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brutal expansion, facing transformation

recently, many leading domestic chain drugstores have faced turbulent times.

since august 30, laobaixing pharmacy chain co., ltd. (hereinafter referred to as "laobaixing pharmacy") has first achieved 6 daily limit ups in 7 consecutive trading days, with a cumulative increase of more than 60% in stock prices. then, since september 10, for 3 consecutive trading days, the closing price decline deviation value has accumulated to more than 20%, and the stock price has soared and plummeted. prior to this, the bigger turmoil surrounding laobaixing pharmacy was that the company's actual controller and chairman xie zilong was detained and investigated on july 28.

in addition to laobaixing pharmacy, leading drugstore chains such as yifeng, dasanlin, and yixintang are also having a hard time. at the end of august, listed drugstore chains handed in their half-year report cards, and data from many companies showed that "revenue increased but profits did not." since 2018, domestic drugstore chains have developed rapidly and have been staking out their territory, and have successively entered the scale of 10,000 stores in 2022 and 2023.

at present, competition in the chain drugstore industry is becoming increasingly fierce, and medical insurance policies are constantly adjusting. a senior pharmaceutical practitioner bluntly stated that the number of retail drugstores is already excessive, and the era of barbaric expansion through high-priced mergers and acquisitions and franchising is over. the focus of leading companies in the future should not be expansion, but thinking about how to improve operational efficiency and management level.

a laobaixing pharmacy store in shanghai on july 31. photo: visual china

stock prices exploded

if you pay close attention, you will find that the number of street chain drugstores is increasing significantly. laobaixing pharmacy is the most well-known of these drugstore chains. it started as a small drugstore in front of xiangya hospital of central south university in hunan province in 2001 and has now developed into one of the four leading drugstore chains with more than 14,000 stores.

in the first two weeks of september, laobaixing pharmacy issued three announcements on abnormal stock trading fluctuations.

first, from september 3 to 9, the company's stock closed at the upper limit price for five consecutive trading days, with a cumulative increase of 61.03%, which was higher than the increase of most companies in the pharmaceutical retail industry. then, from september 10, the company's stock fell for three consecutive trading days, with a cumulative closing price drop of more than 20%.

a senior securities lawyer in beijing explained to china news weekly that the reason why laobaixing pharmacy's stock price has been rising for several consecutive days since august 30 may be related to the company's announcement of dividend rights. on august 30, the company released its 2024 semi-annual report and disclosed its mid-term dividend plan, with a cash dividend of 0.3307 yuan per share and a total cash dividend of 251 million yuan, accounting for 50.01% of the net profit attributable to the parent company in the first half of 2024. on the same day, the company also released a shareholder return plan for the next three years (2024-2026), stating that in the next three years, the company's annual cash distribution of profits should be at least 50% of the net profit attributable to the parent company that year.

"generally, the continuous daily limit rise of listed companies' stocks may also be related to mergers and acquisitions or other important favorable information. this information has not been made public and may be illegally obtained by some insiders, resulting in a violent rise and triggering investors' reactions." the senior securities business lawyer said that the subsequent decline is also a correction after the surge, which is a common phenomenon. but in fact, since may 14 this year, the share price of laobaixing pharmacy has been falling for three consecutive months.

on the evening of july 30, the company issued another announcement that the company received a notice from the family of the company's actual controller and chairman xie zilon on july 28. xie zilon's family received a notice issued by the hunan provincial supervision commission on july 28 that xie zilon was detained and under investigation.

the news caused a stir in the industry. xie zilong is known as the "number one figure" in the domestic retail drugstore industry. as early as 2001, he opened the era of affordable pharmacies in china, shouting the slogan "45% lower than the national approved retail price on average", which set off a price reduction storm. at that time, domestic drugstore operators purchased goods through agents, and after the agents added layers of price increases, the prices of drugs in the hands of consumers were generally inflated.

according to the 2023 annual report of laobaixing pharmacy, the company's founder and current chairman xie zilong served as a member of the 11th, 12th and 14th national people's congress, a member of the central committee of the china democratic national construction association, deputy chairman of the hunan provincial committee, honorary president of the china pharmaceutical materials association, vice president of the china pharmaceutical commerce association, and president of the hunan provincial drug distribution industry association.

