Drugstores Surviving Onslaught Of Chains by Banding Together

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Independent drugstores were headed for the endangered list a few years ago, but in Los Angeles community pharmacies are holding on tightly, even as drugstore chains move into their neighborhoods.


While national chains continue to gain market share, the rate of independent pharmacy closings appears to be leveling off, according to various trade groups. Fewer big chain locations are opening, and independents have adapted themselves to compete in a new environment.


“Try going into a chain and talking to the pharmacist,” said David Newman, who has owned Family Discount Pharmacy on Wilshire Boulevard for 15 years. “It’s impossible they’re in the back, busy filling prescriptions. It’s not their fault, it’s because of the volume they do.”


Although a Rite-Aid opened up a few blocks away, Newman said he isn’t worried. His customers see the same pharmacist every time they come in.


Nationwide, the number of independent pharmacies fell by more than one-third between 1990 and 2002, to fewer than 20,000 locations, according to the National Association of Chain Drug Store, as chain drugstores expanded and large retailers including Kmart Holding Corp. and Costco Wholesale Corp. opened pharmacy counters. The number of chain pharmacies rose to 35,400 from 27,000 over roughly the same period.


In California, the number of independent drug stores fell to 1,933 in 2003 from 2,039 in 1997, while during the same period, the number of chain pharmacies rose to 2,036 from 1,839.


“When you live on either coast or in a big metropolitan area, you can get overwhelmed by chains,” said Deleisa Johnson, a spokeswoman for the National Community Pharmacists Association.



Minority stake


Some independents survive by staking claims in urban minority neighborhoods where chains have not ventured.


Bevan’s Pharmacy in South Los Angeles is more than a mile from the nearest Sav-On, while Ethical Drugs in Koreatown is clear of chains in its immediate area. “Sure, we’re losing some business to chain stores,” said owner Jay Park. “But there are a lot of independent pharmacies, and I’m pretty sure it’s growing.”


Independent pharmacists say that personal service, shorter lines and connections built with families over the years have kept customers coming back. According to a recent Consumer Reports survey, community pharmacies won an 88 percent satisfaction rate in the survey, compared with a 58 percent satisfaction rating for chain stores.


Surprisingly, price favors independents as well. A recent Consumer Reports survey showed that an average price of a 30-day cycle of five drugs to be about $11 cheaper at independent pharmacies than at chains.


One explanation: Smaller pharmacies have banded together to form buying groups to cut the size advantage that allows chains to negotiate lower prices from drug manufacturers.


Park belongs to the 100-member Korean Pharmacists Association, which negotiates purchasing agreements.


Still, small neighborhood drugstores face a tough financial climate.


Chain stores are first and foremost retailers: only about 2 percent of chain stores’ revenue comes from prescriptions, according to Michelle McKenna, a spokeswoman for the National Association of Chain Drug Stores. “The vast majority comes from the front-end,” she said toiletries, cosmetics, gifts and groceries.


Independent pharmacies are working with different ratios. Owner Harold Washington said 75 percent of Bevan’s revenues come from prescriptions and 25 percent from over-the-counter items. Bevan’s also serves food because of the high traffic of school kids nearby.


The ratio can run even higher. John Cronin says one of his two pharmacies gets 90 percent of its sales from prescription. Overall, independent pharmacies take in about one-third the revenues that a chain store location does.


Independents also band together to get customers: United Pharmacists Network, for example, is a group of 1,200 pharmacies in California that negotiates contracts with health plans and private employers, giving its members access to customers.


Because so much of their revenues come from prescriptions, independent pharmacies are more vulnerable to reimbursement practices of managed care companies.


As long as a small pharmacy can control its inventory, Washington said, it can manage the delayed payment cycle from drug plans. But as managed care companies drive down the prices they’re willing to pay for medications, drugstores have to make up the income. “It affects the bottom line of both chains and independents,” Cronin said. “But probably mine more than theirs.”

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