1. The more you open, the more you lose
In the past few years, drug stores have sprung up all over the country. Whether it is a first-tier city or a small county town, you can see a drug store almost every 50 meters, and there are at least three drug stores at the entrance of a community.
The "proliferation" of drug stores has exceeded many people's imagination. By the end of 2023, there will be nearly 700,000 retail pharmacies in my country, which is more than 100,000 more than the milk tea shops that are everywhere on the streets.
In 2012, there were only 440,000 drug stores in my country. In 12 years, the number of drug stores has increased by nearly 50%.
Although milk tea shops and snack shops have sprung up in the streets and alleys, they are nothing compared to the expansion speed of chain drug stores.
Dasanlin, which has the fastest store growth rate, is spread across 19 provinces. As of the end of last year, there were 12,993 chain stores, with a year-on-year growth of 29.35% in the past year alone, becoming the fastest growing chain drug store brand.
Another example is Laobaixing Pharmacy. It took 18 years from the first store to the 5,000th store, and only 3 years from 5,000 to 10,000 stores. As of the first half of the year, the number of stores exceeded 16,000, which shows how fast it is expanding.
With the increasing number of stores, are pharmacies really profitable? The answer is no.
The "four great kings" of chain pharmacies have entered the era of 10,000 stores, but the surge in the number of stores has not brought corresponding profit growth. Except for Yifeng Pharmacy, other large pharmacies have fallen into the vicious circle of "the more stores you open, the more you lose."
The 2024 semi-annual report released by Yixintang showed that the revenue in the first half of the year was 9.305 billion yuan, a year-on-year increase of 7.2%; the net profit was 293 million yuan, a sharp year-on-year decline of 44.13%. Dasanlin also showed the same trend in the first half of the year, with revenue increasing by 11% to 13.345 billion yuan and net profit falling by 28.32%. Laobaixing Pharmacy has seen a decline in profits in its semi-annual report for the first time since its listing in 2015.
In addition to the "Four Great Kings", there are also chain drugstores whose revenue and profits have both declined under policy adjustments and market competition. For example, Guoda Pharmacy, a subsidiary of Sinopharm, had a revenue of 11.202 billion yuan in the first half of the year, a year-on-year decrease of 9.3%; net profit was -14 million yuan, a year-on-year decrease of 104.81%.
This is the case for chain giants, not to mention the operating conditions of other chain drugstores in the industry. According to Zhongkang CMH's "2024 Semi-annual Drugstore Survival Report", more than 70% of stores declined in business from January to May this year, and more than 45% of stores are conservatively estimated to be in the red.
As a special retail industry, store expansion is a necessary means for pharmacies. Judging from the development experience of the United States, chainization is also the key to the development of the drugstore industry. In 2021, the chainization rate of drugstores in the United States has reached 90%, while my country is still at a relatively low level. But why, when the top players have entered the era of 10,000 stores, they are making less and less money?

2. Changes in supply and demand
There are several reasons behind this
The first is that the surging tide of store openings has led to fundamental changes in the supply and demand relationship in the pharmaceutical retail market. In short, supply exceeds demand.
In the past few years, under the logic of land grabbing and seeking benefits from scale, the total number of retail pharmacies in the country has surged, from 457,000 in 2017 to 667,000 by the end of 2023.
Excessive scale expansion has begun to bite back at pharmacies. As the distance between pharmacies becomes shorter and shorter, the competition for customer flow between stores intensifies, and the number of people served by a single pharmacy has dropped sharply. Combined with the "2024 Semi-annual Pharmacy Survival Report" released by Zhongkang CMH, according to the permanent population data of the Seventh National Population, pharmacies in various provinces and cities in China serve only 2,000 people, and even some areas only have more than 1,000 people, which is close to the critical point of survival.
In contrast, the number of people served by a single store in the United States is about 6,000, and Japan is between 2,000 and 3,000. Considering that China's population density is much higher than that of the United States and close to that of Japan, such data undoubtedly reveals the grim reality of the oversupply of pharmacies.
