The pharmaceuticals distribution business in India is in for a shake-up. The way in which pharmacies have been doing business in this country is set to change. New players are entering the marketplace, and older players are having to adapt to change or opt out.
The Indian pharmaceuticals market is essentially volume- rather than value-driven. Even a slight variation in volume sales has a direct bearing on the overall growth of the market.
For instance, when unit sales of pharmaceutical packs rose 10 per cent n 1998 from their level in 1997, the corresponding increase in sales value was 14.1 per cent. In the first six months of 1999 unit sales decreased 4.2 per cent compared to 1998. The corresponding growth in rupee terms dropped to 5.4 per cent compared to average 11-14 per cent during the 1990s.
In a geographically diverse and extremely competitive market where sales volumes are high, distribution plays a crucial role. Further, the common incidence of brand substitution makes it imperative for a company to make available its brands at all times and at various levels of distribution. Given an estimated 60,000 stockists and more than 5.5 lakh retailers in the country, plus the population of dispensing doctors, who account for roughly 10 per cent of the pharma market, ensuring availability at every level is not an easy task. (note: 10 lakh = 1 million)
In the seventies and early eighties, there were few but large distributors. As pharma companies expanded their marketing operations, these distributors faced logistics problems while attempting to cater to emerging markets. As a result of this many small players became stockists and wholesalers, making the sector fragmented but more localised.
According to the Retail Druggists and Chemists Association, there were roughly 10,000 distributors and 1.25 lakh retail chemists in India in 1978. The number of distributors has increased six-fold, and retail outlets five-fold in the last two decades.
However, the penetration of medicines has not grown proportionately. It is estimated that more than three-fifths of Indians still do not have access to modern medicines. Which means that the urban and semi-urban marketplaces have become extremely competitive at the stockist and retail levels, while the rural market is largely unattended. If the volume growth, as experts say, is to come from the rural sector, then the trade has to shift to rural areas.
This seems unlikely in the near future. For more on this subject, see Distribution channels in India and Stockists and retail margins.
Drug distribution in India has already begun changing following liberalisation. The changes were initiated by pharma companies, which are increasingly replacing company-owned depots and warehouses with clearing and forwarding agents. The aim is to cut overheads. The C&F agents operate under contract on companies behalf. An agent is paid a fee that depends on the turnover of products, and ranges from 4 per cent on a high turnover product to 10 per cent on a low turnover product.
There is no tax problem here. Excise duties apply only when products are considered sold, that is, only when the goods pass from C&F agents to stockists. So manufacturers can move excess goods to C&F depots as and when required without having to pay excise duty before the goods are actually sold to the stockists.
"The C&F agent is in a better position to understand market needs and provide feedback to the manufacturer on sales trends," says a logistics executive at Glaxo Wellcome. Glaxo replaced all its warehouses with C&F agents in 1996.
Given the poor infrastructure in India, which results in extended transit time, companies can move seasonal products well in advance to C&F agents without incurring ex-factory excise costs. Now, let us examine changes taking place at the stockists and retail levels.
Stockists in India operate on a margin of 8 per cent on the 'maximum retail price' of price-controlled drugs and 16 per cent on de-controlled products. There are an estimated 60,000 stockists in India. Usually a stockist handles the business of six to eight companies. A few of them handle more than 50 companies.
Traditionally, stockists have been non-competitive, with each handling a select group of retailers, and vice-versa. However, the recent spate of mergers and acquisitions in the drug industry has put stockists in a quandary. When two companies merge, the number of stockists almost doubles. That can complicate things.
For example, Glaxo Wellcome has 32 stockists, of whom 12 are Glaxo stockists and 10 each were inherited from Burroughs Wellcome and Biddle Sawyer. Mumbai is divided into five zones. Most pharma companies appoint two stockists per zone. Since a Glaxo, Burroughs Wellcome and Biddle Sawyer stockist in a particular zone would cater to the same number of retail outlets, the ideal solution for the company would be to retain any one of them. However, the stockist association is vehemently opposing this and "considering the past it would be prudent for a company to continue with all of them or to face total boycott", says an industry source.
While it is business as usual in other respects for a merged entity, their stockists are steeped into more intense competition. Says Kishore Shah, president of the Retail Chemists and Druggists Association, "Today two stockists of the same company are competing against each other. Retailers are taking advantage by bargaining for discounts, and stockists are left with no option but to comply in order to sustain their business."
According to Shah, some stockists operate on margins of 2 to 2.5 per cent, and pass on as much as 6 per cent to retailers. "Small stockists who operate by taking bank loans are finding it hard to sustain such undercutting practices. Even bigger stockists are thinking of diversifying into other businesses. As I see it, there will not be more than 20-25 stockists in Mumbai after 2003".
Reputed Mumbai traders such as Chimanlal Chimanlal and Company, Premji Vishram & Company, and Sevantilal Kantilal and Company are selling their prized Princess Street offices and moving to the suburbs. In case of 60-year-old N Thimanlal and Company, the owners are gradually phasing out the distribution business and moving to the more lucrative retail end of the business, say trade sources.
Competition at the stockist level is proving to be a bonanza for retailers, at least for the time being. But this section has also begun to have its own share of worries as the concept of retail chain outlets is beginning to get tested in India for the first time. The first retail pharmacy chain was started by the Subiksha Retail Services Pvt Ltd, which operates 19 retail outlets in Chennai. Similarly, The Medicine Shoppe, one of the largest retail drug store in the US, opened two retail outlets in Mumbai and has franchised three more in Mumbai, Calcutta and Baroda respectively. It is planning 100 such outlets in India.
The drug retail market is very competitive and crowded with more than 5.5 lakh pharmacy outlets. Together, they account for 80 per cent of the pharma market. "We are not worried about competition per se. What is disturbing is the financial muscle of these retail giants and their dictatorial style of operations which is creating unhealthy competition," says a representative of the All India Association of Chemists and Druggists.
Though consolidation in drug distribution is still at a very formative stage, industry observers are encouraged by corporatisation of retail trade. "Corporatisation would lead to elimination of at least one layer of distribution. This would enable companies to offer higher margins to retailers. Consumers too will benefit as drug companies would be in a position to pass on the benefits to consumers.. Corporatisation of trade would mean fewer players. This would improve administration and enhance customer relationship," says a distribution head of a leading Indian company.
also see : RDCA's initiative to
corporatise retail trade