James Dudley Management

James Dudley Management

New Era for Consumer Health Supply Networks - says New Study covering 18 European States and the Russian Federation

Despite the economic gloom the supply networks which serve 588 million people living in Europe and Russia with €32 billion worth of consumer health products are undergoing a major period of restructuring. While merger and acquisition activity combined with vertical integration is concentrating the supply chain at the distributor level, hybrid groupings of retail pharmacies are reshaping the consumer channel into powerful chains. Furthermore, deregulation of the non-prescription healthcare sector is shifting consumer demand to non-pharmacy channels.

Among the main findings of a new 19 country study from James Dudley are:

  • One in five pharmacies is a branch of wholly owned pharmacy multiples
  • One in three pharmacies is a member of a ‘virtual chains’
  • 14% of consumer healthcare purchases are from non-pharmacy channels
  • Nearly 60% of the intermediary pharmaceutical market is controlled by a handful of players
  • The role of the major pharmaceutical distributors in the creation of new hybrid pharmacy channel structures that overcome national restrictions on pharmacy chains.

The report, ‘OTC Distribution in Europe - the 2012 edition - Entering the New Era’, is the eight edition of a study of strategic analysis of the supply network serving the non-prescription pharmaceuticals and OTC Self-medication market in Europe. The report covers Austria, Belgium, Czech Republic, Finland, Denmark, France, Germany, Hungary, Italy, Netherlands, Norway, Poland, Russia, Slovak Republic, Slovenia, Spain, Sweden, Switzerland and the United Kingdom.


Retail Pharmacy Networks

There are 588 million people living in the 19 European States covered in the OTC distribution study who generate a consumer healthcare market worth some €32 billion at consumer prices i.e. 94% of the total European market and 32% of the global market. The consumer healthcare sector comprises non-prescription medicines and related healthcare products and dietary supplements and forms part of the overall pharmaceutical and personal care market worth some €230 billion in the countries under study.

The consumer healthcare sector is split between sales generated purely by consumer purchases of OTC self-medication which is worth €24.3 billion. While by definition non-prescription status products do not need a doctor’s prescription, sales from prescriptions still account for €7.7 billion i.e. nearly a quarter of the total.

While France and Germany are the largest pharmaceutical markets in Europe with 36% of the total European pharmaceutical market between them (excluding hospital business), Russia is the largest market for consumer purchases of OTC self-medication with 23% share.

The United Kingdom, Italy, Poland, Spain and Switzerland make up a further third of the market followed by the Netherlands, Belgium, Czech Republic and Sweden. Figure 1

Retail Pharmacy Networks

The Dudley OTC distribution report found 157,000 pharmacies in the 19 European countries under study of which 80% are owner managed independent businesses. Attached to these are groups of 2 to 4 branches representing around 5% of pharmacies.11% of pharmacies are branches of major chains with more than 50 stores and 1% were Coops. Minor chains with 5 to 50 stores represent 2% of the total number of pharmacies, while 1% of pharmacies are state or publically owned. The latter excludes 11,000 municipal pharmacies attached to hospitals in Russia.

Excluding the 7,200 branches of two to four outlets attached to independent pharmacies, there are approximately 23,500 pharmacies in multiples of five or more outlets and these are found in thirteen of the nineteen markets under study.

Over a third multiple pharmacies are located in Russia and 31% are in the UK. 14% of pharmacies in multiples are located in the Central European States of Czech Republic, Hungary, Poland, and Slovakia. The Nordic Region contains 6% of the European pharmacies in multiples. While 8% of pharmacies in multiples are located in Italy, the majority, 1,550, are owned by municipalities. In Slovenia almost 90% of pharmacies are in publically owned groups. Figure 2 and Figure 3

Wholly owned chains of retail pharmacies are a feature of distribution channel systems in the UK and Ireland, Belgium, Czech Republic and Poland and more recently Hungary, the Netherlands, Norway, Slovakia, Sweden and Switzerland. However, since the beginning of the year Hungary has re-imposed restrictions to prevent new chains being formed by third parties and to progressively restore pharmacists as the majority shareholders of their stores.

A characteristic of the expansion of international wholly owned retail chains has been the lead taken by, Celesio, Alliance Boots, Phoenix and Mediq (OPG) which together own 44% of pharmacies in the large chains found in the study.

