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Price Competition in a Falling Price Environment

by Donald Potter

The fight is on in retail pharmacy. It started with Wal-Mart. In 2006, Wal-Mart introduced a $4 generic prescription for a one month supply of hundreds of unbranded drugs. This move attracted a lot of buzz and new customer volume.

There are three major players in the retail drug prescription business: Walgreen, CVS and Rite Aid. Each of these companies have responded with their own drug plan. Walgreen started its Prescription Savings Club, which provides discounts on generics and five thousand branded medications, and rebates on Walgreen-branded products. CVS introduced a ninety-day supply of more than four hundred generic drugs for $9.99, and a 10% discount at the company’s store-based clinics. Rite Aid rolled out a national program offering a prescription savings card covering hundreds of generic drugs at $8.99 for a thirty-day supply, or $15.99 for a ninety-day supply, plus discounts on branded drugs. All three of these major pharmacy competitors claimed that their programs have attracted new business to their drug stores. Still, they are feeling more margin pressure in what used to be a very profitable business.

It is worth noting several observations about this market evolution:

Wal-Mart, as the leader, started the discounting program. This is unusual. Most market leaders would rather sit on profits from high prices than discount to attract more customers. In Wal-Mart’s case, however, the additional customers it attracts from monthly prescriptions brings with it other purchases.

All three of the major players focused their sales efforts on customers who could buy a large number of pills at one time. The pricing the companies offered were “bundled” products, containing thirty or ninety day supplies, more than the average prescription would normally cover.

None of the three major players matched Wal-Mart’s low price. These companies believe that they can charge a premium for their more convenient locations.

Products and prices vary among the three largest competitors. This is an industry where comparison shopping is still developing. Most customers buy locally and do not spend a great deal of time trying to fine tune the price they pay by going shopping at numerous competitors.

All the three major competitors gained volume in this business. The losers, from a volume point of view, have been the independent pharmacies and the regional drug store chains. Most of these share-losing companies did not go along with the low prices for bundled generic products.

These pricing battles are taking place in the uninsured customer market. The insured customers tend to purchase through mail-order programs, such as those offered by Caremark, Medco and Express Scripts, where prices are already lower.