the above-mentioned lawyer explained to china newsweek that the detention measures taken by the supervisory commission are often related to the suspicion of corruption, bribery or duty-related crimes. considering xie zilong's position, it is speculated that it may be related to bribery, but the details still need to wait for public announcement from relevant departments.

in fact, since last year, several leading drugstore chains have been exposed. in july 2023, ke jinlong, chairman of another leading drugstore chain, dasanlin, was detained. in april this year, the people's court of dianbai district, maoming city, guangdong province issued a "criminal judgment", finding that ke jinlong was guilty of corporate bribery and sentenced him to three years and six months in prison and a fine of 500,000 yuan.

on june 2, the national medical insurance administration's fund supervision department announced a talk with yixintang's relevant person in charge, pointing out that some of yixintang's designated chain stores had violated regulations, causing losses to medical insurance funds, including substitution of drugs, over-prescribing, making medical insurance settlements on behalf of designated retail stores that had suspended medical insurance settlements, mismatched drug purchase and sales records, and irregular sales of prescription drugs. the next day, yixintang's stock closed down 8.53%.

since mid-may this year, the stock prices of the four major "10,000-store" chains, yifeng, dasanlin, laobaixing, and yixintang, have fallen by more than 30% in two months. a person who has been studying the pharmaceutical industry for a long time said frankly that the current anti-corruption storm in the pharmaceutical industry is strong, medical insurance policies are further tightened, and retail pharmacies are also facing a trend of declining efficiency. reflected in the capital market, the investment prospects of chain pharmacies also have many uncertainties.

increased revenue but no increased profits

as of the end of august, many leading domestic chain drugstore listed companies have successively announced their 2024 semi-annual reports.

among the four leading drugstore chains, only yifeng pharmacy achieved double-digit growth in revenue and net profit. in contrast, laobaixing, yixintang, and dasanlin all saw year-on-year revenue growth, but their net profit attributable to their parent companies all declined year-on-year, with yixintang's net profit attributable to its parent company falling as much as 44.13%. the net profit attributable to the parent companies of some mid-tier drugstore chains, such as shuyu pingmin, fell by more than 80% year-on-year.

huang xiuxiang, former secretary-general of the hunan provincial pharmaceutical distribution industry association, also recently analyzed the data of the four major drugstore chains in the first half of the year. in an interview with china newsweek, he particularly emphasized two data: although the total number of directly-operated stores of the four major companies increased by nearly 20% year-on-year, the turnover of directly-operated stores only increased by 5.8% year-on-year. in addition, he and his team also found that in the first half of 2024, the average daily sales of the four major head pharmacies’ direct stores was 48.2 yuan/square meter, compared with 54.2 yuan/square meter in the first half of 2023, a year-on-year decline of 11.2%. "this decline is somewhat surprising, showing that the sales per square meter of pharmacies have decreased."

in fact, the average daily sales per square meter of retail pharmacies once soared during the epidemic. according to media statistics, compared with 2019, in the first half of 2020, the average daily sales per square meter of yifeng pharmacy increased to 66.40 yuan/square meter, an increase of 11.73%, and the average daily sales per square meter of yixintang increased by 90%. however, in the first half of 2021, among the four major pharmacies, except for laobaixing pharmacy, which remained the same as in 2017, the average daily sales per square meter of the other three also began to decline.

this trend continues to this day. many industry insiders interviewed pointed out that this is related to the expansion model of domestic chain drug stores in the past few years, and the profit margins of drug stores have been gradually squeezed.

from 2012 to 2017, the number of pharmacies in china remained relatively stable, growing slowly from 420,000 to 454,000, with a growth rate of no more than 3%. however, in 2017, the policy of separation of medicine and pharmacy was introduced, requiring medical institutions to prescribe drugs according to the generic name of the drug, and patients can purchase drugs at retail pharmacies with prescriptions. the relevant policy clearly mentioned that "retail pharmacies will gradually become an important channel for selling drugs to patients and providing pharmaceutical services". in 2021, the ministry of commerce once again issued a document proposing to cultivate 5-10 professional and diversified pharmaceutical retail chain enterprises with a total value of more than 50 billion yuan, and by 2025, the pharmaceutical retail chain rate will be close to 70%.

