The OTC market
The Over the Counter medicines market has shown a ‘4.1% growth in the year to December 2003, reaching a value of £1,973 billion, compared to just 1% increase in 2002’ (sourced from Chemist and Druggist 2004). Over the Counter (OTC) medicines are those chosen by the consumer as opposed to prescribed drugs/medication from a doctor that is selected on their behalf. Within the OTC market there are medicines that are only obtainable from a licensed pharmacy with a registered pharmacist present. There are however in addition medicines that can be bought on without guidance. These are identifiable by the General Sales List Medicines and can be purchased from a variety of retail outlets. It is this that allows supermarkets such as Tesco to capitalise in on the OTC market. Also the change in recent legislation passed in May 2001 has lifted price fixing on OTC medicines. This has meant that prices on some drugs have been cut by as much as 50% by big retailers and perhaps the cause of falling sales of ‘Boots’ as consumers purchase medicines conveniently at there local supermarket. At present the grocery market claim a 24% share of sales in the OTC market.
The following table shows the proportion of sales accounted for by OTC medicines in 2002:
UK market for OTC Pharmaceutical Products and Top Branded Sellers, by Therapeutic Category, 2002
(Sourced from MBD, Trade estimates.)
Boots Sales
Boots interim results to 30th September 2004 have recorded a sales increase by 4.9% t0 £2.17bn with like fro like growth of 3.8%.
There growth has been attributed to longer opening hours, store refits and new stores.
The following table shows sales and growth rates by category for Boots the Chemist operations:
(Sourced from Boots.com)
Overall the table has shows that healthcare products continue to bring in the most revenue for the company despite intense price competition from supermarkets such as Tesco and main competitor Superdrug.
Conclusion
Boots are still continuing to increase sales growth therefore there is not an urgent need to drastically cut prices to compete with the likes of big supermarket chains like ‘Tesco’. Money would be better of spent on marketing the image of the company so that consumer’s first choice to buy OTC medicines is Boots.
PEST Analysis
Political Factors
Looking at the policies the government implement can help us understand the pharmaceutical industry. The fiscal policy is categorised into direct and indirect taxes. If the level of economic activities is low, lowering the rates of taxation can increase this.
Chemists are price elastic so may be affected by changes in direct taxes. Drugs are purchased most of the time without regard to price however people may go for cheaper substitutes in the industry, which could be why Boots have launched a low price product range. Changes in direct taxes such as income shouldn’t have an impact on the trading of this sector.
The government also invests in transfer payments for this industry, which has an impact on how much consumers spend and on the level of economic activity.
The monetary policy will be used in conjunction with the economic state to improve the level of expenditure and economic activity. This includes changes in interest rates, the money supply and exchange rates. However will this affect this industry? As people will purchase drugs if they are ill in health.
The Resale Price Maintenance (RPM) is the price that is given to businesses as guidance for setting prices and it ensured that the smaller pharmacies could compete with larger firms. RPM was abolished in the 1970s by Restrictive Practices Court, in order to prevent firms setting their prices too high. However by doing this it has had an adverse affect on the industry as it has become highly competitive and there are fears of price wars. It has also encouraged discounting activities thus causing a competitive price war.
Economic Factors
The UK market for retail chemists and drugstores is becoming increasingly competitive. As the regulatory controls that used to govern the industry are dissolving, it has given opportunity for other retailers, such as supermarkets, to expand into the market.
There are three major companies within the pharmaceutical industry in the UK, Alliance Unichem Ltd, Boots the Chemist Ltd and –GEHE AG. Boots dominates the high street retail end whilst Gehe and Alliance Unichem have acquired small retail outlets. Because the government restricts the number of dispensing pharmacy outlets, NHS dispensing licences are limited, which means that retail chemists can only expand their presence in the market through the acquisition of existing outlets. Boots has increased its presence, at what is believed to be at the expense of the independent sector.
There is concern amongst industry analysts that the domination of these three companies in the market may cause a price war that is manufactured by these leaders in order to gain an oligopoly, making it more difficult for smaller independent retailers to operate in the market.
Since the abolition of Retail Price Maintenance (RPM), there has been significant discounting activity by supermarkets and large retail chains, which has impacted the market by intensifying competition.
Analysing the pharmaceutical industry as a whole, there are findings which indicate that government policies, industry structure and the international market are the main factors that have the greatest impact on the industry.
There are 464 pharmaceutical companies in the UK, which are governed by the Department of Health and according bills that have been passed by previous governments. The bills ensure that drugs companies remain ethical in their pricing of drugs and especially in stating the dangers and side effects of certain drugs. In recent years, mergers of large companies have occurred and there has been a move of UK based companies into overseas markets where production expenses are cheaper and regulations are less restrictive.
However, this move from the UK economy accompanied with policies restricting reimbursement to drug companies is causing a downturn in the employment of people in this industry (see appendix 1)
However, the pharmaceutical industry is an essential part of the UK economy as it provides it with a trade surplus that is used in other areas and it sponsors the development of new drugs and treatments of diseases. For example Glaxo-Wellcome donated £1m to Royal Liverpool hospital to support a specialist cancer centre. There for the contribution of UK based pharmaceuticals in research and development is vital for future of health in the UK population.