In Switzerland the principal pharmacy chain operators are Galenica and the Coop. There is also, is the emergence of new international chains such as Penta in Central and Eastern Europe and Polska Grupa Farmaceutyczna (PGF) in Poland.

In Russia well over a quarter of pharmacies are owned by large national or multi-regional operators. The majority are local companies and among the leaders are Apteka 36,6, A5, Pharmakor, Implosia, Doctor Stoletov, Vita, Rigla, and Staryj Lekar. The ten leading chains represent 17% of retail pharmacies in Russia. However, Oriola KD, the Finnish distributor, is among the leading players through its ownership of Staryj Lekar. Figure 4

Virtual Pharmacy Chains

Over the last few years there has been a phenomenal growth in voluntary groupings or so called ‘virtual’ chains. While these have existed in France and the UK for many years, the pace of growth has been greater in Germany, the Netherlands, Poland and Switzerland. With the main international wholesalers Phoenix, Celesio, Alliance Boots and Mediq as the drivers behind this form of retail grouping it is fully expected that virtual chains will expand across the whole continent by the middle of the decade. Already, in the nineteen countries under study there is an estimated membership of 46,600 participating pharmacies. This is equivalent to almost one in three pharmacies in the study.

At national levels major players such as Alliance Boots’ Anzag in Germany, Galenica in Switzerland, Hungaropharma in Hungary and Polska Grupa Farmaceutyczna in Poland have build large affiliate memberships for their virtual chains. Figure 5

The problem with virtual chains is that while in theory they are supposed to provide the dual advantages of the flexibility of independence and the strengths of a chain, there are few mechanisms to maintain network disciplines.

The basic weakness of many of the virtual chains has been the failure on the part of their managements to understand the importance of differentiating their retail offer, positioning and branding. Indeed the development of branding and common formats has been much of an afterthought for many networks. While wholesalers have concentrated on retaining pharmacy loyalty through the leadership of groups, the members themselves are more focused on their own interests and ‘cherry pick’ intermediary offers rather than supporting a retail brand.

The lack of full hearted support for organized brand promotions by group members is frustrating for manufacturers and undermines the group buying strength.

However, this is beginning to change as members are realising that as well as good buying, innovation such as loyalty cards, branding, formatting and promotions are important elements for survival in a competitive retail sector.

Franchising – “MacDonaldization” of the Pharmacy Channel

The pharmacy franchise concept provides a useful way of building a wholly controlled retail brand in markets where wholly owned chains are not permitted. This is the case in Germany where franchised pharmacies are permitted but where pharmacy chains are not. Today there are three main franchised retail pharmacy brands in Germany. The largest of which is Celesio’s DocMorris which intends to open 500 concept pharmacies in Germany.

Franchise concepts, while relatively new to pharmaceutical retailing are an established business model in other sectors, especially fast food. Franchising allows the brand owner to control nearly all the elements that go into the branding process thus largely overcoming the weaknesses of virtual chains.

“Franchise concepts should not be confused with virtual chains. Whereas the franchising company may not have a wholly owned chain of stores in terms of the bricks and mortar it definitely has a wholly owned retail brand. You would hardly describe MacDonald’s’ as a virtual chain“, says James Dudley author of the report.

Behind the principle of the franchise concept model is the idea that franchiser owns the brand and controls the way it is run. The pharmacy buying into the franchise is basically renting a retail brand and exploiting a franchiser’s marketing skills and purchasing power.

Consumer Healthcare Share of Pharmacy Turnover

86% of the European consumer healthcare market is delivered through 157,000 pharmacies. Yet, when prescription business is excluded, consumer purchases of OTC self-medication represent only 8.5% of sales of the average pharmacy.

In Poland, Czech Republic, Slovakia and Russia OTC self-medication represents about 20% of pharmacy turnover. While in Switzerland and Hungary consumer purchases of OTC medicines represent 17% and 15% of pharmacy turnover respectively, the only other States with a double digit share are Austria, Slovenia, Germany, Belgium, Denmark and Finland. In France, Spain and the Netherlands OTC consumer purchases of non-prescription medicines represent less than 5% of average pharmacy turnover albeit, sales of medicines classified as non-prescription almost double in these countries if prescription business is included. Figure 6

Non-pharmacy Channels

14% of licensed OTC products in the 19 countries under study pass through non-pharmacy channels. Non-prescription medicines are listed for General Sale (GSL) in non-pharmacy outlets in Denmark, Czech Republic, Hungary, the Netherlands, Norway, Poland, Sweden, Switzerland and the UK. In Italy since 2006, non-prescription medicines have been permitted for sale through parapharmacies and OTC corners in hypermarkets but only under the supervision of a pharmacist.

