James Dudley Management

James Dudley Management

Time for the European OTC Industry to Plan Strategies to meet Major Changes to Europe’s Distribution Channel Networks

Time for the European OTC Industry to Plan Strategies to meet Major Changes to Europe’s Distribution Channel Networks

Deregulation, EU harmonisation, leading pharmaceutical wholesalers’ strategies, and the ambitions of mass market operators’ are among a combination of evolving themes running through the distribution channel systems serving the OTC medicines market.

Within five years the European OTC manufacturers, in some European markets, will have to compete in an environment that will more closely resemble the broader personal care sector of the consumer market in terms of shape, structure, channel diversity and competitor dynamics.

These are the conclusions of a major new consultancy study from James Dudley Management published in January 2002: OTC Distribution in Europe - 2002 edition: New Challenges and New Strategies to 2006.

Furthermore, the distribution channel system will become more Europe-wide and compressed into large vertically integrated channel management groupings and chain retailers capable of exerting strong buying power and competing with their own brands of OTC medicines, OTC medical devices and dietary supplements.

Gradually the processes of deregulation across Europe’s OTC markets are beginning to impact on the shape and structure of the supply chain. The on-going reclassification of medicines since 1993 has added to the number of active agents available without a prescription from pharmacies. Yet, there are growing pressures to create lists of products available to consumers outside traditional pharmacy outlets.

Czech Republic and Denmark have gone down this route in the last year or two and soon the Netherlands will add to the list of countries that allow non-prescription medicines to be sold outside licensed channels. These already included Germany, Poland, Switzerland and the UK. Yet, even in these markets the lists are gradually being extended. Furthermore, the expected adoption of the proposed EU directive for dietary supplements could also provide the opportunity to switch the majority of pharmacy bound supplements to the mass market.

Even now, 44% of the OTC self-medication and supplements products are purchased from non-pharmacy outlets in the UK (up from around 30% in 1998). This figure is 18% in Germany (up from 13% in 1998).

Another important trend in the processes of deregulation concerns pharmacy ownership. In the last twelve months Norway followed the Netherlands in changing pharmacy ownership regulations thus enabling retail pharmacy chains to develop. Before the regulatory changes in Norway and the Netherlands retail pharmacy chains were permitted in Belgium, Czech Republic, Ireland, Switzerland and the UK. In Italy and Poland new retail pharmacy chains are being created through the privatisation of publicly owned pharmacy and wholesaling groups.

Table 1
Regulated Ownership of Pharmacies in Europe

Country Retail chains permitted Probably Deregulation next 5 years
Austria No Yes
Belgium Yes -
Czech Yes -
Denmark Partial (Maximum 4 pharmacies) Yes
Finland No Yes
France No No
Germany No Yes
Hungary chains exist No
Ireland Yes -
Italy Yes Yes
Netherlands Yes -
Norway Yes -
Poland Yes -
Portugal No Yes
Spain No Yes
Sweden State Owned Yes
Switzerland Yes -
UK Yes -

Source: © James Dudley Management OTC Distribution in Europe – New Challenges and New Strategies for the Future January 2002

In the next five years pharmacy ownership regulations are expected to permit the establishment of retail pharmacy chains in most European markets except France and Hungary. Furthermore, privatisation of the state owned retail pharmacy monopoly in Sweden awaits only a change in government.

Around 7% of Europe’s 132,000 pharmacies are in private or public chains. The growth in retail pharmacy chains has been most dramatic in Norway where international retailers now own almost 86% of pharmacies. The number of independent pharmacy retailers being acquired by chains is also rising in the Netherlands as a consequence of deregulation.

Table 2
Share of Retail Pharmacies in Chains or Public Ownership 2001

Country % Pharmacies in Chains
Sweden* 100.0
Norway 85.7
England & Wales 48.0
Belgium** 10.8
Italy* 9.8
Netherlands 9.6
Poland* 5.6
Czech 3.9
Switzerland 3.0
Average Europe 6.7

*Mostly Publicly Owned
**Mostly Co-ops
Source: © James Dudley Management OTC Distribution in Europe – New Challenges and New Strategies for the Future January 2002

Mass market retailers such as Tesco (UK) and the Dutch druggist chain Kruidvat (operating in the UK) are becoming significant retail pharmacy chains in their own right. The leading mass-market players in Switzerland, Co-op Vitality and Migros, are also following this trend.

There is also a clear trend towards the creation of pan-European groupings among the major players. While Boots has withdrawn from direct investment in pharmacies outside the UK and Ireland (in Europe) Gehe, Alliance UniChem and OPG stand out as companies with pan-European retail ambitions. Add to these a growing interest in retail pharmacy by Phoenix/Tamro and a third pan-European retail pharmacy chain is emerging. Only regulatory barriers stand in the way of full regionalisation of retail chains.

It has not gone unnoticed that the German group Gehe cannot operate its own retail chain in Germany and nor can the Anglo-French group Alliance UniChem own pharmacies in France.

