Retail Outlook – Prescription Sales Dry Up
Retail sales of prescription drugs slowed to their lowest increase in 47 years in 2008; prescription sales grew 1.3% to $291 billion. In 2007, sales were up 3.8% while 2006 showed an 8% increase in sales. There are many reasons we have seen prescription sales dry up, but the number one reason is definitely the state of the economy.
Also, after a brand name drug’s patent expires, a generic can be created and push the price down as much as 90%. Many of these generics are also available over the counter (OTC). With the troubled economy, patients are much less likely to pay the extra money for brand name drugs; they are much more likely to get an OTC or generic.
Prescription retailers Walgreens, CVS and Rite Aid has seen the effects of this recession. When looking at this stock chart, we see that CVS and Walgreens are down 33% and 37% respectively since January of 2007. Rite Aid continues to tetter on the brink of bankruptcy as their stock price has fallen 87% in the same time period. You may say that being down 33% and 37% since the beginning of 2007 is not that bad when compared to many other companies, especially the banks and financial institutions.
That is correct, but these companies are supposed to be recession proof as they provide necessities such as prescriptions, toothpaste, tissues, laundry detergent and canned food among other staple merchandise. This makes perfect sense as Americans are scaling back and only buying these staple products. The problem is that Americans are cutting back so much that they are buying even less of these staples. They are cutting pills in half and only buying sale and coupon items.
Working in retail, I see first hand just how much people are trying to save. Many times, I will see a transaction in which an item is rung up for $4.99. The customer then uses a $2.00 coupon from the Sunday newspaper. The customer also uses one of the coupons they got directly from the retailer from a previous purchase. Common instances of this are “Save $3 on your next purchase with a $20 purchase.” Individuals are saving these up and getting items free in the future. In essence, that $4.99 item is getting sold for mere pennies which goes towards taxes. Obviously, prescription retailers are making no money off these purchases.
On the pharmacy side, each retailer offers $25 for a transferred prescription. Once again, consumers are finding a way to get free items. This time, they will transfer one of their prescriptions from Rite to CVS and get the free $25. They then use the free $25 and coupons they have saved at other pharmacy retailers. After the prescription has been filled, they then transfer it from CVS to Walgreens and get another $25. Just imagine if you have 10 prescriptions for three family members. You can add up money quite quickly by doing this.
Unforunately, customers are getting away with this as customer service is a HUGE push for these companies right now. They are willing to do whatever the customer wants to get them in their doors. Ultimately, this is going to cause their stock prices to decline even further as they cannot make money by giving away merchandise and prescriptions for free. Until these retailers realize that the customer is not “always” right, they are going to struggle to profit in this economy.
There is no way I would be an investor in any retail pharmacy at this time. They are doing their best to turn things around by giving great customer service, but it is coming back to bite them. Too many people have learned to screw the system which results in lost money for these companies. When the economy turns around and the unemployment rate declines, we could see a bounce in this sector, but until then, Americans will continue to find a way to save money and pay little to nothing at these retailers.
Each Thursday I will provide a retail outlook so make sure to bookmark the page below and return for a direct prespective of the retail industry.