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China News Service, August 14 (Wang Yuling) Over the past 20 years, the pharmacy industry has experienced a round of rapid expansion.

"According to incomplete statistics, currently (2001) the number of directly-operated chain retail stores has exceeded 100. The largest chain drugstore has a retail sales of nearly 300 million yuan." Wang Jinxia, ​​a senior economist at the China Pharmaceutical Commerce Association, analyzed the scale of drugstores at the time in an article published in the academic journal "Pharmaceutical Guide" in 2001.

So far, China's top four drugstore chains, Dasanlin, Laobaixing, Yifeng Pharmacy, and Yixintang, have all entered the 10,000-store era, with sales exceeding 10 billion yuan in 2023. According to a report made by Liao Honghui, general manager of Zhongkang Technology's commercial data division at the 17th Health Industry Ecosystem Conference - 2024 Xipu Conference, by the second quarter of 2024, the number of retail drugstores in China will exceed 700,000.

The rapid development of the pharmacy industry is closely related to medical insurance policies.

In 1998, the State Council made it clear that basic medical insurance would be managed by designated medical institutions and designated pharmacies. In addition, China began to implement the "separation of medical care from pharmacy" in the early 2000s, cutting off the direct economic interest connection between medical institutions and drug marketing. The institutional reform and the implementation of the separation of medical care and pharmacy provided policy opportunities for the development of retail pharmacies.

At present, under the influence of a series of policies and internal and external environments, such as the reform of individual medical insurance accounts, the price comparison system of pharmacies in various places, on-site inspections of medical insurance funds, and the connection of medical insurance payments in online pharmacies, the development direction of the pharmacy industry has become a common concern of the guests attending the SIP Conference.

　　Mergers and acquisitions in the pharmacy industry may accelerate

"According to the forecast of Zhongkang Industry Research Institute, the growth rate of all terminal pharmaceuticals in 2024 is expected to drop to 4.9%. The operating environment of physical pharmacies is becoming increasingly severe. The annual growth rate of pharmaceutical categories is expected to be only 2.9%, and the growth rate of B2C (business-to-consumer) market has also narrowed to 6%. All categories, including non-drugs, have basically stopped growing." Wu Han, chairman of the SIP Conference and chairman of Zhongkang Technology, said in an interview with the media.

The reasons behind the decline in pharmacy revenue growth are complex.

Liao Honghui said that since 2023, many places have introduced a series of policies such as special rectification to combat insurance fraud and special price governance to accelerate the standardization of retail, including the launch of pharmacy price comparison systems in various places, and local areas have begun special operations to govern drug prices.

China Business Network noted that the so-called pharmacy price comparison system is a measure promoted and implemented by the government to achieve openness and transparency in drug prices and for the government to guide designated pharmacies to set reasonable prices.

Taking Hainan Province as an example, in July 2024, Hainan Province launched a drug price comparison system for designated retail pharmacies, which connects 308 designated retail pharmacies in the province. Through mobile phones, people can query and compare drug prices of different pharmacies in real time, check the location of pharmacies, and then choose the best pharmacy for offline purchase.

What has a more far-reaching impact on pharmacies is the implementation of the individual medical insurance account reform in China.

According to the real-world purchasing behavior data of Zhongkang Retail Pharmacy, from 2019 to 2023, the contribution of personal accounts in retail pharmacies across the country exceeded 40%. Until 2023, the contribution rate of personal accounts was still as high as 45.8%.However, with the implementation of individual account reform across the country, the unified fund pool has been strengthened on the fundraising side, but the personal account funding pool has narrowed, and the amount of personal account income has been greatly reduced. Drugs and pharmacies that are highly dependent on personal account payments are facing challenges. The accumulated balance amount of personal accounts is expected to reach a downward turning point in 2024.

China Business Network noted that according to the "Statistical Bulletin on the Development of National Medical Insurance in 2023" released by the National Healthcare Security Administration in July, it was mentioned that in 2023, the personal account income of employees' medical insurance was 635.135 billion yuan, the personal account expenditure was 609.795 billion yuan, the current balance of personal accounts was 25.339 billion yuan, and the cumulative balance was 1,395.421 billion yuan.

Liao Honghui said that due to factors such as outpatient mutual aid diversion and personal account payment capabilities, Zhongkang data showedIn 2024, the customer flow of retail pharmacies across the country has shown a downward trend since March. At the same time, the average customer spending, average product spending, and number of customer products are all lower than the same period in 2023.From January to May 2024, the market size of both pharmaceutical and non-pharmaceutical products in retail pharmacies declined year-on-year. The proportion of the non-pharmaceutical sector, which contributes a large amount of gross profit to pharmacies, fell to the lowest level in seven years, a double-digit decline.

