SWOT Analysis in Drug Store Industry
Treasure Womack
PHL/ 320
July 13, 2015
Howard Kersey

SWOT Analysis in Drug Store Industry The drugs store industry has several capabilities. Most consumers have at least the occasional need to shop at a retail drug store. The retail drug store industry consists of neighborhood pharmacies, large drug store chains and supermarkets or general retailers with drug store departments. Competition within the industry is strong as retailers adapt to changing trends in the market and seek to retain customers. Drug stores face several critical issues. Low margins on prescription drugs may push drug stores to expand front store merchandise sales where they compete with discount stores or into related businesses such as Pharmacy Benefit Management. The problem also arises in regulatory pressure to contain drug store prices. The continuing rise in prescription drugs costs has encouraged proposals to control drug prices either through legislation or the formation of large public buyer groups that can negotiate lower prices with drug suppliers. Controls in drug store prices have cut drug store margins. The increase in the number of widely used drugs moving from prescription to over-the-counter (OTC) status proved to be another problematic area for the drug store industry. In the U.S., 106 ingredients in more than 700 widely used medicines have moved from prescription to OTC in the past 30 years; this has completely changed the pharmacy role in categories such as cough-and-cold, allergies, antacids, and insomnia. While OTC has brought greater drug volumes, prices have fallen and such products are now sold widely across other retail channels such as supermarkets and discount department stores. In contrast, the relatively open market in the United States led to large-scale entry by supermarkets and discount department stores into pharmacy and OTC medicines. This new competition spurred a wave of consolidation resulting in three major national drugstore chains by the early 2000s (Walgreens, CVS, and Rite Aid), as well as three large wholesale organizations (Cardinal, AmerisourceBergen, and McKesson), each linked to a network of affiliated independent owner-operator pharmacies. PBMs are a huge threat to the drug store industry. PBMs offer lower drug costs for corporate clients by operating mail order pharmacies that bypass drug stores completely. CVS realized this great area of opportunity and capitalized upon it. CVS bought PBM from Caremark RX. PBMs handle about eighty percent of all prescription processes in the United States. Cost leadership strategies have driven many retail sectors in recent years (for example Walmart and Amazon). It is important to recognize that you cannot have a large number of cost leadership players, since a successful strategy requires volume and scale. This almost inevitably results in only a few players in the end. In pharmacy retail, each country/market is likely to have only one or two successful discount drugstores. Moreover, research suggests that pharmacy customers choose their pharmacy most often because of location/convenience and then brand/chain. Only 20 to 25 percent report that lowest prices are the reason they shop most often at a particular pharmacy. (It also is worth noting that knowledge/trust is not a primary driver of shopping behavior, but this appears to be due to the overall high level of trust in drugstores relative to other retail sectors.)Given the large number of pharmacies and the inherent limitations of focus or cost leadership strategies, differentiation strategies would appear to offer the most appeal. In order to be successful, these strategies must be truly differentiated in the mind of the customer. The need is to extend that difference to other categories, such as health and wellness, or beauty. While these categories have more extensive competition, they also tend to be product- and service-driven—characteristics that are clearly applicable to pharmacy retail. Such differentiation also requires exclusive, first-to-market, or private label products that are not available to mass merchants, which, in turn, requires access to global suppliers and networks. (An example of this is the No. 7 cosmetics lines offered by Boots Pharmacy.) In the longer term, pharmacy retail may have the opportunity for differentiation through the provision of health care services such as immunizations or on-site clinics. The best differentiated offers have built strong brand equity. These brands stand for a strong image, and they deliver on a consistent basis across the store and multichannel networks. In pharmacy, this is likely to require good upstream partnerships with suppliers and wholesalers, and good downstream value for customers. Given the historical trust relationship with customers, pharmacy retailing has an exceptional opportunity to help navigate the complex and exploding categories of health and beauty—in effect becoming a curator and interpreter for the customer. To do so, however, requires that pharmacy executives treat these categories as core business, not add-ons or afterthoughts. The retail drug store industry is subject to trends that affect business just as other types of business are. From late 2000 to early 2010, one of the largest drug store trends involves the growth of large "super center" retailers, whose pharmacy and general merchandise offerings draw customers away from specialty drug stores. Smaller stores sometimes respond by increasing their own merchandise offerings. Another significant trend is the aging Baby Boomer population which, entering retirement in large numbers continues to place increased demand on prescription drug makers and sellers. Personally, I can attest to the fact that convenience/ brand name are pivotal in the decision to shop in traditional pharmacies. The areas of opportunity and strengths are far greater than the threats and weakness. The drug store industry is thriving and including several innovations to remain competitive and relevant to the industry.