Supermarket pharmacy just keeps getting bigger. Since SN conducted its first State of the Industry Report in 1993, supermarket prescription sales, the number of pharmacies operating and pharmacy's contribution to overall grocery store sales have grown consistently each year.
The upward direction is expected to continue this year, according to SN's fourth State of the Industry Report.
All supermarket chains surveyed, which collectively operate 2,278 pharmacies, reported increases in prescription growth. More than two-thirds reported double-digit increases.
Prescription sales in supermarkets are expected to account for $5.8 billion by the end of this year, an 18% gain over last year's $4.9 billion. Supermarket pharmacies generated $4.2 billion in prescription sales in 1994, and $3.6 billion in 1993.
The number of supermarket pharmacies in operation continues to increase at an average rate of 460 a year, and this year the total is projected to be 7,081, up from 6,731 in 1995 and 6,274 in 1994.
The survey results and analysis are largely based on a survey of supermarket pharmacy directors at large chains nationwide. Data from IMS America, Totowa, N.J., a market research firm, and the Food Marketing Institute, Washington, augmented the survey research.
The typical chain represented in the survey averages 168 stores and operates 79 pharmacies.
Other Significant Findings
On average, supermarket executives expect a 16% gain in sales in 1996 over 1995. Among the stores surveyed, the average revenue is expected to hit $3.6 million, compared with $3.1 million last year.
The average supermarket in the survey operated 55 pharmacies in 1995. Respondents estimated they would add an average of 10 new pharmacies this year. This is an 18% projected growth in units by the end of 1996.
The new pharmacies will be bigger, busier and located up front in a prominent position in the store. Almost eight of 10 (79%) of new pharmacies are located up front in the supermarket, with no significant differences in choice between the left and right side of the store, according to survey respondents.
The vast majority of supermarket pharmacies (85%) are 400 to 499 square feet. However, new pharmacies are being built bigger, 59% of respondents said.
In addition, firms in the survey remodeled on average four pharmacies during 1995, and will do about the same in 1996.
More Growth Trends
The percentage of prescriptions paid for by third-party plans continues to climb, this year estimated at 64%, compared with 58% last year. The number of prescriptions filled annually is increasing at all of the pharmacies operated by survey respondents.
Double-digit sales increases were noted by 63%, compared with 48% in last year's survey. This year 28% of respondents reported prescription growth of 20% or more; 34% of respondents grew prescriptions 10% to 19%, and 38% of the respondents said prescriptions went up 1% to 9%.
The average number of prescriptions filled per week by the average pharmacy was reported at 920 prescriptions.
Pharmacy sales are expected to contribute more as a percentage of total store sales. Pharmacy's share of store sales averaged 5.7% in 1995 and executives expect it to go up 6.1% of store sales by the end of this year. It was 5.1% in 1994, according to last year's annual survey.
The survey documents that the percentage of prescriptions filled generically also continues to increase. For 1996, pharmacy executives project that 48% of prescriptions will be filled with generic drugs, up from 44% in 1995.
Despite all the growth, supermarket pharmacists as well as other retail channels are struggling to maintain their profits. Overwhelmingly, 62% of supermarket pharmacists agreed that the No. 1 problem in running a pharmacy is declining margins on prescriptions because of increasing third-party business and pressures on them to cut costs.
The SN survey disclosed that gross margins in 1995 for supermarket pharmacies were 22.6%, down 2.5% from 23.2% in 1994. Respondents forecast that gross margins will slip to 22.2% this year.
More than half (55%) of pharmacy executives polled said they participate in exclusive third-party contracts, in which the choice of pharmacy by a prescription drug customer is limited to specific pharmacies. Forty-one percent said they do not participate, while an additional 4% of pharmacies are expected to enter into exclusive contracts this year.
Among challenges facing supermarket pharmacies are: being shut out of exclusive contracts, named by 21%; increasing the pharmacy business, 7%; and gaining the recognition and cooperation of top management and relationships between pharmacy and store managers, 3%.
