Big Box Stores Poaching Veterinary Hospital Pharmacy Sales

What you can do to Protect your Veterinary Practice

Despite weakness in the overall economy, spending on pets, veterinary services, and related products remains strong and at record levels compared to ten or even five years ago.

However, despite this good news, veterinarians face a number of new competitors seeking to peel away significant amounts of revenue from areas that had once been the exclusive terrain of animal hospitals. In particular, veterinary pharmacy sales, the biggest revenue generator for most veterinary hospitals, are under attack by big box stores operating under low-cost/high-volume sales models.

Even online retailers such as PetMeds are feeling the heat.

The Problem

Making money on pharmacy sales and related products—flea and tick control, prescription diets, etc.—has been a no-brainer for most veterinarians. Many of the most commonly prescribed medications can be bought for low cost from manufacturers and then sold at a markup of 100 percent or more.

In fact, the American Animal Hospital Association—as reported by Lowell Ackerman, DVM, in “What’s the Future of the Veterinary Pharmacy?”—says pharmacy income represents 19 percent of income for most practices. Food and other retail products represents five and six percent of total income respectively. Ronald E. Whitford, DVM, in his piece titled “The Future of the Veterinary Pharmacy” writes that pharmacy sales on average represent 25 percent of hospital income.

Whether it is 19 or 25 percent the fact remains that pharmacy sales is a very important revenue stream. However, that stream is getting choked off.

For a few years now veterinarians have seen pharmacy sales slacken with the advent of online retailers. Now, though, big box retailers are getting into the game. Despite making only tentative steps so far, they are racking up impressive sales figures.

For example, according to a report for the VIN News Service by Eric Lau titled “Target Tests Market for Pet Medications,” Target, one of the largest retailers on the planet, has begun testing veterinary medicine sales in a handful of states. So far, the company reports they have been very pleased with sales, which is in part due to the fact they are offering a wide range of pet prescriptions for $4.

Additionally, Walgreens has gotten into the act in a big way. According to Lau, between January and October of 2009, the company filled more than 400,000 prescriptions for pets. With these early successes in a market measured by the billions of dollars, Wal-Mart and other big box retailers will very likely start taking their own share of the market.

Also, because these companies are selling prescriptions at such a low cost, they are threatening the sales of even online retailers. Online retailers are viewed as less convenient, less timely, and more costly due to shipping and related fees.

The challenges to veterinarians, notes Whitford, are:

• • Clients will not continue to pay significantly more for medications from veterinarians
• • Consumers will listen to advertising telling them they are paying too much for medications from veterinarians.

Lastly, all commenters agree that if clients view the prices a veterinarian charges for medications and other products as excessively high, clients will also perceive other services offered by that veterinarian as being significantly overpriced.

All is not lost, however. There are strategies veterinarians can employ to mitigate the advantages of the big box stores while charging a modest premium for medications and other products.

The Solution

Before getting into what will work, let’s take a look at a false prophet, pardon the pun.

Some veterinarians believe they can compete against big box and online retailers based on price by selling cheaply priced human generics that are basically the same as veterinary labeled drugs. This won’t work. A survey of the writing on this subject shows:

• • The FDA has not approved many of these drugs for pets
• • They do not come in properly sized doses for pets
• • Competitors can still offer their products for much less than a veterinarian can.

The bottom line is that if veterinarians think they can compete on price, they are sadly mistaken. Veterinarians have zero competitive advantages in that area.

What will work—again, according to a survey of the writing on this subject—is leveraging the natural advantages veterinarians have. This will help clients see their veterinarian as a convenient and helpful source of medications worth the extra price.

Manage inventory properly – According to Ackerman, there are costs associated with operating a pharmacy, which are related to acquisition, ordering, stocking and product loss. These costs, he says, can account for 20 to 40 percent of sales price depending on how efficiently veterinarians run their pharmacies. Therefore, better sourcing and management equals enhanced profit.

Price competitively – Most veterinarians follow a markup pricing model where they figure out what the total cost of the medication is and then add 100 to 200 percent. In the current climate this is unsustainable. Veterinarians need to consider Margin (also known as Cost-Plus) and Community pricing models. Margin means taking the base price of a product and adding a standard margin of profit for each unit dispensed. Community means basing the sales price on what others charge—local hospitals and retailers—and adding a small premium. Both of these models will lower the profit per sale, but will mean products are competitively priced leading to sustained sales, if not growth.

Market products based on value-added benefits to consumer – Veterinarians have the unique ability to increase the perceived value to clients of buying medications from them, which allows veterinarians to charge a modest premium for what they sell. These include:

• • Convenience – The prescription is given at the veterinarian’s office so why should a client spend time going somewhere else to buy medications. Additionally, seeking out which retailer has the best price requires some research and additional effort. If their veterinarian’s prices are competitive, clients will spend a few extra dollars for the convenience in the same way they will pay extra for milk at a convenience store.
• • More effective administration – There is a direct link between the exam room and the practice’s pharmacy, which means the client can be sure they are getting the right drug at the right dose with the right directions. They can also be sure that the drug’s effectiveness is accurately monitored.
• • Medical advice – Veterinarians are the expert and prescribing doctor. Therefore, veterinarians should ensure that they and their staff are available during and after the visit to answer questions and provide advice and make recommendations.
• • Quality – Veterinarians have more credibility as a medical profession when it comes to offering the best brand and highest quality medications. Big box retailers may be handing out human generics and other tricks. Veterinarians should make sure their clients know this.
• • Online pharmacy – Adding a pharmacy ordering page to a veterinarian’s website will make refills far more convenient as well as monitoring the drug’s use and effectiveness.
• • Email reminders – By effectively using technology, veterinarians can enhance customer service. For example, by issuing email reminders when it is time to renew a medication or begin seasonal treatments, veterinarians will increase customer loyalty.

Invest in good marketing – By hiring a marketing partner with veterinary experience, especially one that focuses on veterinary hospitals, veterinarians will be able to more effectively promote their natural advantages to consumers. As such, this is an investment that will easily grow sales.

ConclusionThe fact is big box retailers are going to syphon off veterinary pharmacy sales from veterinary hospitals. However, veterinarians are not powerless to fight back. By recognizing the reality of the situation and competitively pricing their pharmacy products and effectively advertising their benefits, veterinarians can maintain and perhaps grow their sales of medications. They may even see improved utilization and outcomes, which means better medicine and greater veterinary client loyalty.

Copyright © VetNetwork, LLC / Mark Feltz, DVM
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