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Over-the-Counter Products Become More Important to Independent Pharmacy Profits

Independent pharmacies make up 38% of all pharmacies in the U.S. with a total of 23,106 stores in 2011.  Sales of prescription medications, over-the-counter medications, and all other items sold in the front of the house totaled $88.5 billion in 2011.  Many independent pharmacies survive in today’s highly competitive marketplace because of the convenience of their locations and their strong customer relationships. An interesting emerging trend reveals that shoppers are buying more of their over-the-counter (OTC) products from independent pharmacies than ever before. Hamacher Resource Group (HRG) and the Healthcare Distribution Management Association (HDMA) recently conducted an in-depth study on the relationship between OTC medications and independent pharmacies’ bottom lines. The results show that, generally, OTC products are making an ever larger contribution towards the independent pharmacy’s profit margin.

Independent pharmacies have traditionally relied on prescription sales as their primary income channel. However, the 2012 National Community Pharmacists Association (NCPA) digest indicates per prescription profit is decreasing in these drug stores. As Adam Fein of Drug Channels points out, the gross margin on prescriptions was 22.1% in 2011, down from 23.3% in 2010. This reversed the 2006 through 2009 trend where prescription gross profit margins rose from  21.5% to 23.4%. Less expensive generics are climbing slowly and steadily to the top of consumers’ shopping lists while brand-names are seeing movement in the opposite direction. Consistent with such trends, OTC products are gaining more recognition amongst shoppers.

According to the 2013 HRG/HDMA report entitled “Independent Pharmacy Shoppers: Who, What, and  Why?”, between 2009 and 2010, the six most popular OTC categories (cold & allergy, pain relief, first aid / wound care, digestive health, vitamins/supplements, and home health care) were identified as the key drivers for generating the most revenue growth for independent pharmacies. Independents saw higher OTC sales growth than chains in the first aid, eye / ear care, sun care, smoking deterrent, and foot care categories. The general message is that consumers tend to favor independent community pharmacies over chain stores for medicinal or clinical-type purchases. Demographically, shoppers over 75 years old lean more towards independent pharmacies to fill their OTC needs. The table below illustrates category growth for independent pharmacies.

Category

Sales Change $ Sales Growth % Market Share Increase
First Aid

$12 million

+16.45%

N/A

Eye/Ear Care

$6.53 million

+10.71%

2010=9%

2009=8%

Sun Care

$0.85 million

+10.71%

N/A

Smoking Deterrents $2.93 million + 8.34%

2010=9%

2009=8%

Foot Care

N/A -0.75%

2010=5%

2009=4%

Source: HRG/HDMA 

Seventy-three percent of the pharmacists surveyed stated that their front-end business was either growing or was level with the previous year. Higher OTC and personal care item sales were due in part to increased frequency of shopping trips. Overall, prescription sales averaged 81% of an independent pharmacy’s business, with OTC and personal care items accounting for 11% and general merchandise making up the final 8%. However, with the average front-end product gross profit margin of 38%, the importance of this segment of the independent pharmacy business will only increase.