Our veterinary practices' pharmacy revenue is being challenged on a number of fronts, and these challenges will surely impact how we approach this major revenue stream. If we lose or see a significant reduction in our pharmacy revenue, and if we hope to maintain our profitability and the value of our practices, we will have to look somewhere other than our pharmacy shelves for revenue.

It's difficult to compete on price with chain or big box stores and alternative delivery methods. While pet pharmaceuticals represent on average 20 percent of veterinary practices' revenue, they do not represent 20 percent of Walmart's or Target's revenue. For these stores, an expanding product mix is valuable not only for the revenue it generates, but also for the foot traffic it creates. And just like veterinary clinics, neighborhood pharmacies and supermarkets are addressing competition from chain stores, too. Shopping for groceries at supermarkets dropped from 66 percent to 51 percent between 2000 and 2011. Retailers like Target view groceries as a traffic generator—a loss leader to attract shoppers who will then, while they're there, shop for more profitable items.

Narrowing the pricing gap

Jason DeRise, an industry analyst with UBS, a major banking and financial services firm, says, "Supermarkets cannot continue to do the same things they did in 1990s and expect a different result than the one we've seen over the last 10 years." Historically, supermarkets survived by enticing shoppers with promotions, and the stores earned profits off of the products they sold at full price.

Groceries drive traffic into businesses like Target and Walmart. They are typically low-profit items, but they don't tend to sit on shelves for long periods of time. Grocery stores can't continue to charge more without delivering differentiation. And yet supermarkets are often significantly more expensive than their competition. Consider Whole Foods, which has proven extremely successful at selling high-quality goods at higher prices and emphasizing better service and shopping experience. Perhaps there is a lesson here.

The fate of neighborhood pharmacies

Is it any wonder that supermarket pharmacies like Wynn Dixie and Publix are promoting veterinary prescriptions at very low prices? They seem to recognize the fact that traffic is critical to sales. That brings us to another industry: neighborhood pharmacies. I remember growing up in the Midwest, where pharmacies were essentially drug stores. Some even carried a few boxes of Whitman's chocolate samplers or teddy bears around Valentine's Day, but a large store from the bygone era would fit comfortably into the cosmetics section of today's pharmacies. Chain stores like Walgreens and CVS and big-box pharmacies like Walmart and Costco have almost eliminated what were once called "professional pharmacies." Those that remain have accepted change and added gift items, grooming products and toys to their stores. No longer will a malt bring in customers—so how can a single pharmacy respond to the challenges of these chains?

Major chains gain a large part of their revenues from items other than prescription medications. These nonprescription items have a larger price margin than prescriptions, which have become virtual loss leaders in major stores. Community pharmacies rely on drug dispensing for about 90 percent of their revenues, and significant price reductions rapidly eat into profits. At the same time, these small pharmacies are losing market to heavily discounting outlets that may actually give away drugs or dispense them below cost realizing they will make far more profit on another product. We, as veterinarians, are in a similar position in that we are competing with outlets that are willing to dispense products simply to generate foot traffic and impulse shopping.