Industry Analysis Paper
Drugstores
Prepared for
Mr. Bob Boettcher
Lab Instructor
MAN 4720
University of Central Florida
Orlando, FL 32816
Prepared by
Wilson Edgar Sales
Lab Section
19
Fall, 2006
University of Central Florida
Orlando, FL 32816
Email: wilsondentalstudio@hotmail.com
MLA Format
Date: 10/30/06
1
Table of Contents
1. The Industry's Dominant Economic Features………………………………………..3
2. Porter's Five Forces…………………………………………………………………….5
3. The Drivers of Change in the Industry and Impact They Will Have………………..6
4. Companies in the Strongest/Weakest Positions……………………………………….6
5. Industry’s Attractiveness and Prospects for Long-Term Profitability……………….8
6. Work Cited & Reference List……………………………………………………………10
2
Introduction:
INDUSTRY DEFINITION
“This industry comprises establishments known as pharmacies and drug stores engaged in retailing prescription or
nonprescription drugs and medicines. The Pharmacy and Drug Store Industry in the US retails a range of
prescription and over the counter (OTC) medicines, apothecaries, and health and beauty items such as vitamin
supplements, cosmetics and toiletries as well as offering photo processing services. Major industry supplies are
sourced from the Drug and Druggist Sundries Wholesale industry, the Toilet Preparation Manufacturing industry, the
Soap and Other Cleaning Compounds Manufacturing industry, and the Photographic Equipment and Supplies
Wholesale industry.”1
“In 2003 drug stores posted revenues of $203.1 billion, a double digit growth rate for the eighth year in a row. Chain
drug stores, which account for 51 percent of the industry's over 43,000 stores, took in 73 percent of the income. The
rapid growth in this industry prompted powerful supermarket and mass-merchandise chains to enter traditional drug
store markets, forcing the independent drug store industry to compete with these larger companies. In addition, the
drug store industry faced narrowing profit margins due to the general push to reduce health care costs in the United
States, and as a result, acquisitions and consolidation became prevalent. These factors combined have forced drug
stores to concentrate on customer service, expand into niche markets, add products, form partnerships with suppliers
and health care providers, and automate operations for increased cost-efficiency.”2
1. The Industry's Dominant Economic Features
This section must include:
 Market size,” $203.1 billion of 2003” (Business & Company Resource Center )3

Scope of rivalry, large number of competing firms

Growth rate and what stage of the life cycle is the industry in, double digit growth rate in a
growth industry
3

Number of rivals and their relative size, The three industry leaders are, Walgreens with
sales of $ 37.5 billion in 2004, CVS. Corp with reported sales of $37.5 billion in 2004, and
RiteAid Corp. with sales of $16.6 billion in 2004.

Prevalence of forward/backwards integration, channels of distribution, pace of process and
product technology change, in order to compete within the industry five main store formats
emerged within the drug store industry: independents, chain drug stores, mass
merchandisers, supermarkets, and mail order.

Whether products are highly differentiated or very similar, products or medicines in general
are not highly differentiated to the purpose of its use, relieve and cure someone ill.

To what extent are economies of scale in purchasing, distribution, advertising, etc.
important, very important. A chain drug store would definitely make good usage of all these
techniques to be a more profitable business.

To what extent do learning curves exist, to the extent of store lay-out on how to attract more
customers and the location of more profitable stores.

Are high rates of capacity utilization important for profitability, yes. As your capacity to
turn more products increase , your profitability can also increase

What are the historical levels of profitability. LOW

Are there segments within the industry? Yes. Households are the major market segment for
the nation's pharmacy and drugstore retailers. Within this group its representation by age are
stratified accordingly: 0-19 > 8% , 20-34 > 16%, 35-64 > 45%, and 65+ > 31%.

