According to the new rating of leading pharmacy chains in Russia in the 1st half of 2016, published by the rating agency RNS Pharma, our company is moving confidently towards the top: we are now ranked third among all largest pharmacy associations.
Pharmaceutical market dynamics (2014-2016). Expert opinion
Russian market in general is still subject to financial crisis, which consequently affects small pharmaceutical businesses as well.
What did the executives of large local pharmacy chains of the Northwest Federal District have to say on the matter by the end of 2015 and the first half of 2016?
Here is a brief summary of interview-obtained opinions voiced by directors or heads of marketing departments of all the major players in the local pharmaceutical market - members of our association in the Northwest Federal District.
Sure enough, the main concern lies in the decrease of purchasing power of the population and the price increase of pharmaceutical assortment goods, including vital and essential drugs (VED). All interviewers noted the price rise of about 20%, while consumer demand has dropped by about 10%. People now only go to the pharmacy when absolutely necessary.
Pharmacy chains associate the price rise with manufacturers increasing their price, and, consequently, distributors doing the same. However, many discounter pharmacies (low-price pharmacies) had to reduce the margin by 2-3% so that their revenue would remain at least at the 2014 level. The amount of customers decreased by 5-10%, but at the same time, the average check changed in different ways. Some fell by 15-20%, and some grew by 5-10%. People only purchase necessary goods and prefer cheaper brands. In general, this leads to profitability decrease for small pharmaceutical businesses and creates favorable conditions for increasing the market share of large retail chains.
Pharmaceutical business is one of the most regulated. Therefore, to evaluate changes in the pharmaceutical market, it is important to understand how much has the legislative burden changed. In terms of the government regulation of the pharmaceutical business, the executives state the constantly expanding required drugs list which puts pharmacies under more pressure. Not every company is eager to maintain it, as many drugs included in the list remain unclaimed until the expiry date, which causes additional expenses for pharmacies.
Interestingly, pharmacy chains are willing to purchase domestic products instead of imported goods in case Russian manufacturers will invest money and effort in an effective promotion of these products to create a solid consumer demand. As noted by majority of respondents, pharmacies prefer demanded goods, but not every domestic company can create a high demand for its products.
But what mechanisms create product demand?
According to those surveyed, we can distinguish "1 + 1" promotions directed toward the final consumer among the most effective tools. It is particularly effective in cases where it’s possible to replace one drug with another. Another profitable promotion methods include marketing contracts and TV advertising.
All respondents stated that the competition in the pharmaceutical field has become even more intense, mainly due to the aggressive policy of the countrywide pharmacy chains. They are increasing their footprint by absorbing local players or forcing them out of the market. Another difficulty for small pharmaceutical businesses is that federal pharmacy chains allow themselves to set the price on cost price level for some drugs, run special campaigns together with manufacturers or even operate at a loss in order to tie the buyer to their chain instead of local pharmacy chains, where the same product is sold with a standard retail margin. As a result, the local players’ sales drop significantly and many products freeze their current assets or turn into additional costs after the product expires.
Pharmacy chains’ heads aren’t very optimistic about current year. However, there is a common understanding that it will be difficult but not catastrophic. There also were some issues on which opinions were divided among the leaders of small pharmaceutical business.
Some believe that this year’s sales will fall by 10% in physical terms (packages), but will remain the same in terms of money.
Others predict an increase in sales and customers by 10%.
The common belief is that the amount of pharmacies will continue to grow by federal pharmacy chains opening new outlets, by mergers and takeovers. The competition will become tougher, and it will get increasingly more difficult for local players to stay afloat.
The change dynamics as shown in diagram: