Supermarkets are finding the blush of profits associated with the release of prescription to over-the-counter products is short-lived, especially in a competitive category like analgesics.
More than one year ago, retailer expectations were high when the analgesics, Orudis KT and Actron, were introduced as OTC medications. They expected another flurry of sales activity would boost their profits and volume in the category.
"That has not been the case," said Steve Lauder, health care category manager for Minneapolis-based Supervalu.
Actron was launched over the counter in January 1996 and is marketed by Bayer Corp., Morristown, N.J. Orudis KT was distributed to retail stores in November 1995 by Whitehall-Robins Healthcare, Madison, N.J., a division of American Home Products.
"We expected them to be [as successful] as Aleve [jointly launched as OTC in June 1994 by Procter & Gamble and the Syntex Corp.], Lauder added.
In the more than two years Aleve has been on the market, it has achieved a 5.7% share of the $2.5 billion analgesics market and is ranked fourth in top selling analgesics, behind Tylenol, private label and Advil, according statistics from Information Resources Inc., Chicago, for the 52 weeks ended Jan. 26.
Orudis KT placed 12th and Actron came in 14th with a small percentage of the total market.
When drugs switch from prescription to OTC, they often bring supermarkets good initial profit returns, but maintaining market share and profits in the face of competition can be a stiff challenge for retailers.
Competition is driving down prices and profits said retailers and wholesalers surveyed by SN.
"Because Wal-Mart is a major competitive factor in our area, we match the pricing of new OTC-switched products based on what their retails are," said Art Bundy, the director of nonfood, Harps Food Stores, Springdale, Ark. "And because they get the product in before we do, we are kind of between a rock and a hard place."
"You're really locked into the same pricing structure, which sometimes lowers the profit for us and Wal-Mart since the item has come off prescription. On an item you were making 24% on as an Rx, you're now selling for 5% to 10% margin," Bundy said.
"Analgesics are a key cornerstone of any HBC department. That means heavy competition," said Supervalu's Lauder.
"When the new OTC analgesics came out, the retails were slightly higher, or about 10%, but then competitive pressures move the price down," said David Himel, the nonfood buyer at Associated Grocers, Baton Rouge, La. "This can take six to 12 months until it becomes a commodity item. Margins are around 10% higher than traditional analgesics, but if it becomes a commodity, the retail and profit drop."
How quickly a new item becomes a commodity item depends on what the competition is doing in your market, noted Pete Gassenberger, director of health and beauty care and pharmacy at Consumers Markets, Springfield, Mo.
"The competition can drive the change in status of some items more than anything else. For example, pricing on a 24-count package of Aleve dropped $1 to around $4.99, compared to the introductory $5.99 to $6.99 when it entered the market," he said.
"These new switched items [Actron and Orudis KT] will probably sustain their initial sales until a round of new items comes out; they will probably slip to commodity status after a while. They still carry about 10% higher price points than the more traditional analgesics like Advil and Bayer aspirin," Gassenberger said.
At Harps Food Stores, analgesic selections like Aleve, Orudis KT and Actron are treated as commodity items from the starting gate, Bundy said. "Pricing new OTC items higher than traditional products is hard to do because Wal-Mart 'won't allow' that. What they do is pick a category that they want to make a statement with, like analgesics. We've seen Wal-Mart going out at cost or below on a brand new item to build that low-price image. Everybody else has to come along and meet that retail price from day one to be competitive with Wal-Mart, which is 20 minutes up the road."