The decline in customer flow and average customer spending has put a sharp increase in the operating pressure on drugstores. The "2024 Semi-annual Drugstore Survival Report" previously released by Zhongkang CMH mentioned that from January to May, 72% of stores experienced a decline in business. If calculated based on the 35% gross profit and 5% net profit of the top chain stores, a store's revenue will reach the break-even line if it declines by 15%.

Liao Honghui mentioned that by the second quarter of 2024, the number of retail pharmacies will exceed 700,000. China New Economics calculated that the population is 1.41 billion, and each pharmacy serves 2,000 people.

According to Zhongkang Pharmacy Monitoring, the growth in the number of retail pharmacies nationwide slowed down in the second quarter of 2024, and the number of store closures increased significantly.

Regarding whether the total number of drugstores will decline in the future, Gao Yi, chairman of Yifeng Pharmacy Chain Co., Ltd., said in his speech that almost all retail industries continue to open stores during their peak period, while the profit margin of each store declines. Either a new model will emerge, or a large number of stores will be closed, resulting in industry consolidation.

"2024 will be the turning point for the high growth in the number of pharmacy stores. The number of stores will then show a downward trend, which may be quite obvious. Industry mergers and acquisitions will accelerate in the future. The fundamental indicators that determine whether one can continue to survive in this industry are the single-store sales and net profit margin of a store." Gao Yi said.

“Pharmacies can’t just rely on selling medicines”

Moving forward under pressure has become the keyword for the pharmacy industry in 2024.

When talking about whether pharmacies can strike a balance between transformation and current business models, Li Neng, chairman of Yangtianhe Pharmacy, said frankly that there is no balance between the current survival transformation of pharmacies and traditional routines. All pharmacies have entered a period of pain. Many pharmacies are still holding on to their original promotional plans and products and cannot find new development trends.The market will reduce the homogeneity of pharmacies and increase the selection of differentiated pharmacies.

Regarding the future prospects and survival strategies of drugstores, Ruan Hongxian, chairman of Yixintang Pharmaceutical, summarized it in four words: follow the trend. "There is still room and potential for China's retail drugstores, but we must adjust our operating structure and business model, combine the policy environment, and follow the trend. This is our survival space. As an enterprise, we must reduce costs and increase efficiency in operation and management," said Ruan Hongxian.

In an interview with Chinanews.com and other media, Wu Han responded that the future development prospects of drugstores are still positive. On the one hand, the value of drugstores has not been fully tapped.In addition, the main profit model of pharmacies is still selling medicines. In the future, they will use the pharmacy scene to provide consumers with comprehensive solutions to diseases or health problems. Some pharmacy chains have already made attempts.

China Business Network noted that, on the one hand, many chain drugstore managers mentioned at the meeting that pharmacy operations must provide comprehensive solutions and tap into opportunities for chronic disease management.

Gao Yi believes thatPharmacies will become the traffic operation pool for community health. For middle-aged and elderly people, the closest entrance to their health is retail pharmacies.He mentioned that when middle-aged and elderly people in many places such as Japan and Europe have health problems, their first stop is medical pharmacies, followed by clinics and hospitals.

In an exclusive interview with China Business Network, Jianzhijia Vice President Chai Zhiqi mentioned that the professional services of pharmacies, such as chronic disease management, can drive customer flow. "Regarding chronic disease management, Jianzhijia is doing to improve the professional service system and expand the scope of chronic disease management services. In addition to the four highs (hypertension, hyperlipidemia, hyperglycemia, and hyperuricemia), Jianzhijia has added services for chronic respiratory diseases, skin diseases, pain, and other diseases, as well as health management services such as sleep, hair, and weight. On the other hand, we will improve the standardization of the process of chronic disease management and continue to promote drug consultation, comprehensive health file creation, and health assessment for long-term drug users," said Chai Zhiqi.

On the other hand, China Business Network noted that many pharmacies have begun to experiment with business diversification, with different directions.

In addition to the drug retail business, Yixintang is also involved in the lottery business. In an investor research meeting held in May 2024, Yixintang pointed out that as of the end of 2023, Yixintang had launched a lottery pilot business in more than 3,000 stores across the country, and Yixintang's lottery sales in 2023 reached 76.98 million yuan (including 8.52 million yuan from Yixin Convenience).

In addition, Beitanni stated on the investor interaction platform in January 2024 that it has currently cooperated with drugstore chains such as Jianzhijia, Yixintang, Laobaixing, and Shuyu Pingmin, and claimed that "with factors such as pharmaceutical industry policies and the transformation and upgrading of drugstore chains themselves in new retail, the company will continue to upgrade in the direction of high-quality channel empowerment of products + services, and help create a phenomenal beauty category value growth in pharmacies."

At this year's Xipu Conference, the Winona brand of Beitanni Group also jointly released the "White Paper on Trends in Functional Skin Care Products in Chinese Retail Pharmacies" with the Zhongkang Technology Consumer Research Center, which mentioned thatThe market for functional skin care products in retail pharmacies is in a rapid growth stage: in 2023, the sales of functional skin care products in China's retail pharmacies will reach 2.27 billion yuan, compared with 1.46 billion yuan in 2022, with a growth rate of 56%., the industry is in its infancy and is developing rapidly.

