Business should be good next year, but you should proceed with caution. That’s the somewhat mixed message drug chain executives are sending this year.
Responding to Drug Topics’ annual “Business Outlook” survey, 78% of chain executives said they expected the coming business year to be good to excellent–exactly the same proportion who felt that way in last year’s survey. Even more encouraging, not a single one of our respondents rated the outlook for 1988 as “poor.”
Nor did they appear to be shaken by the rumblings on Wall St. Although our survey was taken before the stock market crash of Oct. 19, few of our respondents appear, to be having second thoughts. Ten of the executives in our survey were contacted a second time and offered a chance to change their vote. The results? Nine were firmly sticking to their guns; only one modified his forecast, from a “very good” year to merely a “good” one (see box, page 43).
Fewer openings: Nevertheless, despite the overall confidence, chains seem more concerned about competitive pressures than ever, and perhaps more cautious. Significantly, fewer chain executives this year said they plan to open new stores in the coming year.
Most respondents in our September survey mentioned strong sales figures and a generally strong economy as the reason for their optimism. “It’s a good climate for business,” said the CEO of a small Eastern chain. Many believed the economy is either stable or growing and were cheered by high employment and relatively low inflation and interest rates. A number of executives also mentioned the boost in the economy that an election year usually brings. “Congress and the administration want to make things look good,” said a Midwest executive.
A few took a more jaundiced view of the coming year. A manager of a small Eastern chain who rated prospects for the coming year as “good” did so for cynical reasons: “Our deflated dollar and national deficit will continue the false prosperity,” he predicted ominously.
Some 22% of our respondents rated the business outlook as merely “fair.” A few of our pessimists were mistrustful of the whole business climate. The CEO of a small Southern chain, for example, predicted a recession that would find stores overstocked and merchandise overpriced.
Most of the pessimists, however, were more concerned with the competitive pressures of an increasingly mature drugstore industry. The president of a fairly large chain in the South and midwest predicted that mature stores would see growth of only 3% or 4%. Competition from nondrugstore sources such as mail order and physician dispensing were mentioned more frequently this year than ever before.
Variables: As always, local factors played a large part in determining whether a chain’s expectations were high or low, perhaps widening the gap between successful and unsuccessful chains.
The local economy loomed large in many executives’ calculations. In South Dakota, a small-chain manager was optimistic, based upon the low unemployment and improving agricultural picture in his region. In contrast, a Midwest executive called the local farm economy “very unstable” and rated the coming year as “fair.” An executive in a chain situated in the oil patch was encouraged by recent drilling and expected a good year. Meanwhile, the president of a small Southern chain in the “somewhat depressed” coal-producing region thought business would be only “fair.”
Regional patterns were also discernible (see map below). The prosperous East, for instance, was even more optimistic than last year, while the West–last year’s most confident chains–registered a drop in expectations. The outlook in the Southern chains has brightened considerably over last year, and the Midwest improved somewhat–although it still has the least confidence of any region.
Another variable–and a more important one than ever–was third-party contracts. Clearly, the trend toward managed care is a double-edged sword, profitable for some and disastrous for others. Several executives who rated business prospects as “very good” mentioned favorable contracts with third parties, particularly with health maintenance organizations that were expected to increase in membership.
On the other hand, some of the more pessimistic executives mentioned being shut out of closed HMO contracts or not being able to turn a profit on the ones they were in. “HMOs, preferred provider organizations, and third-party vendors have reduced the gross profit too dramatically,” said the president of a Southern chain.
Winners and losers: In the cautious optimism that prevailed in most quarters, it was pharmaceuticals that were expected to keep bottom lines in the black. Some 59% of our executives expected Rx drugs, especially generics, to be the leading gainer for the coming year. OTC drugs were the next most frequently mentioned category (13%), and there was a special interest in condoms and birth control products.
Emphasis on health care was apparent in the 11% of respondents who predicted home health care would be the fastest-growing category this year (although there was less enthusiasm for home health care than last year, when 18% of the chains expected it to boom). Alternate profit centers were not forgotten; HBAs, eye care, cards, and video rentals each had some strong boosters.
Ad for the “dogs” of the coming season, tobacco and cosmetics split the honors with 16% each, reflecting on the one hand an increased awareness of the dangers of smoking and, on the other, increased competition from nondrugstore sources. HBAs took second place, with prescription drugs, OTCs, and sundries each garnering a handful of doubters.
Bottoms up: Confidence in the economy is reflected in the chains’ expectations that sales will go up (76%) or remain the same (18%). Although slightly fewer chains than last year predicted a growth in sales, the average advance predicted by those who were optimistic (8.4%) was about 1% higher than last year’s prediction. Only 6% of our executives expect sales in their stores to dip this year.
On the other hand, costs were also expected to increase, with exactly the same number of executives predicting a rise as in last year’s survey (68%). The average increase forecast was almost 5%.
Some 21% of our respondents expected to keep operating expenses about the same, and 11% optimistically planned on reducing costs. One place the chains won’t be cutting costs, though, is in pharmacists salaries. The good new for pharmacists is that 91% of the chains expect pharmacists’ wages to rise. How much? The average advance was pegged at 5%.
