This industry includes drug stores that also operate a soda fountain or lunch counter.
Pharmacies and Drug Stores
In 2003 drug stores posted revenues of $203.1 billion, a double digit growth rate for the eighth year in a row. Chain drug stores, which account for 51 percent of the industry's over 43,000 stores, took in 73 percent of the income. The rapid growth in this industry prompted powerful supermarket and mass-merchandise chains to enter traditional drug store markets, forcing the independent drug store industry to compete with these larger companies. In addition, the drug store industry faced narrowing profit margins due to the general push to reduce health care costs in the United States, and as a result, acquisitions and consolidation became prevalent. These factors combined have forced drug stores to concentrate on customer service, expand into niche markets, add products, form partnerships with suppliers and health care providers, and automate operations for increased cost-efficiency.
Drug stores face a future that holds potential for significant growth and harbors unique challenges. The average age of the U.S. consumer is increasing rapidly as the Baby Boomer generation grows older. An aging population has increased health care and prescription needs, thus providing a growing customer base for drug stores. However, paper-thin profit margins on prescription drugs, a shortage of pharmacists, and challenges from grocers and discounters may make the road ahead perilous.
In the mid-2000s, pain medication, particularly for headaches, was the top seller, accounting for nearly $955 million in sales. Nutritional supplements held the second spot, with $838.3 million in sales. Adult cold remedies sold $806.3 million in products, followed by women's hair coloring products with $596 million in sales, and facial products such as cleansers and lotions with $531 million in sales. The industry leaders in 2004 were Walgreens, CVS, and Rite Aid, which held about two-thirds of the combined total market share.
As drug stores faced increasing competition from other retailers, chains and independents alike began to vary their store formats in order to differentiate themselves from competitors and strengthen their image as health care providers. As a result, five main store formats emerged within the drug store industry: independents, chain drug stores, mass merchandisers, supermarkets, and mail order.
In 1998, independents grew 10.6 percent over 1997 with $26.4 billion in prescription sales. In the same year, there were more than 20,644 outlets. According to the National Association of Chain Drug Stores (NACDS), these independent pharmacies filled almost 693 million prescriptions in 1998, an increase of 1.2 percent over 1997. Sales for OTC medications were $1.3 billion in 1998. Independent drug stores are expected to account for 24.4 percent of prescription sales in 1999.
Chain drug stores averaged 8,958 square feet and offered a wide assortment of goods. Typically, to draw traffic through, the pharmacy was placed in the rear of the store. Some well-known chains that operated conventional drug stores were Walgreen Co., CVS Corporation, Rite Aid Corporation, and Eckerd Corporation. According to the NACDS, chain pharmacies filled 60 percent of all prescriptions, more than four million a day and 1.6 billion per year in 1998. Prescriptions accounted for $63.3 billion in sales—61.5 percent of sales for chain stores.
Mass merchandisers accounted for 11 percent of all prescription sales in 1998, with $10.4 million in sales. The growth rate for this portion of the drug store industry was slowing somewhat, with 5,258 outlets—up from 4,914 in 1997. Prescription sales increased by 16.3 percent in 1998 and accounted for 10.1 percent of total sales. This segment dispensed 272 million prescriptions in 1998, an increase of 7.1 percent from the previous year, and accounted for 10 percent of all prescriptions.
This market also includes supermarket pharmacies, which operated 6,963 outlets in 1998. These stores accounted for $11.4 billion in prescription sales in 1998, an increase of 16.4 percent from 1997. Supermarkets also controlled 11 percent of total prescription sales in this industry. These food stores dispensed 306 million prescriptions in 1998, 10.5 percent of total prescriptions.
OTC sales in supermarkets have also grown. In 1998, sales were $9.2 billion and projected to increase 7.5 percent in 1999. Mass merchandiser OTC sales were $9.3 billion and projected to increase 11.1 percent in 1999, independent sales were $1.3 billion and expected to rise by 3 percent, and traditional chain sales were $9.7 billion and forecast to be $10.4 billion in 1999.
Mail order drug stores also play an important role in this industry. In 1998, mail order constituted 13 percent of the prescription and OTC market with more than $13.4 billion in sales. Mail order dispensed 368 million prescriptions in 1998. A move that started in 1995 and continued to factor into the success of mail order was convincing federal government retirees, who are part of a managed health care program, to order prescriptions through discounted mail order outlets. By using the mail order system, retirees were able to avoid paying the usual 20 percent co-pay. If the retirees decided instead to fill their prescriptions at local drug stores, they were responsible for the co-pay.
The drug store industry relied on four core...