The pharmaceutical retail battlefield

Despite past predictions describing a totally bleak future, based on specific features of underfunding and a much disputed claw-back mechanism, local pharmacy retail kept the upward trend in 2012, increasing by 2.6%.


Amongst noticeable trends observed in the previous year, we can note the continuous growth of the over-the-counter (OTC) segment (6.5% in 2012 compared to 8.4% in 2011) and the constant, long-term issue encountered by retail players: payment terms causing severe lack of liquidity. The slower growth was based on the decreasing consumer purchasing power, whilst the latter issue is currently dealt with. Otherwise, the local pharmaceutical market is rather fragmented, largely import-oriented, in search for high returns and continues to rank below the average for European countries in terms of investments in R&D, with EUR 218 million in 20111.

Last year was rather one of stagnation for the pharmaceutical sector in Romania, as the increase was more tempered than those recorded in the past. 2013 is forecasted to bring brighter prospects, as the removal of some of the claw-back tax inefficiencies would reduce costs incurred by the industry - specifically, the computation principle according to which the tax was applied to a post-VAT price was eliminated based on its unconstitutional nature.
When it comes to identifying a pattern within the local market, it helps to look at the Central and Eastern European (CEE) Pharma industry, as value growth in Romanian retail is, similar to countries in the region, mainly driven by the OTC segment.
However, when looking to the value of medicines sold, the prescription-drug segment accounts for approximately 84% and was increasing at a rapid pace until 2011 (i.e. 31.6% in 2010 compared to only 8.3% in 2011), when it was surpassed in growth rate by the OTC section (namely, 8.4% compared to 8.3%).
According to a PMR analysis, accelerated development of the local market is forecasted for 2013 – 2014, the main potential drivers being: a lower OTC spending per capita within the CEE countries, revealing a considerable growth potential, government policy focusing on cheap medicines and expansion of pharmacy chains.
The local pharmacy retail is comprised of large chain groups, highly dependent on price regulated operations for RX products, with 83% of total sales being generated by the prescription business in 2012. In line with the entire sector, the pharmaceutical retailers did not undergo any significant transformations during 2012, except for already long-term struggle with public  administration in order to combat long payment terms and continuing the classic battle for market share. The first issue has somehow been tackled as the Directive 2011/7/EU, which reduces payment terms to 60 days, was transposed into national law starting with March 2013 (enforcing Law no.72/2013). However, it appears to be a long road ahead for public and local authorities to comply with this task, taking into consideration the past difficulties in respecting the payment terms valid before March 2013, which could go up to 210 days.

The number of pharmacy units has continually grown since 2006. However, the pace has recently slowed down, as large chains shifted focus on business consolidation, being cautious in approaching new expansion opportunities. Meanwhile, independent pharmacies (owned by independent pharmacist and not part of a chain) are continually trying to survive in a market dominated by developing chains which have started to absorb these self-reliant stores as part of their expansion strategies. On the regulatory side, it all seems quiet, as the removal of the demographic criterion, which restricts the number of units to a volume related to the number of citizens, has been postponed until 2015.
A major aspect ruling the pharmaceutical retail market is the game played by top competitors for survival and prosperity. In recent years, the competition amongst pharmacy chains in Romania strongly increased as a consequence of higher drug consumption and increased health awareness of the population.
The current trend is concentration of the market, as the first 10 players represent approximately 48% of total sales in 2012,
relative to 38% in 2011.

Owned by a local entrepreneur, Catena has outpaced former market leader Sensiblu in 2012, with 12.5% of total sales, relative to 10.8%, represented by Sensiblu share. Focusing on buying rationale in the pharmaceutical sector and highly aware of the Romanian consumer behaviour, which, due to low GDP/capita, is usually settling for cheaper alternatives, the retailer continued with the same low-pricing policy and went on with its robust expansion plans, opening 150 units in 2012. Best sector performer in 2011, Sensiblu acquired 90 units of rival City Pharma in 2012 in order to strengthen its leading position.
Following its strategic move, in 2012 the chain experienced a net loss of EUR 14 million, while opponent Catena recorded the highest performance in the sector, with EUR 8 million net profit.
While Catena is focusing on low priced medicines, acting as a big discounter, Sensiblu is targeting premium opportunities, as first chain to have introduced loyalty cards on the local market.
Both players are currently offering discount cards in order to gain consumer loyalty. For instance, the potential discounts granted in Catena chain range between 3% and 22%, whereas Sensiblu clients may receive either a 10% direct discount or up to a 12% price reduction after accumulating a set number of points.
When it comes to brand building strategies, the first two performers are quite comparable. Since 2004, the retailer belonging to A&D Pharma has developed the largest portfolio of own brands on the market, covering areas such as: anti allergy detergents (Dermalin), hair, body and skin care (Herbosophy), personal hygiene (Sensiblu), dermato-cosmetic (Oxyance) and feminine hygiene (Imacul’eau). Similarly, in 2005 Catena launched Naturalis private brand, comprising beauty care, skin care and nutritional products.
Perspectives appear to be bright for the Romanian retail, as players already started implementing innovative strategies, such as ordering on-line with picking-up in-store developed by Catena, the launch of a mobile application to identify pharmacies and products by Dona chain and the introduction of the drive-in concept by Centrofarm. In order to survive in such a  competitive market, players will need to improve their strategic thinking and, as long as the regulatory environment eases, increasing competition would be a certain benefit for Romanian consumers.