Thinking Points
- Drug stores are entering convenience territory, offering goods typically available at convenience stores.
- Convenience chains are fighting back by slowly working into the more regulated OTC drug market, mostly through partnerships with drug and pharmacy chains.
- The distinguishing characteristics of the convenience, drug store, and pharmacy industry are less apparent now.
Backdrop
After talking to a reader, I decided to look into Japanese pharmacies and drug stores. Originally, I found a couple companies particularly interesting (I’ll write about them soon). Then I realized the competitive landscape in small store retail (convenience, drug store, pharmacy) is rapidly changing. Instead of going over the industries in each one of the company specific posts, I figured I’ll write a post broadly covering the industries first, then work my way into company specific posts.
So here you have it, a broad overview of the convenience, drug store, and pharmacy industries. Hope you find this useful!
How are pharmacies and drug stores inconveniencing the convenience industry?
The easiest place to start is to explain the difference between pharmacies and drug stores in Japan, then talk about the inconvenience to convenience stores.
Unlike convenience stores, pharmacies and drug stores are more regulated. From highest regulated to least regulated:
- Pharmacy
- Drug store
- Convenience store
A quick terminology recap: Pharmacies are places with pharmacists – people who can fill prescriptions. Drug stores are places where you can buy over-the-counter (OTC) drugs.
Now, a little bit about OTC drugs in Japan.
OTC drugs are divided into three categories from highest to lowest risk:
- Category 1
- Category 2
- Category 3
Pretty simple.
In order to sell OTC drugs, one must become a registered sales clerk. In order to become a registered sales clerk, one must first work alongside a registered sales clerk or a pharmacist for two years. Only then is one eligible to take the exam to become a registered sales clerk.
Now we get to the fun part. Only pharmacists and registered sales clerks with more than 3 years of experience are allowed to sell Category 1 OTC drugs. For Category 2 and 3, a registered sales clerk or pharmacist will suffice.
In summary, this is the distinction between a drug store and a pharmacy:
Pharmacy = Prescription + Category 1, 2, & 3 OTC drugs
Drug Store = Category 2 & 3 OTC drugs
Back to how pharmacies and drug stores are inconveniencing convenience stores.
Drug stores are eating into the ready-made food market, a convenience industry stronghold. Meanwhile, many consumers wish OTC drugs were available at convenience stores. It’s harder for convenience stores to get into OTC drugs than it is for drug stores to get into ready-made food. Hence, the inconvenience.
A little bit about each industry
- Convenience Stores
In case you’ve never been to Japan or any one of its 55,000+ convenience stores, it’s vastly different from what you’d find in the US. For starters, the stores are clean, well lit, and offer decent food. You can buy event tickets, use the photocopier, pay bills, draw cash from the ATM, and receive packages… all at 3 AM, if you wish. Most locations operate 24/7. More recently, the focus across the industry has gravitated toward food, with 7-Eleven, Family Mart, and Lawson all adding seating space to stores.
About 92% of Japan’s convenience industry is controlled by three companies: Seven & i Holdings (TYO: 3382), UNY Family Mart (TYO: 8028), and Lawson (TYO: 2651). Industry total sales was about 10.6 trillion yen (or 93 billion US Dollars) in 2016, according to Japan Franchise Association (in Japanese).
Source: Seven & i Holdings, UNY Family Mart, Lawson, Japanese Franchise Association (all in Japanese)
- Pharmacy
The pharmacy industry in Japan is a highly fragmented, 7.9 trillion yen (~69 billion USD) industry. The top 10 players account for 15.8% of industry sales and 11.7% of store count. Roughly 70% of stores are operated by individuals.
The top 5 pharmacy operators by prescription revenues are:
Source: MAC Advisory (Japanese)
It’s not all good for pharmacies. Here are a couple concerns:
- Industry wide shortage of pharmacists.
- Government’s push for “family pharmacist”, lower prices, and generic drugs.