Chai Zhiqi also stressed the importance of diversification in drugstore operations. Drugstore operations cannot rely solely on selling medicines. In the future, drugstore operations will undergo some changes. They will focus on health products and medical beauty products in the health sector, and will expand some foreign health products.

However, China Business Network noted that the business scope and management requirements of medical insurance agreement pharmacies are formulated by local medical insurance management departments in accordance with relevant national policies, and pharmacies must comply with local requirements if they want to sell non-drug products.

According to media reports, since the National Healthcare Security Administration interviewed relevant persons in charge of Yixintang Pharmaceutical Group Co., Ltd. in May this year, medical insurance departments in Yunnan, Jilin, Guizhou, Hainan and other places have quickly followed up and conducted concentrated talks and reminders on compliance operations with designated retail pharmacies in their respective areas.

In an article released in July, the National Healthcare Security Administration clearly pointed out that it hopes that designated retail pharmacies of all levels and types across the country will correctly understand the importance of maintaining the security of medical insurance funds, accurately grasp the overall situation of comprehensive and strict supervision of medical insurance funds, and truly understand the role of the medical insurance system in promoting the long-term sustainable development of the pharmaceutical retail industry. In the aspects of pharmaceutical operation, management, and sales, they should actively strengthen management, regulate behavior, and refuse fraud and insurance fraud.

In this regard, Chai Zhiqi believes that the trend of strict supervision of medical insurance funds will definitely become normalized. Jianzhijia has built a compliance system. Only products that enter the medical insurance can swipe the medical insurance code, which effectively distinguishes medical insurance products from other categories of products and avoids theft and multiple swipes of medical insurance cards.

“Medical insurance is not a moat for pharmacies”

In addition, the competition between offline pharmacies and online channels is still inevitable.

At present, the Internet plus medical insurance is being improved rapidly across the country. Many places have begun to promote online drug purchase and medical insurance payment, mainly focusing on personal accounts and over-the-counter drugs.

Data shows that in Shanghai, as of the end of June 2024, more than 1,000 designated retail pharmacies have joined the Internet drug purchase and medical insurance online payment project on platforms such as Meituan, Ele.me, and JD.com, and have completed 2.047 million medical insurance settlements.

According to Zhongkang CMH data, in 2023, O2O (online to offline) drug sales accounted for 4.0% of the scale of physical drugstores, an increase of 0.6% year-on-year. However, in terms of growth rate, in 2023, the scale of drug sales in physical drugstores (including O2O) will only increase by 1% year-on-year, while the O2O drug market will grow by 19.4% year-on-year. In the sales of physical drugstores, the importance of O2O channels has increased significantly.

Liao Honghui also mentioned that since Shanghai opened the online medical insurance payment route for drug purchases in October 2023, the number of O2O medical insurance payment stores has continued to increase, and the average daily output of a single store is significantly higher than that of ordinary stores.

Talking about the impact of online drug purchases and medical insurance payment on drugstore operations and the countermeasures, Gao Yi said that online medical insurance payment does not bring about an increase, but a change in the stock, not just a matter of payment methods. The heavy online users are young people, and the middle-aged and elderly also consume online, but they are not the main users. However, the online rate will definitely affect the development of the industry.

Gao Yi believes that we should oppose the price "involution" on online platforms. In pharmacies, we should establish private domain operations centered on members, respond to customer services, and have a differentiated understanding of the health status of each customer. In addition, we should establish differentiated supply chains online and offline.

Chai Zhiqi believes that the liberalization of online medical insurance drug purchases will indeed put offline pharmacies under pressure in the short term, but from another perspective, this is an opportunity to force pharmacies to upgrade and transform, and pharmacies will enter the elimination round.

　　“Medical insurance is not a pharmacy’s moat. A pharmacy’s moat is its operational capability, professional strength, product strength, brand strength and scale strength.Pharmacies provide professional pharmaceutical services, and it is unsustainable for online pharmacies to provide large subsidies. The development trend of retail channels must respond to changes in consumer demand. Consumers need more convenient and faster transaction methods with high quality-price ratios, which can meet their needs anytime, anywhere, and at will. Therefore, B2C (business to consumer) and O2O (online to offline) were born and developed rapidly.But this does not mean that online and offline are in an antagonistic and competitive relationship. Instead, they should be integrated with each other to give full play to their strengths."Chai Zhiqi said.

(For more reporting clues, please contact the author of this article, Wang Yuling: [email protected]) (China News Service APP)

　　(The views in this article are for reference only and do not constitute investment advice. Investment is risky and you should be cautious when entering the market.)

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Editor-in-charge: Luo Kun, Li Zhongyuan