As reported in past surveys, retail pharmacies are countering exclusion from third-party contracts with provider networks of their own. More than three out of four (76%) said they belong to Super Net, the pharmacy network formed by supermarket operators.
Patient compliance came to the forefront in 1995 as more than eight out of 10 pharmacy executives (83%) indicated that they focused more on patient compliance than in previous years.
For the first time, the survey asked whether pharmacies are employing more technicians to free up pharmacists' time for more patient counseling. About 80% of those surveyed said they are using more technicians for this purpose.
Importance of Relations
Once again, the SN survey showed that pharmacies are offering a variety of value-added services to help secure customer loyalty. Those most commonly offered are: computer-generated drug monographs, 100%; extensive patient counseling when needed, 97%; blood pressure machines, 90%; special order of over-the-counter medications, 83%; dedicated waiting area, 72%; health screenings, 69%; separate counseling area/windows, 59%, and home delivery and video library, 38%.
Most pharmacy executives, 69%, said relations between pharmacy and top management, and between pharmacy and store management, are getting better. While only 7% of respondents said they are getting worse, relations have stayed about the same for 24% of pharmacy directors.
When it comes to describing the relationship, more than half, (52%) agree with the statement: "Top management understands pharmacy and supports it," significantly up from 43% who agreed with the statement last year.
Another 41% said management sees pharmacy as "just another department," up from 30% a year ago. Only 3% indicated they believe that top management doesn't understand or support pharmacy, down from 4% last year.
As in previous surveys, one area in which top management seems to fall short is advertising. While 45% said pharmacy is included most weeks in the circular, 14% wrote that pharmacy is rarely or never featured. Some 10% said pharmacy is included monthly, with 31% describing the pharmacy ad frequency as "occasionally." While pharmacy executives believe it is very important to have good relations with HBC departments, in reality, they don't seem to have much opportunity to practice good relations.
The survey notes that frequent contacts on merchandising policy are the exception rather than the rule for more than half of the respondents.
When it comes to meeting with HBC to plan merchandising strategy, only 31% said they meet weekly, down from 38% last year. Monthly meetings with their HBC counterparts were reported by 17% of respondents and 24% reported quarterly contacts. The remainder (28%) said they never meet with their HBC counterparts.
When it comes to attracting pharmacy customers, having a personal relationship with a pharmacist is ranked very important, along with providing service, respondent said.
On a scale of 1 to 5, with 5 seen as "extremely important," a personal relationship with the pharmacist was rated 4.3; service also was rated 4.3; convenience, 3.8; having pharmacy in a prominent, accessible part of the store, 3.5; over-the-counter selection, 3.4, and price, 3.3.
As to supermarket pharmacy's main competition, the survey noted that 55% of executives still view chain drug stores as the No. 1 competitor. About a third (28%) of executives view mass merchants with pharmacy operations as their major competitor, while 21% see other supermarkets with pharmacies as their primary competitor. Only 14% of pharmacy executives think of mail-order pharmacies as their major competitor.
Prescriptions paid for by third-party plans continue to be a larger part of supermarket pharmacy business. By the end of this year, third-party plans are expected to comprise 64% of supermarket pharmacy business.
Third-Party Plans' Share in Supermarket Pharmacies
1996 64% (projected)
Supermarket pharmacies are facing the challenge of shrinking margins. This is partly due to cost-cutting measures from third parties, an increasing part of supermarket pharmacy's business.
Margins in Supermarket Pharmacies
1996 22% (projected)
Pharmacy Units Multiply
Supermarket companies are projected to operate a total of 7,081 pharmacies by the end of the year; 350 more than in 1995.
Number of Pharmacies in Supermarkets
1996 7081 (projected)
Scripts Move Up
The momentum of prescription sales growth continues this year as supermarket pharmacies project an 18% increase to $5.8 billion.