Large chains push small drugstores out of the market

  • 2012-01-25
  • By Linas Jegelevicius

LOOKING UP: Mergers sweeping the market could lead to a more efficient industry.

KLAIPEDA - Single non-chain community pharmacies cannot stand up against large pharmacy chains, and the latter keep crawling into small Lithuanian towns, settlements and even larger villages which, until recently, were mostly serviced by small, one person-managed drugstores. Not anymore.

Mindful of the fierce competition and expansion, even big pharmacy chains are merging – Gintarine’s acquisition of Litfarma at the end of last year marks the latest concentration on the market.
Not only non-chain drugstores are being closed; those belonging to the chains also incur a rapid process of augmentation – smaller pharmacies are being replaced by large ones at busy intersections.
In 2008, 26 chain drugstores were shut down, and the number went over 50 last year. The opening of new chain drugstores also slowed, from 112 in 2008 to a bit over 30 last year. When it comes to single drugstores, 25 were opened in 2008 and only 15 in 2011.

The merger of Gintarine and Litfarma pharmacy chains may signal the upcoming years’ trends in the market, some experts say. After the acquisition, Gintarine, a part of the international Dutch pharmacy enterprise Central European Pharmaceutical Distribution (CEPD) N. V., has become the second largest Lithuanian drug market player, with 283 pharmacies countrywide overtaken only by Eurovaistine.

Saulius Jasiulevicius, chairman of Lithuania’s Small and Medium Pharmacy Owner Association (LSMPOA), says the merger exposes the state’s inability to promote small and medium pharmacies. “Only in election programs do politicians rant about supporting small and medium-size businesses. In real life, all goes to the opposite,” says Jasiulevicius.

He is not aware what percen- tage of the market the new pharmaceutical giant will take up after the coalescence. “Maybe that is not even so important. What is important is the market’s monopolization. Undoubtedly, it should be seen negatively,” the chairman says.

Lithuania seeks the unbundling of energy sector monopolies, but when it comes to other sectors, like pharmacy, the state turns the green light on for the reverse, Jasiulevicius notes.
“Lithuania’s Competition Council (LCC) has not determined what a maximal part of the market a monopolist can take up. In that sense, the principal criterion remains the possibility of competition. What concerns us is whether mergers and business concentrations do not create, or enhance, their dominating status in the market, thus limiting competition,” Gintare Izokaityte, Dominating Business Entities and Merger Department senior specialist at the LCC, says.

She emphasized that, deliberating the acquisition bid, ill-effects of the expansion on competition in five Lithuanian districts, Jonava, Varena, Kelme, Telsiai and Birzai, was taken into consideration. The Competition Council has refused to give the bidder the green light for the takeover of six Litfarma drug stores in the regions, arguing it would undermine competition.

This, Jasiulevicius asserts, is not enough. “The biggest pharmacy market players roll rapidly ahead with the highest gear set, and no one is capable of stopping them.”
The merger deal is reported to be worth more than 14.2 million litas (a bit more than 4 million euros) and annual turnover is expected to reach 250 million litas.

“Both pharmacy chains were similar in terms of their conceptions and ideas, focusing on the pharmaceutical services and the client, not on the game of discounts, a priority of some other chains,” Kestutis Broniukaitis, director general of JSC Gintarine vaistine, says.
He fends off the accusations of market monopolization, claiming the merger will increase accessibility to the drugstores and, due to the effect of size, will enable customers to buy drugs from pharmaceutical providers and producers on better conditions.

“An expansion strategy is a constant process everywhere. We have simply taken advantage of the possibility,” Broniukaitis asserts.
CEPD president Maria Wishniewska says that the Lithuanian pharmacy market could be an example for the countries where the pharmaceuticals business is not consolidated yet. The CEPD, she said, is eyeing an active expansion in other Eastern and Central European countries soon.

Now the CEPD-managed National Pharmacy Group runs 289 drug stores in Lithuania, taking up 23 percent of the Lithuanian drug wholesale market and 20 percent of the drug retail market.
Though the state insists the market concentration will not adversely impact small pharmacies, the trend scares most small drugstore owners. According to the data of the State Medicine Control Service (SMCS), in the period of 2008-2010, more than triple the number of small drugstores were closed down than chain drugstores. In addition, during the period, a more than four-fold number of new chain pharmacies were opened.

“It is very clear that small single drugstores cannot stand the competition and are forced to close down, as the large chain-owned drugstores replace them. The chains get in groups among themselves, use zoning to better withstand competition and merge. We see a rapid monopolization,” says Aukse Dambrauskaite, a SMCS representative. She says these trends will prevail in 2012 as well.

“The state pharmacy policies are extremely adverse to small drugstores like ours,” says Zilvinas Macijauskas, chairman of Pharmacy Association Provifarma and owner of drugstore Migdule in Taurage.
“With no constraints to the expansion of the large pharmacy chains, most small drugstores will be wiped away soon. The only thing that attracts many regular customers into our drugstore is the personalized service we provide. Discount-wise, we are not able, most often, to compete with the large chains in the neighborhood,” he said to The Baltic Times.

Broniukaitis, the Gintarine head, says the market players’ concentration has been considerably induced by the government decisions on drug mark-up limitations. “The authorities thought the limitations will work in favor of ordinary drug buyers. It has turned out, however, they have weighed heavily on the small drugstores most, as those of large pharmacy chains managed to set off the losses due to the [slower] mark-up easier,” the Gintarine director notes. He added: “It is always easier to withstand difficulties for those who have some extra fat.”