Table 3
Europe’s Largest Retail Pharmacy Chains

Company No. of Pharmacies Territories Origin
Gehe 1,631 Belgium, Czech, Ireland, Italy, Netherlands, Norway, UK German
Boots +1,400 UK, Ireland, (+ store in-plants Netherlands, Italy, Switzerland) British
Alliance Unichem 925 Italy, Netherlands, Norway, Switzerland, UK Anglo French
Apoteket + 900 Sweden (State Owned) Swedish
Phoenix/Tamro 325/162 UK, Italy/Norway, Baltic States German/Nordic
Kruidvat 230 UK (potentially Netherlands) Dutch
National Co-op Chemists +280 UK British
Tesco 210 UK British
OPG 180 Netherlands, Poland Dutch

Source: © James Dudley Management OTC Distribution in Europe – New Challenges and New Strategies for the Future January 2002

For almost a decade there has been a gradual consolidation of pharmaceutical wholesaling. The reasons are largely to do with the high costs of customer services and compliance to more and more regulatory requirements against relatively poor financial returns.

Together, Gehe, Phoenix and Alliance UniChem, along with their associates, had captured nearly 60% of the European wholesale pharmacy market by 2001. This share is expected to rise to over 70% in 2002.

Table 4
Europe’s Major Pharmaceutical Wholesalers National and Consolidated euro % Market Share 2001

Country Gehe Alliance Unichem (Galenica) Phoenix (Tamro/Amedis) Total
Austria 50   18 68
Belgium 17     17
Czech Republic 11 21 30 62
Denmark     69 69
Finland     59 59
France 40 29 <5 +70
Germany 20   28 48
Greece   12   12
Hungary     30 30
Italy 1 20 21 42
The Netherlands   22 20 42
Norway 50   27 77
Portugal 11 21   32
Sweden     52 52
Spain   11   11
Switzerland   45 33 78
UK 36 28 12 76
Total 21 18 19 58

Source: © James Dudley Management OTC Distribution in Europe – New Challenges and New Strategies for the Future January 2002

While large market shares provide for operational scale economies in terms of pure wholesaling, they also provide a large customer base and the infrastructure around which these major players can move into more profitable segments of the supply chain. Pre-wholesaling and retailing are the most attractive opportunities.

Furthermore, all three of the major players operate virtual pharmacy chains either in the form of voluntary or mutual trading organisations such as Phoenix involvement with Numark’s 1,400 members in the UK or through franchising, such as the 970 pharmacies with Gehe’s Vantage format.

E-commerce is another new phenomena that has come to the fore in the last two or three years. It is forecast that e-pharmacies will take 5% to 8% of total European pharmacy sales in the next five years. This given, that legality issues are resolved by the European courts. This is expected to occur during 2002.

The nature of demand has also undergone considerable change over the last 10 years. The decline in semi-ethical prescription business has had a detrimental impact on the industry especially in France and Germany. These two markets account for two thirds of semi-ethical prescription business in Europe.

In 1992 70% of non-prescription brands in Europe were semi-ethical products, many of which were marketed in the same way as prescription only brands. Over 40% of turnover was derived from prescription sales in 1992. Health reforms, de-reimbursement, state imposed price reductions, and clinical obsolescence have together contributed to the decline of the semi-ethical prescription business.

In 2001 only 30% of European non-prescription bound sales were derived from prescriptions. Of these France contributed to 37.4%, Germany 29.0% and the UK 13.0%. The importance of semi-ethical prescription business has diminished to almost insignificant levels in all other European markets. As a result manufacturers have had to become much more consumer focused.

Table 5
Europe’s 15 Major Markets Rx: OTC Ratios
1992 - 2001

Indicator 1992 1994 1996 1998 2001
Total Non Prescription 100 100 100 100 100
Semi-ethical Prescription 41 37 36 34 30
OTC Self-medication 59 63 64 66 70

Source: © James Dudley Management OTC Distribution in Europe – New Challenges and New Strategies for the Future January 2002

In conclusion, OTC manufacturers will need to consider how to adapt their strategic thinking to the high probability of significant changes to the shape and structures of the OTC distribution channel system right across the EU and in other European markets. As has already been shown, deregulation has led to an increasing diversity of channels in some markets. This trend will no doubt extend to most of the others over the next five years. Companies will then need to find strategies for competing in or with the mass market.

Yet, of more immediate importance, are the clear trends towards concentration of buying power presently accumulating in the wholesaler sector and the expectancy that these will extend to the retail sector. There are clear signs that any changes to pharmacy ownership regulations in Europe’s major markets will have the profound effect of concentrating the retail sector around chains. Indeed, all the major wholesalers already engaged in retail activities have stated that their aims are to move from wholesaling dependency to retailing as rapidly as regulations permit.

© James Dudley Management -The information in this News Release may be reproduced providing the source is acknowledged.

Details of the Report:

Title: OTC Distribution in Europe - The 2002 edition – New Challenges and New Strategies for the Future – 2006

Published: January 2002 by James Dudley Management

Price: £1,495, US$ 2,545, ¥273,585
Tel: +44(0) 1562 747705
Fax: +44(0) 1562 750275
e-mail: information@james-dudley.co.uk

Table of contents available on Web site www.james-dudley.co.uk from 25th January 2002


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