If so, what are they, and how do their presence effect firms, strategies, competition, and
levels of profitability within each segment?
Percentage distribution of annual expenditures per consumer unit for health care
Dollars
Total health care exp.
Percentage
Health Insurance
Percentage
Medical devices
Percentage
Drugs and medical
640
44.5
30.6
25
25-34 years old
1417
53.8
27.6
18.6
35-44 years old
1980
51.7
28.1
20.3
45-54 years old
2550
46.3
30.1
23.6
55-64 years old
3007
45.1
28.7
26.2
65-74 years old
3588
53.5
17.7
28.8
3584
51.6
14.7
33.7
Age group
Under 25
75 years plus
Source: US Census4
4
2. Porter's Five Forces
For Power of Buyers:
 What are the top three issues that represent high or low power?
o Economies of Scale- high power to the extent of how powerful which company is to
purchase from the manufacturers.
o Cost Leadership- for similar products as medicines are, the company that can sell for
a lower price will have a competitive advantage.
o
 Determine whether the force affects the attractiveness of the industry.
o Yes
For Power of Suppliers:
 What are the top three issues that represent high or low power?
o Small number of suppliers, pharmaceutical companies, High Power
o Suppliers sell sometimes unique medicines, patented for example, high power
o Firms are important for suppliers
 Determine whether the force affects the attractiveness of the industry. Yes
For Barriers to Entry: “Barriers to entry in this industry are medium
these barriers are steady”
 What are the top three issues that represent high or low power?
o Dominance of current players operating within the industry.
o Availability of suitable locations.
o High investment costs required for franchisees.
o However, joint marketing and purchasing organizations facilitate entry for smaller
players.

Determine whether the force affects the attractiveness of the industry. Yes
For Threat of Substitutes: Supermarket
 What are the top three issues that represent high or low power?
o Convenience High
o Location High
o Customer Service High
 Determine whether the force affects the attractiveness of the industry. Yes
For Competitive Rivalry:
 What are the top three issues that represent high or low power?
o Lack of product differentiation
o Capacity added in large increments
 Determine whether the force affects the attractiveness of the industry. Yes
After you have gone through all five forces:
 Include a summary of your analysis and what it means for the industry. Very competitive
industry with great potential for growth
5

If the industry is segmented, be sure to include a brief discussion of that fact and how the
forces might differ across the different segments. Forces are similar among the segments
3. The Drivers of Change in the Industry and Impact They Will Have
The drivers of change section must include:
 Long term growth rate is definitely in the double digit range. The aging of the population
and the longer life expectancy of Americans will require more the need of medicines

Who buys the product and how they use it. Individual consumers buy medicine and they
follow the directions according to their physician’s prescriptions and manufacturers.

Significance of product innovation & technological change. Technology to speed filling
process and software robotics to delivery the products more efficiently.

Marketing innovation. The ability to service the quick-pick customers and fill-in
prescriptions by the phone.

Entry/exits of major firm No regulations to enter the industry. Franchise opportunities
available and free access to expansion.

Diffusion of technological know-how. Easy to copy any implementation or new techniques
of doing business.

Extent of Globalization , at the present time there are no international drug store chain
operating in US and the only outside competition is from Canada.

Changes in costs and efficiencies. The efficiency of the industry is very technological
dependent and as technology tends to get better, profits have a growth tendency and cost a
decrease growth.

Emerging buyer preferences (shift towards differentiation or commodity)

Regulatory influences Government programs such as Medicare have strong influence on
profit margins and the way drug stores do business

Changes in societal concerns, attitudes, lifestyles. The aging of the population and the babyboomers are the strong changes for the nearest future.

Reductions in uncertainty and risk in the industry over time. There will always be
uncertainty and risk in any industry over time.
4. Companies in the Strongest/Weakest Positions
Identify at least three different firms (or types of firms) in your industry.
6
For firm number one: Walgreen Co.
 Discuss how firm number one has positioned, or tried to position, themselves, in their
industry. Open four new centers of distribution, the most recent been in Moreno Valley,
CA.

Is their position in the industry that is more attractive than others? Yes, Walgreen is the
number 1 in the industry

What strategies does this firm pursue? Expansion with new stores and more productive
distribution centers.

Identify characteristics that differentiate this firm from the other two firms:
o Quality/price . Competitive within the industry
o Geographic coverage 45 states in the US and Puerto Rico.
o vertical integration No
o Product line breadth, prescription drugs, over-the-counter medications, cosmetics,
toiletries, food, beverages, and tobacco products.
o Distribution, or service . Service
For firm number two: CVS Corporation
 Discuss how firm number two has positioned, or tried to position, themselves, in their
industry. Firm was formerly known as Melville, during the mid-1990s the company sold off
its apparel, home goods, and shoe-retailing operations to concentrate on its profitable CVS
chain.

Is their position in the industry that is more attractive than others? CVS is the number 2 in
the industry.

