The economics of community pharmacy in Canada. Part 2: A synthesis of the evidence on competitive strategies

In the first paper in this series, we reviewed the basic economics of community pharmacy in Canada. In this paper, we describe the structure of corporate and non-corporate pharmacies and their competitive strategies. We find that corporate pharmacies generate much larger sales volumes than non-corporate pharmacies. To do so, they typically offer loyalty points on purchases of their large array of front-store products. The corporate chain pharmacies tend to be located in high-visibility areas and offer the longest operating hours. They strive for uniformity in pharmacy look and feel and engage the most heavily in marketing. Dispensing fees are relatively high. With their large sales volumes, corporate pharmacies can exploit scale economies that reduce the average cost per prescription dispensed below that faced by most non-corporates. The corporate model also owes its success to the centralization and standardization of pharmacy operations at the corporate head office. To encourage manager effort, the head office uses financial incentives that reward the attainment of profit targets and penalize underperformance. The scale at which corporate pharmacies operate limits their spread, creating opportunities for smaller non-corporates. Each corporate pharmacy requires a large catchment area to generate sufficient patient volumes and sales revenues to cover fixed costs. Moreover, there are relatively few commercial areas zoned to accommodate a large-footprint pharmacy. Both factors limit their geographic density. Pharmacist-owned pharmacies, being smaller, require a smaller patient volume to cover fixed costs and have more commercial locations to choose from. To compete, non-corporates offer services not routinely offered by the corporates. Many are located adjacent to, and sometimes within, medical clinics. Others have developed strong reputations in ethnic communities. To reduce costs, most pharmacist-owned pharmacies have joined banners and other consortia to share the marketing costs and inventory management and exploit bulk purchasing advantages. There is emerging evidence that non-corporate pharmacies apply less pressure on professional staff to achieve volume targets.