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Pharma retailers shifting to organised sector

March 17, 2008

THE pharmaceutical retailing business in India has traditionally been dominated by small-time dispensers of medicines, operating out of tiny shops. As in the case of the grocery retailing sector, it is dominated by unorganised players.

There are over 800,000 pharma retailers in the unorganised sector spread across the country. Though they are a dispersed lot, in many states and cities pharma retailers constitute a powerful lobby, who thanks to their close-knit trade associations are able to enter into collective bargaining with drug manufacturers.

In the past, powerful bodies representing pharmacies have crossed swords with multinational and domestic Indian drug producers, demanding higher commissions. Companies that failed to jack up the commissions faced widespread boycott of their products and drugs.

Many of the pharmacies, besides selling medicines, also hawk cosmetics and other related products, where the margins are higher. Thanks to the clout of the retailers, they have been able to dictate terms to multinationals, domestic giants and new entrants.

While pharmaceutical majors have shied from engaging in a direct fight with the retailers, many have complained that smaller retailers, especially in semi-urban and rural areas, also peddle counterfeit products, eating into the revenues of the established manufacturers.

For instance, it is not uncommon to come across petroleum jelly products marketed under brands like Vasiline or Veselin at pharmacies in most non-metro cities in India; when a consumers asks for Vaseline, the international brand, the retailer will inevitably pass off the duplicate – which is packaged almost like the original. Likewise, toothpastes with names like Colgette or College – with the familiar Colgate colours – are also passed off to consumers in ‘less sophisticated’ markets by retailers.

While many of the multinationals and Indian fast moving consumer goods (FMCG) manufacturers launch crackdowns on the sale of such bogus products, it is difficult to sustain the campaigns, as it works out to be prohibitively expensive.

Passing off fake petroleum jellies or toothpastes may appear to be a harmless activity, but selling counterfeit medicines is a serious offence that can endanger the lives of patients. Unfortunately, in many smaller cities and villages across India, it is not uncommon to come across such products.

Most local food and drugs administration bodies and the police also ignore the marketing of such fake drugs, till such time a disaster occurs, when there is a temporary crackdown. But the hefty commissions that the drug manufacturer from the unorganised sector offers the retailer tempt many to stock such medicines and sell it to less affluent and illiterate consumers.

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BUT the pharma retailing sector is also witnessing major changes in India. Leading Indian business groups, hospital chains, pharmaceutical majors and even international retailers are entering the $6 billion pharma retailing sector, which is growing at a frenetic pace.

The global pharmaceutical industry itself is undergoing major changes and established manufacturers are facing enormous challenges with the expiry of patents on most of the blockbuster drugs. Retail margins are huge – between 15 and 30 per cent.

While branded drugs fetch the retailer about 15 per cent commission, generic-drug manufacturers give hefty ones ranging from 20 to 30 per cent.

More importantly, according to pharmaceutical industry sources, future blockbuster drugs – those that manage to fetch revenues of over a billion dollars – will be bio-technology based ones, requiring special facilities for transportation and storage. In fact, nine out of 10 blockbuster drugs in the future will be bio-tech based ones.

A majority of the over three-quarter million pharmacies in India do not have facilities to stock such drugs. Even the few that have refrigerators in major cities do not have power back-ups; in case of power outages – which occur daily across the country – the medicines would obviously lose their effectiveness.

Investing in refrigeration units, power back-ups and other facilities costs a lot of money, which most of the unorganised sector players can ill-afford. Organised retailers thus see tremendous opportunities for growth in India.

According to Technopak Advisors, an international retail sector consultancy, the share of organised retailing in the pharmaceutical sector will more than double over the next two to three years. While the total retail pharmacy market is expected to grow at about 15per cent annually, organised sector pharma retailing is likely to expand at almost 40 per cent.

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INDIA’S top business groups, including the Mukesh Ambani-controlled Reliance Industries, the Aditya Birla group, the Futures group, and Alliance Boots from the UK, are among those firming up plans to make a foray into the rapidly expanding sector.

Other international retailers are also waiting for the government to spell out its policies relating to foreign direct investment (FDI) in retailing. While the government is keen to open up retailing to 100 per cent FDI, there is stiff opposition from the Left parties and even the Bharatiya Janata Party (BJP).

But the rules have been modified somewhat, allowing 100 per cent FDI for single-brand foreign retailers. Some of the international pharma retailers are planning to enter India through this route.

The Reliance group has embarked on a multi-billion-dollar retail foray, which includes – besides general retailing – specialised segments, including pharma, jewellery and footwear. The group plans to set up a chain of 1,200 Retail Wellness outlets across India in the initial phase. The outlets will market, besides medicines, health food and personal care products as well.

The Aditya Birla group, which has also set up its More brand of supermarkets, will also house pharmacies within its store format. The Future group, which operates the Big Bazaar and Food Bazaar brand of retail outlets, will launch Medicine Bazaars all over India.

Subiksha, a south India-based grocery retailer, has also set up ‘shop-in-shop’ outlets to market drugs. It also offers discounts on generic drugs, triggering off a rate war in the business.

Domestic pharmaceutical companies are also making ambitious forays into the retailing sector. Ranbaxy Laboratories, India’s leading drug manufacturer, launched Fortis HealthWorld last year. It plans to set up a chain of 1,000 stores over the next four years at a cost of over $200 million.

Dabur India, a leading drug-maker, plans to open over 150 drug stores over the next two years, while Himalaya Drug Company – a maker of Ayurvedic medicines – plans to open nearly 200 outlets in two years. Other smaller drug companies have also entered the retailing business. They include Zydus Cadila (with its Dial for Health brand),

Corporate hospitals are also firming up their plans in the pharma retailing sector. Some have already set up a chain of pharmacies and plan to expand the network. Apollo Pharmacy, part of the Apollo Hospitals group, plans to expand its retail chain from 200 to 700 over the next few months. By next year, it will be having 1,500 pharmaceutical retailing outlets across India.

International pharma retailer Medicine Shoppe has already started operations and has set up a chain of 100 speciality stores. The company is part of the $75 billion international healthcare major Cardinal Health Inc. Medicine Shoppe India plans to operate over 700 outlets within two years in India.

Other new entrants to pharma retailing include Guardian Pharmacy, LifeKen, 98.4 degrees, Care & Cure, Planet Health and MedPlus.

Many of the new entrants offer a wide range of healthcare related services, including medical insurance policies, diagnostic services, clinical laboratories and collection centres. They also offer services like free home delivery of medicines, 24-hour counters, loyalty programmes, help-lines and reminder services for patients. Health camps, newsletters and even retailing of health related books are other features that some of the new entrants are offering.

The world of pharma retailing in India is indeed undergoing dramatic changes. Many of the unorganised players are also coming together to take o the challenge posed by the new entrants.