taking advantage of the favorable policies, major domestic drugstore chains have begun to expand their stores rapidly through self-construction, mergers and acquisitions, and franchising. after 18 years of development, laobaixing pharmacy had a total of 5,000 stores at the end of 2019, and then in just three years, the number exceeded 10,000, doubling. subsequently, the number of stores of yifeng pharmacy, yixintang, and dasanlin also exceeded 10,000 one after another. the drugstore retail industry has entered the "10,000-store era", the industry concentration has increased, and scale competition has become the norm.

with the entry of capital, the enthusiasm of the market was further pushed to a high point. in 2017, hillhouse capital took a fancy to the pharmacy business and established gaoji medical. through full acquisition or controlling mergers and acquisitions of chain pharmacies, within a year, the number of its pharmacies exceeded 12,000.

chain drugstores have blossomed everywhere. at the entrance of some residential areas, there may be three or four drugstores in a 50-meter section of the road. therefore, some people lament: "there are more drugstores at the doorstep than milk tea shops." this is indeed the case. according to the data of zhaimen catering, as of may 2024, the total number of stores in the "milk tea beverage" track is about 418,000. by the end of 2023, there will be about 688,000 companies holding "drug business licenses" nationwide, of which the total number of drugstores nationwide will exceed 667,000.

but on the other hand, the growth rate of the chain drugstore market size is lower than the growth rate of the number of stores. according to relevant data from zhongkang technology, in the first half of 2024, the cumulative size of the national retail drugstore market reached 258.2 billion yuan, a year-on-year decline of 3.9%, while the overall number of drugstores still increased by 15,000. "with so many stores to share the cake, every company is not doing well." huang xiuxiang said frankly. the chain drugstore shuyu pingmin also publicly stated that the growth rate of the market size is lower than the growth rate of the number of stores, resulting in serious internal circulation in the industry.

in april this year, xinhu pharmacy, a chain of 450 drugstores, launched a new membership system to attract customers. members can buy drugs at a price close to the ex-factory price. that is, customers only need to pay an annual fee of 100 yuan to enjoy ultra-low prices of all goods with only an increase of 1%-14% on the ex-factory price. this strategy is supported by some consumers, who praise it as a "conscientious drugstore, promoted nationwide", but it has also caused dissatisfaction among pharmaceutical companies and drugstores, saying that its public purchase price disrupts the market order, and some pharmaceutical companies even said that they "will no longer supply it". the relevant person in charge of chongqing xinhu admitted to the media that the drugstore was also impacted by the low-price model of online drug sales, which was a helpless move. this also reveals the current operating difficulties of offline retail drugstores.

but why do chain drugstores still generally increase their revenue? huang xiuxiang analyzed that the overall revenue has not declined. one of the reasons is that many chain drugstores currently attach importance to the expansion model of franchise stores when expanding. "franchise stores do not need to invest in labor costs and rent. they are purely brand output, and the overall profitability is good. the profit from this makes up for the financial costs brought about by the direct-operated stores and the overall decline in efficiency per square meter. the two offset each other, and from the data, there will be appropriate growth."

why is it becoming difficult to make a profit?

in addition to the sharp increase in the number of pharmacies, many industry insiders pointed out that the decline in pharmacy profits is also related to the adjustment of medical insurance policies.

the current medical insurance system in china consists of two parts: personal medical insurance funds and pooled medical insurance funds. retail pharmacies mainly increase sales through personal medical insurance account payments, that is, consumers can use their personal medical insurance accounts to purchase medicines, and pharmacies rely on the difference between the purchase and sale prices of medicines to make profits. as of the end of august 2023, the number of retail pharmacies covered by medical insurance nationwide has reached 484,000, accounting for 73% of the total number of drug retail stores.

however, starting from february 2023, the national health insurance administration will implement the reform of individual medical insurance accounts, putting about half of the funds originally transferred to individual medical insurance accounts into a large pool of unified funds to improve outpatient reimbursement benefits. the pool of individual account funds has shrunk, but on the other hand, the policy is also promoting designated retail pharmacies to be included in the outpatient unified management.

at that time, the industry generally believed that the policy was beneficial to the development of retail pharmacies and brought more sales space to drug retailers. before the reform, insured persons could only use their personal accounts to buy medicines at designated pharmacies, but after the reform, they could use the prescriptions of designated medical institutions for outpatient coordination to buy medicines at designated pharmacies that provide outpatient coordination services, and the expenses within the scope of the medical insurance policy could be reimbursed. to this end, many places have successively established electronic prescription circulation platforms.