It goes without saying that pharmacies need pharmacists. In Japan, pharmacies are required to keep a 40 daily prescriptions to 1 pharmacist ratio. On top of that, Japan’s 4-year pharmacology programs were modified to 6-year programs in 2006. This created a constraint for pharmacies. It starts to make sense how Japan’s convenience industry is largely consolidated while the pharmacy industry is highly fragmented.
Japan is expecting that 30% of its total population will be 65+ years old by 2035.Between 2002 and 2014, prescription drug spending doubled. Prescription drug use is expected to continue increasing through the foreseeable future. In preparation, the government is gradually reducing the prices of drugs.
There are four ways that revenue is generated at pharmacies:
- Dispensing: Fee paid for pharmacist to fill a prescription as instructed.
- Instruction: Fee paid for pharmacist to instruct patient on proper usage of drug.
- Drug: Fee paid for the drug itself.
- Designated medical material covered by insurance: Fee paid for designated non-drug medical use material.
The Japanese government has a point system that assigns points for each of the 4 categories. The points are converted into money, which is how pharmacies get paid. Basically, pharmacies make their money in category 1 & 2 while the government is gradually reducing drug prices in category 3.
The push for “family pharmacist” is an attempt to consolidate drug use info while also improving industry-wide servicing capabilities. Today, most patients get their prescriptions filled at pharmacies right by hospitals and clinics, which are called monzen pharmacies, or “front of gate” pharmacies. The government is pushing to change this. The government wants patients to fill prescriptions at a local pharmacy (near a patient’s residence). The idea is to have a network of pharmacies operating 24 hours per day that are able to visit patient homes when needed, with the necessary drug use information. Pharmacies meeting certain parameters (i.e., high volume, high prescription insurance pharmacies, partnered with hospital), are assigned a lower point scale for category 1 fees compared to other pharmacies to incentivize neighborhood pharmacies.
- Drug Stores
The drug store industry is in between convenience and pharmacy in terms of fragmentation. The top 10 drug store operators account for 68% of the industry’s approximately 6.5 trillion yen ( of revenues.
Here are the top 5 drug store operators:
Source: MAC Advisory (Japanese)
These are the main drug store operators. Some of them also operate pharmacies. Among drug store operators, Welcia is known to focus on pharmacies. With 97,484 million yen of prescription revenues, the company comes in at #6 – within spitting distance of #5 Suzuken for prescription revenues in the pharmacy industry.
In a August Nikkei BP article, the chairman of Welcia was quoted:
“We will start offering products commonly available at convenience stores.”
This is basically a declaration of war against the convenience industry. According to the same article, about 100 of Welcia’s stores operate 24/7. The company already offers ready made food at some of its stores.
What are convenience stores doing about the situation?
According to a Nikkei article published in March, UNY Family Mart partnered with pharmacy and drug store operators. In total, the company has 50 convenience store locations attached to drug stores or pharmacies.
Lawson is partnered with Qol, one of the top 5 pharmacy operators. Lawson has about 150 stores that sells OTC drugs.
7-Eleven has also partnered with drug stores and pharmacies. The core of 7-Eleven’s approach, though, is to sell OTC drugs (including category 1) online and give customers the option to pickup in-store or delivered. The company handles about 3,000 types of OTC drugs.
If you can’t beat them, join them. But if you’re 7-Eleven, join them and beat them at the same time.
In closing
The convenience industry is well aware of the drug store and pharmacy threat it faces. Thus far, the impact of partnerships with drugs stores and pharmacies appear trivial. It would be interesting to see whether 7-Eleven’s online OTC drug approach (implemented late 2016) gains any traction.
The characteristics that clearly separated convenience stores from drug stores and pharmacies in the past are gradually becoming less transparent. Convenience chains have the scale, pharmacies have the technical advantage, and drug stores are somewhere in the middle. Only time will tell who comes out ahead.
** If you’d like to copy/paste the tables from this article, here is a Google Sheet file containing the tables.