As for the bottom line, 58% expect to see an increase in profits, down slightly from last year, and they were predicting an average advance of 6.1% (again, down a bit from last year). Some 27% expect profits to remain stable, and 15% are predicting a loss.
Despite the generally cheerful pattern that the numbers show, executives are expressing more concern about competitive pressures than ever. Perhaps because of this, fewer chains than last year see the present as a good time for expansion. The number of executives planning to open new stores dropped 10% this year (from 52% last year to 42%), with more than half of the chains in our survey expressing no interest in seeing their store count expand.
Once again, however, the gap between prosperous and marginal chains may be more glaring this year. Many of the chains that are opening stores this year have ambitious plans. (The average number of projected stores this year is four, as opposed to three last year.) Among the eight largest chains in our survey (those with more than 100 stores), seven were planning to expand, with anywhere from five to 60 new stores in the works. About three-quarters of the projected new stores will be traditional drugstores.
The challengers: The biggest challenge facing the chains is clearly competition. Who are the chains most worried about? The deep-discounters? The new “hyper” markets? Supermarket combos? Surprisingly, mail-order pharmacy, which was only fourth last year, was the competitor most often mentioned, with almost 30% of the executives singling it out. The chain executives would dearly like to pass legislation to curb the ability of such operators to cross state lines.
The next biggest competitive headache for chain executives is the HMO and PPO business they are losing out on (mentioned by 26%) and reimbursement worries from plans they work with (16%). Many mentioned aggressively negotiating for third-party contracts as a goal for the coming year. Others, hurting from closed contracts, would like to see legislation forbidding such arrangements.
As always, competition from deep-discounters and other chain competitors is a fact of life for drugstore chains, with 21% of our executives listing this problem.
One problem apparently on the rise is a shortage of personnel, mentioned by 19%. Labor problems seem particularly acute in the East. “Our biggest headache is getting qualified help for all facets of the drugstore–pharmacists, managers, and clerks,” said the CEO of a small EAstern chain. “We’re competing for entry-level personnel with fast-food chains,” said another Eastern executive.
Larger chains are feeling the pinch as well. “We need an available, qualified work force,” said the CEO of a big chain in the East and South.
The chains are particularly hurting behind the pharmacy counters. “There are too many pharmacies and not enough pharmacists,” said the vice president of a large chain in the East. Other regions feel the pinch too. “Our biggest challenge is finding pharmacists to operate the stores,” the president of a chain in the South said. The only solution proposed was active recruiting and “staying on top of the problem.”
Another headache that’s getting worse is M.D. dispensing. Last year this newest form of competition barely made the list of challenger; this year it was mentioned by 15% of our respondents, nosing past supermarket chains (9.5%). As with mail-order, chains are looking to their legislatures for a possible solution to this one.
Failing new laws to squelch the competition, chain executives would like to see a greater emphasis on customer service to increase consumer satisfaction. A return to basics and the drugstore’s health-care image were also recommended, with specific suggestions such as promoting patient self-testing and working with nursing homes.
Reform worries: When asked what was the greatest problem they foresaw in their own area next year, almost two out of three executives (63%) picked cuts in third-party reimbursement. Although third-party blues are always popular, this year’s special nervousness might be due to uncertainty over the course of the new Medicaid “reforms,” which went into effect on Oct 29. When asked specifically about these reforms, many executives either didn’t know how their business would be affected or expected cuts in profits.
“It will be detrimental to pharmacy, because most states do not understand that the difference between average wholesale price and net acquisition has always been a part of the pharmacy’s ‘fee.’ Most states will choose to treat this as a discount and not increase the ‘fee,’ thus making it unprofitable to fill welfare prescriptions,” said the vice president of operations of a large national chain. The president of a small Eastern chain was equally pessimistic about the state’s new freedom to pursue “innovative” payment schemes: “Is ‘innovative’ Reagan double-speak for ‘lower?” he asked.
Clearly, the chains expect more hassles–and more paperwork–in dealing with new state regulations. The effect, said the director of operations of a large chain in the East, will be “no change in Rx volume, an increase in headaches, and a decrease in third-party collections.” Many respondents also predicted an increase in the use of generics, as hard-pressed pharmacies try to turn a profit from the state plans.
As for other problems facing them in their own operating areas, our chain executives had no shortage of laments (particularly as we invited them to choose more than one answer). Besides the 63% who chose cuts in third-party reimbursement, 54% expect to figh competition from in-house HMOs, 49% said they were battling competition from other drugstores, 47% saw M.D. dispensing as a threat, 45% were worried about the shortage of a good employee pool, and 31% were facing tough competition from hospitals.
With so many headaches within the drugstore industry, the overall economic picture was not a major concern. Only 19% believed–at that time–that a worsening economy would be their major problem this year.
Source Citation (MLA 7th Edition)
Weiss, Barbara. “Drug Topics finds chains optimistic – up to a point.” Drug Topics 14 Dec. 1987: 40+. General OneFile. Web. 23 Mar. 2015.