"but the problem now is that the electronic prescriptions for outpatient clinics in many medical institutions cannot be circulated." li zihao, a researcher at the pharmacy institute of the china pharmaceutical materials association research institute, told china newsweek that hospitals have outpatient pharmacies and inpatient pharmacies, forming a closed loop of prescribing and selling medicines. moreover, all prescriptions are electronic, and hospitals lack the motivation to transfer prescriptions to pharmacies.

according to media reports, in 2023, the relevant team of zhongkang information, an information and data company focusing on the field of medicine and health, conducted a survey on the implementation effect of outpatient mutual aid policies in cities such as changsha and dalian. the results show that there are differences in the institutional design of different regions, resulting in different degrees of difficulty in obtaining prescriptions in pharmacies. in changsha, relevant pharmacies are more likely to obtain prescriptions, customer flow can increase by 20%-30%, and sales can increase by 10%-30%; but in dalian, due to the difficulty in obtaining prescriptions, the customer flow of pharmacies has dropped sharply by 50%, and sales have also decreased by 30%, and they have to face difficulties such as layoffs.

the original customers of drugstores are also being diverted. in the past, the main customers of retail drugstores were middle-aged and elderly people, but with the implementation of the outpatient mutual aid reform policy and the promotion of policies such as centralized drug procurement, the problem of single drug types and small quantities in primary medical and health institutions has begun to ease. "the price of drugs there may be cheaper, so middle-aged and elderly people are more likely to go to community health service centers to buy drugs." huang xiuxiang mentioned that younger customers are attracted to online platforms such as meituan and ele.me to buy drugs.

on the other hand, the pricing autonomy that retail pharmacies originally enjoyed is now gradually shrinking. in 2020, hunan, yunnan, xinjiang and other places issued regulations that the price difference rate of government-negotiated centralized procurement varieties in store sales shall not exceed 15%, setting a "ceiling" for the prices of these selected drugs. huang xiuxiang learned from some front-line pharmacy practitioners that the 15% profit margin cannot cover the pharmacy costs, including water, electricity, rent, and labor costs.

in addition, the medical insurance bureaus in xi'an, xianyang in shaanxi, shenzhen in guangdong and other places have also launched drug price comparison systems for designated retail pharmacies. customers can compare prices online in real time, encouraging consumers to vote with their feet and creating an impact on retail pharmacies that want to raise drug prices.

recently, huang xiuxiang has noticed that some regional drugstore chains, and even some leading listed companies, "all have a basic action of integrating existing stores and closing, suspending and transferring loss-making stores. i understand that these large listed companies have taken action. a company with more than 10,000 directly-operated stores plans to close 2,000 stores this year."

huang xiuxiang mentioned that the stores newly opened last year or this year will be the focus of store closures - these stores have few members, and it takes a long cultivation period for pharmacies to be profitable, and it is more difficult for new stores to obtain store coordination qualifications. he conducted a market survey this year and found that in hunan, hubei, anhui and other regions, new stores that have not obtained medical insurance qualifications and do not carry out large marketing activities have an average daily sales of about 600-1000 yuan. in the economically developed jiangsu, zhejiang and shanghai regions, the average daily sales may be 1200-1500 yuan - many new stores are losing money. according to the rules, a store may reach the break-even point in 1-2 years in the past, but now with multiple policy adjustments, "if the output of a single store is followed, profitability is basically a long way off."

yan hui has worked in national retail sales management for 6 years. in his opinion, whether the drugstore expansion model is feasible depends on the specific situation of the company. for example, some brands in the growth stage, especially regional leaders, are still actively expanding, and their management still has the intention to develop new markets, and some leading companies will also appropriately increase the number of stores according to demand.