Secondly, increasingly fierce competition, coupled with the impact of online pharmacies on offline pharmacies, has led to a decline in customer unit prices.
From January to July 2024, the average daily sales of physical pharmacies was less than 3,000 yuan per store, a year-on-year decline of nearly 10%. Among them, the average customer unit price was about 71.3 yuan, a year-on-year decrease of 8.58%.
Since last year, local medical insurance bureaus have also taken the lead in launching a price comparison system. Taking Shenzhen as an example, Shenzhen Medical Insurance can provide insured persons with the average price of a certain drug in a pharmacy, the average price of a hospital, the price range of a pharmacy, and the price range of a hospital, and realize real-time online price comparison. In this way, the medical insurance drug prices of designated retail pharmacies are more open and transparent, and the public can "compare prices from three stores".
With the gradual elimination of information gaps and price gaps, perhaps the customer unit price will decline further.
Of course, the decline in customer unit price is also related to the strengthening of supervision.
In the past, the supervision of pharmacies by the National Medical Insurance Bureau was far weaker than that of hospitals, which made it a routine operation for pharmacies to use medical insurance to buy daily necessities. Now, the "good days" are over.
In June, Yixintang was interviewed by the Fund Supervision Department of the National Medical Insurance Bureau. The reason is that Yixintang's stores have problems such as drug substitution, excessive prescription, mismatch of drug purchase and sales records, and irregular sales of prescription drugs, resulting in losses to medical insurance funds. This is also the first time that the Medical Insurance Bureau has publicly interviewed designated retail pharmacies.
In addition, changes in medical insurance policies and drug purchase methods have also brought challenges to the pharmacy industry.

3. Visible hand
Policy adjustments such as medical insurance cost control and prescription outflow, as well as the rise of online drug purchases, are constantly squeezing the living space of traditional pharmacies.
Among them, the reform of medical insurance personal accounts has directly affected the operating income of pharmacies. For a long time, medical insurance personal account income has been an important part of pharmacy income. From 2019 to 2023, the contribution rate of personal accounts in retail pharmacies across the country exceeded 40%.
Since the implementation of the reform of personal medical insurance accounts in 2021, the original unit payment part is no longer transferred to personal accounts, but is instead included in the pooling fund. This measure has directly led to a significant reduction in personal account income. According to statistics, the personal account income of employee medical insurance in 2023 has decreased by nearly 140 billion yuan compared with 2022.
For pharmacies, the retired elderly group used to be their main consumer group. The reduction of personal account funds and the decline in prices after hospital drug procurement have made this group of people sensitive to drug prices, resulting in a significant reduction in customer flow.
At the same time, the rapid growth of medical Internet channels has further diverted physical pharmacies. According to Zhongkang CMH data, in the first half of 2024, the cumulative scale of the national retail pharmacy market reached 258.2 billion yuan, a year-on-year decrease of 3.9%. From a monthly perspective, the scale of the national retail pharmacy market has declined for two consecutive periods year-on-year, and in June 2024 it has declined by 5.1% year-on-year. The average sales of pharmacies fell by 10.6% year-on-year, and the average customer price also fell by 8.9% year-on-year.
Of course, the growth rate of medical e-commerce is also slowing down. In the first half of the year, JD Health's revenue reached 28.3 billion yuan, a year-on-year increase of 4.6%.
This result is the worst performance of JD Health in the past five years. Judging from the trend of previous years, the company's growth rate has declined year by year, but the growth rate in the first half of 2023 remained at 34%, and now it has dropped to single digits.
This also conveys to the outside world that starting in 2024, the market's demand for purchasing medicines is returning to normal levels.
At present, the fourth limiting factor is also taking shape: the trend of medical insurance cost control gradually increasing the coverage of pharmacies.
The anti-corruption of medicines, special rectification against insurance fraud, special price governance, and the inclusion of designated retail pharmacies in the annual flight inspection scope by the Medical Insurance Bureau have further increased the intensity of flight inspections this year, focusing on the investigation and punishment of pharmacies for false drug purchases, participation in reselling medical insurance drugs, and substitution of drugs.