Whereas a free sale list of medicines exists in Germany, it is very restricted and does not include analgesics, antacids, laxatives or even nicotine replacement therapies. In Russia OTC medicines are permitted to be sold through pharmacy kiosks but in no other non-pharmacy channel. In the Netherlands druggists are the principal channel for consumer purchases of OTC medicines. Figure 7

Pharmaceutical Distributors New Structures

The major distributors still lead. Celesio and Phoenix and Alliance Boots still represent nearly half of the intermediary pharmaceutical market in the nineteen markets under study. This is despite the fact that both Celesio and Phoenix have left the Russian market. Other major European wholesaling groups include Sanastera, Mediq and Oriola KD.

Among West and Central European States there are clear signs that the leading European pharmaceutical wholesalers will continue to lead the consolidation process. Their role is also likely to evolve from that played by traditional wholesalers into one of becoming central logistics providers across the entire distribution chain. This will concentrate the various parts of the supply chain by merging wholesaling, pre-wholesaling logistics and retailing into single supply lines run from central hubs and linked across Europe.

In Russia the emphasis is on vertical integration in the huge domestic market, especially in retailing and production. There is a State incentive to participate in pharmacy clusters to develop pharmaceutical manufacture in Russia. This has attracted distributors into the production sector often in partnership with foreign or local manufacturers.

The three largest pharmaceutical wholesalers Protek, SIA International and Katren have a combined market share of over 50%. While both Protek and SIA International have entered the manufacturing sector, Katren has developed the Melodiya Zdorovya pharmacy network which is among the top 20 drugstore chains in Russia

With the exception of Sanastera all the major Western international distributors are pharmacy retailers with Europe-wide groups of wholly owned pharmacies, virtual chains and emerging franchise concept brands.

While the big distributors have tried in part to grow retail chains, they have faced regulatory hurdles in Europe’s major markets especially France, Germany, Italy and Spain. Yet, Celesio, for one, has already announced that it is exploring ways of developing a major international chain that will meet local regulatory criteria, exploit major economies of scale and create huge buying clout.

“The step is not as big as it might first appear - The elements are in place to allow such a major player to create a large Europe-wide entity. This can be done by integrating the different retailing models which have already been developed including mail order and Internet offers. We might expect to see a mix of innovative franchise concepts, well run virtual chains and wholly owned branches, where permitted, built into a powerful international retail brand”, says Dudley.

Figures 1 to 7

Figure 1: Country Estimated % Share of the Total 19 Markets under Study 2011

Source: James Dudley Management - OTC Distribution in Europe 2012 edition

Figure 2: Pharmacies in 19 European Countries Split by Grouping Type 2011

Source: James Dudley Management - OTC Distribution in Europe 2012 edition

Figure 3: % of Pharmacies as Branches by European State

Excludes 11,000 municipal pharmacies attached to hospitals in Russia
Slovenia and Italy mostly state owned.
Source: James Dudley Management - OTC Distribution in Europe 2012 edition

Figure 4: Europe’s Leading Retail Pharmacy Chains 2010/2011

Source: James Dudley Management - OTC Distribution in Europe 2012 edition

Figure 5: % of Pharmacies in Virtual chains by European Country 2011

Source: James Dudley Management - OTC Distribution in Europe 2012 edition

Figure 6: Average % of Turnover taken by Consumer Purchases of OTC Self-medication per Pharmacy (excluding prescription business) Compared by Country

Source: James Dudley Management - OTC Distribution in Europe 2012 edition

Figure 7: % Share of Consumer OTC Purchases taken by Non-pharmacy Channels by European Country

*In Russia Pharmacy Kiosks represent 25% of turnover. Source: James Dudley Management - OTC Distribution in Europe 2012 edition

Paragraph. For enquiries contact James Dudley ++44(0)1562 747705 email information@james-dudley.co.uk or visit www.jamesdudley.info


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