James Dudley Management

James Dudley Management

Why Europe Needs Virtual Pharmacy Chains

Against the threats of direct and indirect competition the case is made for voluntary groupings of pharmacies.

Over the last few years challenges to restrictive regulations limiting or banning third party pharmacy ownership and limits on the distribution of non-prescription medicines in a number States have come in waves from the European Commission, legal battles in the European Court of Justice and national monopoly watchdogs - the latest of which emerged in Germany this summer.

The Monopolkommission in its 18th expert report in July to Germany’s economics ministry stated that the country’s restrictions on pharmacy ownership by third-parties and restrictions on retail chains must be lifted. The institution provides independent advice to German legislators on competition issues. Pharmacy chains are again back on the German political agenda. This is within a year when challenges to the domestic laws on pharmacy ownership in Germany collapsed in the European Court of Justice following rulings against the mail order firm DocMorris by German Courts.

Since 2004 German pharmacists have been able to own up to four pharmacies. This has had a beneficial effect on the retail pharmacy structure and has coincided with a turnaround in the decline in pharmacy numbers since 2000 and a growth in average turnover from €1.2 million p.a. to €1.7 million p.a. over the same period. Also as a result Germany has the second highest share of branch pharmacies in Europe behind the United Kingdom.

Figure1: Location of Pharmacies in Virtual Retail Pharmacy Chains and Wholly owned Multiple Pharmacies – 18 European Markets 2010

Country

Location of Virtual Chains Members
(based on % of 35,000 pharmacies defined as members of virtual chains)

Location Wholly owned Branches(based on % of 19,000 pharmacies defined as branches)

% Total Pharmacies
(based on % of 128,000 pharmacies in the study)

Belgium

0.6

6.0

4.0

France

37.9

0.0

17.5

Germany

39.5

14.8*

16.9

Hungary

1.4

4.2

1.9

Italy

1.1

1.1**

13.7

Netherlands

1.4

2.8

1.5

Switzerland

2.1

1.8

1.3

UK

8.7

52.9

10.3

Poland

5.6

6.0

9.8

Nordic

0.2

7.1

2.1

Others

1.5

3.3

21.0

Total

100.0

100.0

100.0

*Limited to 4 pharmacies
**Mostly municipal
Source: © James Dudley Management – OTC Distribution in Europe the 2010 Edition

Across Europe the main distributors, Celesio, Alliance Boots, Phoenix, Mediq and others are setting up pharmacy chains in States where third party ownership is permitted. Yet a bigger perceived threat is from the major international druggist chains such as DM, A.S. Watson, Schlecker and Rossman. The British supermarket chain Tesco is expanding its retail healthcare offer across CEE and Leclerc and Auchan are among French hypermarket operators eying up the European retail pharmacy sector.

Given the hostility to the formation of retail pharmacy multiples by lobby groups who represent the independent sector the question has to asked as to why over a quarter of pharmacies in Europe’s main markets are members of voluntary trading groups or virtual pharmacy chains. What is more 77% of European pharmacies in voluntary chains are found in France and Germany. The answer is the retail pharmacy sector needs chains to survive and virtual chains provide the means of developing them particularly where legal restrictions on wholly owned chains persist.

“35,500 pharmacies representing over a quarter of all pharmacies in our 18 European States Distribution Study are affiliated to voluntary groups or ‘virtual pharmacy chains’. We concluded that in highly competitive markets such as France and Germany pharmacies need chains to survive economically despite the rhetoric from some pharmacists’ trade associations”, says James W. Dudley, author of “OTC Distribution in Europe”.

While the retail pharmacy plays a vital role in providing a dispensing network for prescription medicines, commercial prosperity is derived increasingly from retailing of non-reimbursable medicines, medical devices and related health and beauty merchandise. The pharmacy channel faces diminishing returns from fulfilling its public health dispensing function and at the same time is facing increasing competition from mail order and competing non-pharmacy channels. Hence, clusters of independent retail pharmacies are more likely to form into voluntary groupings especially where there is an absence of wholly owned chains and where competition is having an impact on the sector.

These pharmacy groupings, described as virtual chains or symbol groups, can reinforce their competitive positions through innovation more effectively than by individual independent business owners. Examples are: Internet portals, loyalty cards, home delivery, diagnostic services, health clubs and magazines and the communication of a host of patient offers available from members’ branches.

