①The growth rate of total sales revenue of retail pharmacies has slowed down, and the competition in the existing stock continues to intensify. In the first half of this year, it was difficult for major chain pharmacies to increase their income. ②In the future, the focus of competition in pharmacies will shift to product extension and services. According to the forecast of Zhongkang Industry Research Institute, the growth rate of pharmaceuticals in all terminals is expected to decrease to 4.9% in 2024, compared with a decrease in 2023.
On September 2, Caixin reported that the sales of retail pharmacies in all categories have slowed down and the competition in the existing stock continues to intensify. In the first half of this year, major chain pharmacies found it difficult to increase their income.
Industry experts told Caixin reporters that this year will be a turning point for the rapid growth of the number of stores in the pharmacy industry. The number of stores is expected to decline next, and the industry is entering a period of differentiation and accelerated mergers and acquisitions. After going through a major reshuffle, the number of stores in the pharmacy industry will reach a reasonable level, and the focus of competition in pharmacies will shift to product extension and services. "The fundamental indicators that determine whether a company can continue to survive in this industry are the sales per store and net profit margin."
The prices in the industry are in turmoil, and it is difficult for large chain pharmacies to increase their income in the first half of the year.
The semi-annual reports of six major pharmacy chain listed companies, including Yifeng Pharmacy (603939.SH), LBX Pharmacy Chain (603883.SH), Dashenlin (603233.SH), Yixintang (002727.SZ), Shuyu Pingmin (301017.SZ), Jianzhijia (605266.SH), have all been released. Overall, chain pharmacies are facing increasing operating pressure this year. While expanding the number of stores, it is difficult to increase income and even more difficult to increase profits.
Comparing the six listed pharmacy chains mentioned above, their H1 revenues have all achieved positive growth, with Shuyu Pingmin, Dashenlin, Yifeng Pharmacy, Yixintang, Jianzhijia, and LBX Pharmacy Chain increasing by 13.08%, 11.29%, 9.86%, 7.26%, 3.4%, and 1.19% respectively compared to the same period last year.
In terms of net income, only Yifeng Pharmacy achieved growth. In the first half of the year, the company achieved a net income attributable to shareholders of the listed company of 0.798 billion yuan, a year-on-year increase of 13.13%; Shuyu Pingmin had the largest decline in net income, with its H1 net income attributable to the parent company decreasing by 82.6% year-on-year; Jianzhijia, Yixintang, Dashenlin, and LBX Pharmacy Chain all saw their net income attributable to the parent company decrease by 60.23%, 44.13%, 28.32%, and 2.05% respectively.
Why is the net income of the pharmacy chain industry mostly negative in H1? The influencing factors are multifaceted. Shuyu Pingmin stated that the continuous deepening and adjustment of medical reform policies, the normalization of drug procurement, and other changes in industry policies have affected the behavior of end consumers, resulting in a slowdown in the overall revenue growth of the company and a further decline in the profit margin of existing products, leading to a significant decline in net income compared to the same period last year.
According to the financial report of Shu Yuping, the company's main source of revenue is traditional Chinese and Western medicine, with an H1 gross margin of 21.59%, a decrease of 3.04 percentage points year-on-year.
Dashenlin's H1 net profit and non-net profit decreased by 28.32% and 26.65% year-on-year respectively. The company explained that the main reasons for the decrease in gross margin and the increase in sales expenses were the decrease in consumer purchasing power and the presence of many new stores still in their nurturing phase. Dashenlin's gross margin for traditional Chinese and Western medicine in H1 was 30.64%, a decrease of 1.88 percentage points year-on-year.
Furthermore, the growth rate of the pharmaceutical market is lower than the increase in the number of stores, leading to severe industry competition. According to Zhongkang's statistics, in the first half of 2024, the average sales of national pharmacies dropped by 10.6% year-on-year, with the average customer price dropping by 8.9% year-on-year. In addition, Minine's data shows that in the first half of 2024, China's physical drugstore retail scale (pharmaceuticals + non-pharmaceuticals) was 298.6 billion yuan, a 3.7% year-on-year decrease.