but he is sure that "china does not need so many pharmacies, as supply currently exceeds demand". the retail pharmacy industry generally uses the number of people served by pharmacies to observe its potential consumption scale. by the end of 2023, the average number of people served by pharmacies in china is about 2,100, while the average number of people served by pharmacies in the united states and japan is about 4,000. he believes: "in the future, many uncompetitive pharmacies will be closed or acquired, and the stage of barbaric expansion has passed."

some chain stores have also slowed down their expansion. laobaixing pharmacy publicly stated at a recent semi-annual report interpretation meeting that based on the market and the company's expansion in the first half of the year, the full-year target will be reduced from 3,800 stores at the beginning of the year to 2,800 stores.

what is the way out?

in yan hui's view, although the drugstore retail industry is currently in a negative state, in the long run, the drugstore industry will usher in a favorable situation. with the implementation of the outpatient coordination system in various places, the leading chain drugstores will usher in a turnaround.

he explained to china newsweek that people generally still choose branded chain pharmacies, and large chain pharmacies have stronger bargaining power with upstream purchases. from the perspective of transaction scenarios, many chain pharmacies are currently transforming into o2o (online ordering, physical pharmacies shipping and delivery) and b2c (online pharmacies selling medicines) operations, investing more manpower and financial resources every year to seize the internet dividend. "the simplest example is that large chain pharmacies get goods cheaper than small pharmacies. if they fight a traffic war, it's okay for them to lose a little, but small businesses can't afford it."

looking around the world, the chain of drugstores is a major trend. in june this year, laobaixing publicly mentioned in the minutes of the institutional investor exchange event that the top 10 drugstores in japan have a combined market share of 74%, and the top 3 drugstores in the united states have a combined market share of 85%. in comparison, the top 10 retail drugstores in china have a combined market share of 31%. many industry insiders interviewed also mentioned that industry concentration will be the future trend.

but in huang xiuxiang's view, there is no problem with the expansion of chain drugstores. the key lies in how companies can effectively integrate resources after mergers and acquisitions and reorganizations to improve the output efficiency of single stores and achieve the effect of 1+1>2.

he analyzed that most of the current domestic drugstore chains still rely on a high gross profit margin business model. according to the semi-annual report data of the four major listed drugstore chains, the average gross profit margin of these companies this year is 38.49%, a decrease of 0.5 percentage points compared with the same period last year. the reason why drugstores can maintain high gross profit margins is that: first, the listed companies' own-brand products are the main contributors to high gross profit margins; second, the gradual advancement of the centralized procurement policy has a lag effect, which allows drugstores to still obtain price difference profits on certain drug categories. "with the advancement of centralized procurement, the overall price space of drugs will definitely be further compressed. for chain drugstores, improving the efficiency of single stores and the efficiency of personnel is the kingly way."

many experts interviewed mentioned that the japanese chain drugstore model can be used as a reference for china. japanese chain drugstores are divided into two categories: dispensing pharmacies and drugstores. the former are usually located near hospitals, mainly accepting prescriptions from hospitals, and are equipped with full-time registered pharmacists to provide medication guidance to patients. however, at present, the professional backgrounds of many pharmacy staff in china are mostly specialists, and their professional skills in pharmacy are insufficient. this is one of the directions that pharmacies need to improve in the future. drugstores take the big health route, selling over-the-counter drugs, cosmetics, daily groceries, etc. related research shows that it took about 30 years for japan to separate the medical industry, and chain drugstores are a segment that requires long-term investment.

it is generally acknowledged in the industry that diversification and specialization are one of the development directions of chain drugstores. at present, some domestic chain drugstores are exploring specialization, such as providing health management services for chronic disease management of middle-aged and elderly people, targeting those with high blood pressure, high blood lipids, high blood sugar, and high uric acid.

yan hui also mentioned that in the future, in addition to continuing to provide prescription drugs, chain drugstores should pay more attention to how to attract customers to actively walk into drugstores and be willing to pay. the profit space for drugstores still lies in actively embracing changes in pharmaceutical categories. some stores have begun to transform to health improvement products such as anti-aging, beauty, treatment of male hair loss, and women's health conditioning, and activate customer flow by providing more professional and personalized services. "the transformation process is definitely painful, but it is a direction that must be taken."

(at the request of the interviewee, yan hui is a pseudonym.)

reporter: yang zhijie