What strategies does this firm pursue? (i) store locations and convenience, (ii) customer
service and satisfaction, (iii) product selection and variety, (iv) and price. The company has
been restructuring and streamlining to boost returns over the past few years with these
factors in mind.

Identify characteristics that differentiate this firm from the other two firms:
o quality/price Competitive within the industry
o geographic coverage CVS now operates 5,439 stores in 36 states and the District of
Columbia
o vertical integration No
o product line breadth prescription drugs, over-the-counter medications, cosmetics,
food, film processing and general merchandise
7
o distribution, or service Service
For firm number three: Rite Aid Corporation
 Discuss how this firm has positioned, or tried to position, themselves, in their industry. The
strong relationship with GNC and the rights to sell its vitamins and supplements has been a
key success factor for the company

Is their position in the industry that is more attractive than others? Presently, it is the third
largest drug store chain in the US.

What strategies does this firm pursue? Strategic alliance with GNC to jointly market and
sell line of vitamins and supplement.

Identify characteristics that differentiate this firm from the other two firms:
o quality/price Competitive within the industry
o geographic coverage 3,382 drugstores in 28 states and DC. Of Rite Aid's retail
locations, 53 percent are freestanding, 38 percent include a drive through pharmacy,
72 percent include one-hour photo shops, and 29 percent include a GNC store within
a Rite Aid store.
o vertical integration No
o product line breadth prescription drugs, over-the-counter medications, cosmetics,
food, film processing and general merchandise
o distribution, or service Service
5. Industry’s Attractiveness and Prospects for Long-Term Profitability
Analysis of the industry's attractiveness must include:
 Growth potential, Very high because according to statistic the number of 65 and over
are expected to double in the future

Will competitive forces strengthen, Yes because they have to grow and come up with
new ideas in order to compete with each other. For example Walgreens is already
planning to expand its in-store Health Corner Clinic, this clinic offers patients diagnosis
and treatments for their medical conditions. Also Rite Aid CEO plans to open 800 to
1000 stores by 2010. The company plans to gain more outlets in key strategic markets.

Will driving forces increase/decrease profitability, The driving factor in the industry is
the world's increasing elderly population. The over-65 set, which consumes three times
8
as many drugs as younger populations, and people are living longer thanks to drugs
meaning that profitability will increase.

Which company’s strategic position will improve/decline, Another factor driving the
industry is the world's increasing elderly population. The over-65 set, which consumes
three times as many drugs as younger populations, is expected to reach 690 million by
2025, and people are living longer thanks to drugs

How can firms insulate themselves from the unattractive forces in the industry,
Regulatory changes: firms can protect themselves by reducing Medicaid clients’
Intense competition: firms can find niche markets and secure prime real estate location
Drug imports from Canada: Firms can find legal ways to block imports from Canada.

Degree of uncertainty and severity of problems confronting industry, , The aging
population has also increased the demand for low-cost prescriptions. As drug prices
continue to climb, many states are taking hard-line bargaining positions to reduce their
Medicaid drug costs. The industry also faces new challenges with the Medicare
prescription drug benefit poised to roll out in January 2006.While the buyers may be
living longer, monopoly profits from patents don't last forever

Which types of firms/strategies seem to be most lucrative, real state location, customer
service and satisfaction, technological advancements.

Is this an attractive industry in which to participate? Yes. The strongest factor in
considering the attractiveness of this industry is the enormous potential and future
increase of the aging population, which will demand more medicines.
9
Work Cited & Reference List:

(3,4) Business & Company Resource Center <http://galenet.galegroup.com>

(1,2) IbisWorld Industry Market Research
<http://www.ibisworld.com/industry/default.aspx?indid=1054>

Net Advantage http://www.netadvantage.standardpoor.com

Agnese, Joseph. “Industry Surveys, Supermarkets & Drugstores.” Standard & Poors

Hoovers Online <http://premium.hoovers.com/subscribe/>

Historical Statistics of the USA Millenial Edition Online
http://hsus.cambridge.org/HSUSWeb/search/simpleSearch.do

Mergent Online http://www.mergentonline.com/compsearch.asp

Lexis Nexis http://web.lexis-nexis.com/universe/

Business Organizations http://newfirstsearch.oclc.org

RDS Business Reference Suite http://rdsweb2.rdsinc.com/
10