As the aging situation becomes more severe, the pressure on national medical insurance expenditures is increasing. This is why the wind of medical anti-corruption has blown from hospitals to pharmacies, and from hospitals to the out-of-hospital market.
In the foreseeable future, the external force of supervision will also prompt the current traditional pharmacy retail model to accelerate the transformation, further return to the essence of retail services, reduce dependence on individual medical insurance payments, and achieve sustainable development.
Under the combined effect of these factors, the clearing of pharmacy capacity seems to have become inevitable.

4. Start to step on the brakes
After experiencing the Great Leap Forward in the past few years, the pharmacy industry is feeling the chill of the market.
Data shows that the number of closed pharmacies nationwide has risen sharply from 6,778 in the first quarter to 8,792 in the second quarter, not including independent pharmacies that are not included in the statistics.
Judging from the interim report, the chain drugstore industry seems to be caught in a "prisoner's dilemma": oversupply has clearly become an industry consensus, and companies are still expanding.
Behind this, there are both optimistic expectations of industry analysts for future development prospects, such as according to the "14th Five-Year Plan" guidelines for the pharmaceutical distribution industry, by 2025, there will be 5 to 10 pharmaceutical retail chain companies with revenue exceeding 50 billion yuan, and other goal-driven, as well as the company's own strategic considerations.
In addition, according to Zhongkang CMH, the chain rate of pharmacies in my country will be only about 58% in 2023, and there are significant differences in the chain rates of pharmacies in different regions. Compared with the US market, there is still a lot of room for the development of domestic retail pharmacies.
Therefore, Dasanlin, Laobaixing, Yifeng Pharmacy, and Yixintang have not stopped their expansion. As of the end of the first half of the year, Dasanlin had the largest number of stores, reaching 16,151, and the number of net new stores during the reporting period was also the largest, exceeding 2,000. Yifeng Pharmacy, Laobaixing, and Yixintang all had net new pharmacies exceeding 1,000, namely 1,486, 1,395, and 1,036, respectively.
No matter which emerging industry, it is always easy to get exciting numbers by deducing the market size and penetration rate based on the current development logic.
But the development of the market will not be linear, and reality is always full of many uncertainties and surprises. The Zhongkang report shows that the average sales of pharmacies in the first half of 2024 fell by 10% year-on-year, of which 72% of stores saw a decline in business. If we estimate the profit level of the top chain stores, more than half of the stores are already in a loss-making state.
On the one hand, there is continuous expansion, and on the other hand, there are losses and closures. The optimistic expectations at the macro level and the difficult situation at the micro level are in sharp contrast.
Of course, with the fluctuations of the market, the expansion strategy of pharmacies must also change with the times.
In fact, some companies have clearly pointed out that the expansion speed will be slowed down. For example, Laobaixing Pharmacy will reduce its annual target from 3,800 at the beginning of the year to 2,800. After the adjustment, the expansion speed has slowed down compared with the net increase of 3,388 stores in 2023.
Jianzhijia also stated that the company combined the actual situation of the continued sluggish market environment and the slow progress of the medical insurance coordination reform policy. On the basis of slowing down the second quarter new store expansion target in the early stage, in June, the annual expansion plan was fully and significantly reduced to about 400 stores, slowing down the store expansion speed, and focusing more resources on the performance improvement of existing stores.
According to the financial report, the net increase in the number of Jianzhijia stores in the first half of the year has reached 328. This means that its main work in the second half of the year is to operate existing stores, rather than continue to expand.
The surge in the number of pharmacies has not brought about overall prosperity in the industry, but has intensified competition, leading to losses and closures of many pharmacies. In this case, bowing to reality and asking management for growth, how to maintain competitiveness in the fierce market competition, rather than just winning by scale, has become a problem that all pharmacies must face and solve.

Source: https://mp.weixin.qq.com