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
Craig Herkert, a former Walmart executive and now CEO of a major supermarket chain, says, "Consumers have a wide range of sources for their groceries, and that will continue." A bit like the fragmentation we've seen in the veterinary industry, perhaps? "In this economy, it's simply not acceptable anymore to have prices as far out of line as ours have been," Herkert says. "But getting prices right for us doesn't mean we're going to become a discounter. It means we have to narrow that pricing gap." Sounds a bit like response to the economy, doesn't it?
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.
Pharmacists' expanding roles
Medication adherence is a major concern in human healthcare. Both pharmacy groups and drugstore chains alike say an enhanced role for the pharmacist makes it easier for patients to improve adherence. Drugstore chains are training pharmacists to specialize in conditions like diabetes in addition to teaching them motivational interview techniques that can help elicit patients' reasons for not taking their medicines.
As veterinarians, we tell ourselves that human pharmacists are not familiar with animal diseases and drugs. They aren't trained in endocrinology, either—but spending time with a sophisticated computer system and a few hours of education can familiarize a pharmacist with a great deal of information. In relatively short order, a human pharmacist can be educated and trained to address animal issues.
Veterinary clinics thrive when they rely on differentiators such as familiarity with the patient and relationships with the pet owners. This is no different from the independent community pharmacists, especially those who are becoming more proactive in differentiating themselves from chains. The National Community Pharmacy Association represents 23,000 pharmacies, and it suggests that members work harder on adherence and building trust and relationships. Their focus will be to support patients by encouraging better adherence and making patients aware that they are committed to the patient's health and education. They will facilitate prescription refills and remind patients of the value proposition of a drug, all the while believing that they must own patient education, adherence and responsibility for patient care.
Unlike the bigger chains, which get a big chunk of their revenue from selling other products, community pharmacies rely on prescriptions for about 90 percent of their sales. In other words, they're about developing relationships and building trust. We can—and must—do the same thing. It's important that any veterinary team member who deals with the pet owner is trained to truly be an advocate for care and to understand the benefits and reasons for treatment and adherence long term. We must emphasize better reminder systems and call-backs. Placing responsibility and blame solely on pet owners isn't enough. We must support them in doing the best for their pets.
Dr. Mike Paul is a veterinary consultant and a nationally known speaker and columnist. He is the principal of Magpie Veterinary Consulting.