The LSPMOA president, Jasiulevicius, agrees partly with him on this. “The large drugstore chains always can play around with their prices, offering lower [prices] than in a nearby single small drugstore. Small pharmacies always have to wait until a big player offers some discount, and go from there,” the president stressed.
Broniukaitis does not dispute this: “Sure, the enterprise expansion means better conditions when it comes to obtaining drugs from the wholesalers and the producers. And, in turn, this means vast possibilities to carry out campaigns of significant discounts in our pharmacies.”

Jasiulevicius says that the complicated financial plight of small drugstores is being exacerbated by the state’s policies on compensated drugs. Sales of this kind of drug have made up nearly half of all sales until recently.
“If a small drugstore owner sells half of his drugs without a sales mark-up, how can one expect he will manage to make ends meet?” the LSPMOA president wonders.

Small drugstore owners, in attempts to fend off large chain expansion bids, had lobbied for a Pharmacy Law amendment in 2010, seeking limitations on pharmacy numbers. The initiator of the amendment, parliamentarian Algimantas Dumbrava, proposed that a new license for establishing a new pharmacy or its branch would be issued heeding the actual number of inhabitants in an eldership, except of those in the countryside.
“Small drugstores are facing a very difficult situation and often are unequally competing against the chain pharmacies. This amendment would limit drugstore concentrations in localities and allow small drugstores to survive the competition,” Dambrava said, defending his draft.

However, the amendment has not been put up for vote after Seimas’ several committees expressed concerns the proposed amendment violates the EU and some national laws.
Not giving up, the LSPMOA has rewritten some formulations in the draft and has resubmitted it to Seimas. The association asks Seimas to set a minimum number of inhabitants necessary for opening a new drugstore. The LSPMOA sees the number at 2,500. However, the proportion, in reality, is considerably smaller, around 1,000 inhabitants per one pharmacy. It remains unclear when the Pharmacy Law amendments could be put for the MPs’ vote.

With the drugstore concentration rising, even the biggest pharmacy market player, Eurovaistine, does not eye expansion in 2012. Raimonda Kiziene, Eurovaistine board chairwoman, says the proportion of drugstores per one inhabitant in Lithuania is one of the highest in the entire European Union. “That is one of the reasons why the number of drugstores is on the decline,” she says.
The largest chain executive also points out that the restrictions on drug pricing, like the mark-up limitations, large emigration and consumption decrease in general, have also ill-effected the business.

She agrees small drugstores in the provinces face the most adversities.
Tauras Endriukaitis, director general of Entafarma, told the weekly Ekonomika he has always dreamt of becoming a pharmacist. However, he has chosen another pharmaceutical path, opening up the largest pharmacy logistics center and storage in Eastern and Central Europe.

“Running a pharmacy is a complicated business, especially nowadays,” he says, adding, “The current pharmacy market is very different from the way it was before. A couple of decades ago, most pharmacies were independent, and now they are controlled by five large drugstore chains, which take up nearly 90 percent of the market. A similar situation is also in the drug wholesale market, where out of several dozens of wholesalers, until recently, only eight are left now. The majority of them provide drugs only to their drugstores,” Endriukaitis noted.

He says pharmacists have also changed. “Years before, they would not only sell drugs, but give pieces of advice on healthiness as well. Nowadays, most pharmacists do not bother to do so, telling customers only how frequently one or another drug should be used,” the entrepreneur says.

Endriukaitis disagrees that the drug mark-ups in Lithuania are extremely large. “Frankly, they are among the least in the entire Europe,” he maintains. “We do not know what kind of price mark-ups foreign drug manufacturers apply to their production. Maybe they make a drug that costs only one litas, but sell it to us for 10 litas. However, in the wholesale trade, the mark-ups are very small, even one of the smallest in Europe. For example, in a German drugstore, an average drug price mark-up is around 50 percent; meanwhile in Lithuania it is approximately 15 percent,” the Entafarma owner says.
Having graduated from Kaunas Medicine University, he took over his father’s little drugstore in Sakiai district, but soon realized the drugstore, due to its remote location, could not be run profitably. “It was then when I decided to take on the drug wholesale trade,” he says. Entafarma, started in Jurbarkas and later moved to Kaunas, has fulfilled his business endeavors in Lithuania, with over 50 employees working in the drug wholesaler.

The entrepreneur has brought the firm to a higher level, expanding the business beyond the Lithuanian borders – from his newly built drug distribution operation drugs are being sent as far as Mongolia, Kazakhstan and Azerbaijan.
“We thought of taking on the retail drug trade as well. However, there were serious fears we may lose many of our clients in doing so, as they, mostly independent drugstores, could see us as their direct competitors,” Endriukaitis recalled.
He notes that the number of independent drugstores in the country is on the decline, as they become a part of the large pharmacy chains.

Perceiving their vulnerability, he thought it was too risky to bind his business to them. Therefore, searching for new business niches, he decided to develop the pharmacy logistics business, which, he says, is still little known to many in Lithuania, i.e. providing the services of drug storage, stocking and distribution for foreign pharmaceutical enterprises.
The entrepreneur is convinced the construction of a modern 8,000 square meter storage facility would have been a lot costlier if he had built it now, in the post-crisis. He says it cost him over 12 million litas in total.

Endriukaitis says the Entafarma storage is the only licensed storage of this kind to correspond to the EU-set demands. “We are looking forward to receiving a license for repacking drugs, as well as expanding the foreign client base. Though the drug transportation service we provide is one of the cheapest in the region, with the number of clients increasing, we could reduce the service costs,” he says. He adds:  “However, we will never engage in discount games at the expense of our quality,” the businessman claims.