Social Factors
Social factors have a major impact on the pharmaceutical industry. This includes the shift in family structures, attitudes and beliefs towards working life and increasing long life.
Firstly we now have more of the symmetrical family. This is where husband and wife are perceived as being equal and carry out the same tasks, this is now reflected through the number of women working. This has an affect on our industry as the working hours of many pharmacies are nine to five. For this type of family it makes it difficult to purchase from these stores, hence the reason why Boots have increased their staff working hours and extending store opening hours. This gives the consumer more option of when to shop and also gives more flexibility to accommodate full-time workers, part-time workers, older workers, those with children trying to find the right balance between family and work, However it could also have adverse affects as longer opening hours could mean staff may be required to work longer hours.
In terms of life expectancy we are now noticing an increase in numbers. “At the start of the last century, in the United Kingdom, a person would expect to live to an average of about 44 years of age. By the year 2000, this had increased to around 77 years.”
It is the medicines and treatments that have contributed to this increase as people are living healthier lives. This is promising for the pharmaceutical industry as their demand will be high as medicines are heavily used by people of 60 and over. Over 55% of the elderly account for the total number of prescriptions made. This has increased by 15% since the early 1990s.
Source Government Actuary’s Department
Technological Factors
The innovation of E-commerce has allowed the internet technology to become integrated into business practice via Electronic Data Interchange (EDI) which assists with communication amongst the industry. E-commerce provides businesses with fast and efficient transaction processing, product marketing and sales, and an impact on its competitive edge and growth, which effectively opens up its access to global operations, shrinking geographical distances. This information, applied to the OTC sector, allows the high street leader Boots to efficiently communicate with suppliers and improve its logistics according to supplies and stocks of goods, and delivery to customers or in other words, the Supply Chain Management.
Customers are provided with an electronic interface that acts as a brochure of the products that they can purchase and available online medical advice and sales and after sales services. There is a comprehensive list of common ailments and remedies to treat them. There are services being offered where customers can arrange for Boots to pick up their prescriptions when they are not able to. This is convenient as they can order online, eliminating time.
On October 28 2004, it was announced by Boots that an agreement had been made with the information solutions company IMS to deliver OTC healthcare intelligence regarding the market place. This will be put into effect via integrating its IMS’ intelligence systems into the Electronic Points of Sales of Boots estimated 1, 300 stores. This partnership will provide Boots with the market intelligence that will identify opportunities and insights of the market, thus providing Boots with information that will be vital in understanding consumer buying habits, and trends. The integration is scheduled to be implemented over the Christmas period; however Boots has put it on hold as the company wants to enjoy the influx of consumer buying over the festive period.
The integration of e-commerce and information systems into the business gives an opportunity to improve productivity whilst reducing costs and maximising profits whilst improving human resource output.
6. CONSLUSIONS
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RECOMMENDATIONS
Was Boots right to introduce marginal activities?
Boots’ performance to a certain extent was attributed to the diversification of products outside of the pharmacy, it would seem that they have possibly over diversified and this has led to a loss of focus on the core of the business.
Firstly, Boots the Chemist does not operate on the same economies of scale as supermarkets such as Tesco, who can afford to slash prices to a marginal cost, but recover profits by selling by volume. This makes it difficult for Boots to compete to the same extent as Tesco’s in the price war of OTC drugs. A possible solution would be vertical integration i.e. merging with a supermarket, although costly in the short run, but may be profitable in the long term.
There needs to be a review of Boots’ strategic marketing, this would provide “insights into the consumer that are true for today, but may importantly anticipate tomorrow” (Business Review, Volume 2, Nov 2003) This could be implemented through both quantitative and qualitative market research through demographics, psychographics and Geographic’s of their customers, giving a greater insight that can be manipulated for market and product segmentation.
Boots needs to focus on retrenchment, through monitoring the areas of the business that and performing well, and those that need evaluating. This will effectively place focus on improving existent practices and strategies, remove focus from expansion by acquiring more outlets.
The change in management that will occur in 2005, whereby the former MD for Tesco will take over will open up opportunities for growth and improvement of strategy.
Boots should consider the possibility of offering interactive diagnostics and consultations over the internet. This will attract customers who are very busy and cannot obtain an appointment from the GP and thus require medical advice from elsewhere. Boots can outsource medical support from the numerous interactive medical consultancies that already exist on-line.
Boots can approach local health authorities to form a partnership where they can offer patient services such as blood pressure or cholesterol level tests within their outlets. This will increase the customer base of the store and attract spending and use of services, as well as loyalty.
The pharmaceutical industry is forecast to grow by 39.2% until 2005, thus there is opportunity to increase market share. Perhaps Boots should consider investing more into ayurvedic and alternative medicines. The company will soon introduce its products developed by Piramal which will attract a different segment of the market.
7. BIBLIOGRAPHY
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REFERENCES
Letts study guide A-level Sociology; Stephen Moore
AS/ A- level Business Studies 2nd edition; Malcolm Surridge
Bloomberg.com
Financialtimes.com
Bbc.co.uk
8. APPENDIX