The idea of independent pharmacies grouping together for collective buying is not new. By clubbing together pharmacies can place larger orders from suppliers for bulk purchase items than they could on their own and as a result can leverage better discounts from suppliers. To do this there needs to be collaboration and agreements on the brands and products to be purchased. The more commonality the greater the buying efficiency is achieved.

What is relatively new to most parts of Europe is the grouping of pharmacies around a principal pharmaceutical wholesaler or a trading company to form ‘virtual’ chains or voluntary trading organisations (VTO’s).

Increasingly the main international wholesalers Celesio, Phoenix, Alliance Boots and Mediq are recognising the competitive advantages of sponsoring virtual pharmacy chains for their own businesses and are assuming leadership behind this form of retail grouping. What is more, their voluntary groupings are becoming Europe-wide entities. At national levels major players such as Anzag in Germany, Galenica in Switzerland, Hungaropharma in Hungary and Polska Grupa Farmaceutyczna in Poland have build large affiliate memberships into virtual chains.

Such groupings are evolving into branded pharmacy retailers with the sponsoring organisations acting in much the same way as the head office of a wholly owned retail chain. The central roles of procurement, marketing, advertising, promotions, merchandising layouts, training and Internet portal development combine to provide the ‘virtual’ organisation with much the same advantages as those of wholly owned pharmacy chains while each member remains relatively independent.

“The traditional view has been that the greater the levels to which pharmacy groups achieve both a cohesive brand offer and buyer power, the more they can influence market share and supplier terms. This indeed is true in part. But in an ever increasingly competitive environment innovation and brand renewal are also critical success factors. Hence, in successful pharmacy groups innovation, marketing cohesiveness and buyer power are harnessed to improve profitability, consumer and patient loyalty and the overall competitiveness of the brand”, says James Dudley.

Country

Group

Sponsor/owner

Baltic States

Apteek

Phoenix

France

Pharmactive

Celesio/OCP

 

Alphega

Alliance Boots

Germany

Commitment /DocMorris*

Celesio

 

MVDA/Linda & Midas

Phoenix

 

Meine Apotheke
EMK**

Sanacorp

 

Vivesco

Anzag

 

Parmapharm

Independent co-operative

Hungary

Gyöngy

Hungaropharma

Italy

Alphega

Alliance Boots

 

SPEM

Phoenix

Netherlands

Mediq

Mediq

 

Kring

Alliance Boots

Norway

Selmos Valstine

Phoenix

Poland

I Care for My Health

Polska Grupa Farmaceutyczna sa

Spain

Alphega

Alliance Boots

Sweden

Boots

Farmacevtföretagarna (Alliance Boots and Sveriges Farmacevtförbund)

Switzerland

Winconcept/Amavita

Galenica

UK

Numark

Phoenix

 

Alphega

Alliance Boots/ Unichem

* Acquired 2007
**Acquired 2009
Source: © James Dudley Management – OTC Distribution in Europe the 2010 Edition

In theory virtual pharmacy chains behave in much the same way as wholly owned multiples i.e.: -

  • Assortment listing criteria based on fast moving strong brands at the cost of slow moving lines and minor brands
  • The quality of retail outlets in terms of branding, fascia, size, furnishings and merchandising control
  • Building of a loyal consumer franchise around a recognised brand through promotions, store cards and services at the cost of more weakly competing independents
  • Demands for discounts and deals based on buying power
  • Demands upon suppliers to demonstrate marketing commitment, in terms of promotional expenditure
  • The development of ‘own’ or ‘private label ’ brands to compete with those of their suppliers
  • The development of computerised logistics and inventory management

There are however problems. Some so called virtual pharmacy chains while striving to provide the dual advantages of the flexibility of independence and the strengths of a group but have few mechanisms in place to maintain the discipline. Hence, individual pharmacists may be members of a number of chains and merely ‘cherry pick’ offers and promotions. Furthermore, some wholesaler sponsors seem to have been keener to sign up members than to integrate them into a fully formatted branded concept.

This often leads to frustration when dealing with virtual pharmacy chains in that it is difficult to make promotional offers stick or stock planning targets work.

End

For further information call James Dudley Management telephone ++44 (0) 1562 747705 email information@james-dudley.co.uk websitewww.jamesdudley.info

  1. The OTC Distribution in Europe report covers 18 European  States: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Netherlands, Norway, Poland, Slovakia, Slovenia, Spain, Sweden, Switzerland and the United Kingdom

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