Yunnan Jianzhijia's corporate secretary Li Heng stated at the performance briefing for the first half of 2024 that the company's revenue in the first half of 2024 increased by 3.40% year-on-year, weaker than expected. The comprehensive gross profit from low-income growth could not cover the rapid increase in stores, leading to a 17.11% year-on-year increase in operating expenses.
Where is the turning point for the high-growth phase in the industry?
Currently, the top four chain pharmacies, Dashenlin, LBX Pharmacy Chain Joint Stock, Yifeng Pharmacy Chain, and Yixintang Pharmaceutical have all entered the era of ten thousand stores. In the first half of the year, the number of stores of the six major chain pharmacies continued to grow. Among them, Dashenlin expanded the fastest, adding 2,077 stores. LBX Pharmacy Chain Joint Stock, Yifeng Pharmacy Chain, and Yixintang Pharmaceutical added 1,625, 1,575, and 1,317 stores respectively.
According to preliminary statistics from Zhongkang, the number of pharmacies reached 0.701 million by the end of June 2024, intensifying industry competition. In the second quarter of this year, the growth rate of the total number of retail pharmacies nationwide slowed down, and the number of closures increased significantly. In the first quarter of 2024, the retail market primarily relied on four types of drugs to drive growth. With drug demand returning to normal, the market will struggle to support such a large number of stores.
In 2019, before the epidemic, the retail market scale was 465.7 billion yuan, with a total of 0.53 million stores nationwide and an average annual turnover per store of 0.88 million yuan. If the retail market scale for 2024 is estimated at 500 billion, there will be approximately 0.7 million stores, reducing the annual turnover per store to 0.71 million yuan. This represents a nearly 20% decrease compared to the individual store turnover in 2019.
(Data Source: "China Pharmacy Development Report 2023-2024" "China Pharmacy" Magazine)
Will the total number of pharmacies decrease in the future? Gao Yi, Chairman of Yifeng Pharmacy Chain, publicly stated recently that almost all retail industries continue to open stores during their peak, while single-store profit margins decrease. In the future, either new models will emerge, or there will be a large number of closures and industry consolidation. Future industry mergers and acquisitions will accelerate, with the fundamental indicators determining whether a company can continue to survive in this industry being single-store sales and net margins.
"In the era where pharmacies outnumber rice shops, the overall lowering of drug prices, and the online stores squeezing out physical stores, the model of relying on the price difference of pharmaceuticals for profit is no longer sustainable." A senior industry expert candidly told journalists from Financial Union, "Closing a batch of stores, the overall pie remains the same size; relatively, the remaining stores can thrive better."
In a period of existing competition and industry 'rolling prices,' how to find new growth points? A senior executive of a large chain pharmacy company told journalists from Financial Union, "In the long run, the non-pharmaceutical aspects of comprehensive health are companies' must-grow areas in the future, including functional products and food. In the future, pharmacy competition will focus on new varieties of services and goods, as well as comprehensive operational capabilities."
The current main profit model for pharmacies is still in pharmaceutical sales. How to use the pharmacy scene to provide consumers with comprehensive solutions for diseases or health issues in the future. Information revealed from the interim report shows that some chain pharmacies have made attempts, such as Yixintang's pan-health category initially focusing on beauty and personal care, now expanding into a multi-category development pattern including beauty, personal care, food, infant formula, etc.
LBX Pharmacy Chain related individuals told journalists from Financial Union that the company has put a lot of effort into its own brands. In the first half of the year, the company's sales from self-owned brand self-operated stores reached 1.69 billion yuan, accounting for 21.5% of revenue, an increase of approximately 1.6 percentage points from the same period in 2023.
According to individuals related to Yifeng Pharmacy Chain, the company is trying to maintain and expand regional competitive advantages through health management services, business model extension, and the development of new formats for comprehensive health pharmacies.
According to Zhongkang Industry Research Institute's forecast, the overall growth rate of pharmaceuticals in all terminals in 2024 is expected to be 4.9%, a decrease compared to the previous year. The annual growth rate of pharmaceutical categories in physical pharmacies is only expected to be 2.9%. As industry growth slows down, some small and medium-sized chain companies may be eliminated due to compliance, losses, cash flow pressure, etc.
