How pharma companies can address the retail market transformations in China

"How pharma companies can address the retail market transformations in China" explores the current status and challenges of the pharmaceutical retail market in China, and proposes winning strategies for companies in light of the four main transformations in the retail market resulting from its structural changes. 

Viewpoints / key findings

With the implementation of health care reform policies, such as Separation of Prescribing and Dispensing, QCE, "4+7" VBP, and DRGs, the prescription outflow from the hospital market to the retail market has been accelerated. The COVID-19 outbreak has further promoted the shift of prescription drug sales out of hospitals. 

Moreover, as innovative models such as B2C, O2O, and internet hospitals become mature, more online retail usage scenarios are emerging, setting higher requirements for retail strategies.

Structural changes taking place within the retail market

• Prescription drugs driving growth: From 2019 to 2023, the retail prescription drug market is estimated to maintain a CAGR of 8.5%. The main drivers include the expansion of prescription outflow, the development of internet hospitals, and the deregulation of online pharma sales. In comparison, the growth of OTC drugs is expected to be lower, with an estimated CAGR of just 5.4%.

Figure 1: China retail pharma market forecast (2019-2023)

• Demand differences between urban and county markets are becoming more apparent: The urban market is larger in size and has higher income per store, but it is increasingly saturated and needs new growth engines. On the contrary, the county market, although still relatively smaller in size, is seeing its market concentration and income per store increase rapidly, with remarkable market potential for pharma companies to capture.  
• Online pharma retail has entered a rapid development stage: Explosive growth is expected, mainly driven by the consumer trend of buying online more frequently, promotion efforts from online health care services providers, and the policy deregulation. Under these trends, China's online pharma retail sales are expected to grow to around RMB 177 billion by 2028, accounting for 30.8% of total pharma retail sales.

Figure 2: China online pharma retail market forecast (2018-2028)

Four transformations

These structural changes in the retail market have led to the following four industry transformations, bringing new opportunities and challenges for pharma companies：

• Differentiating demands among urban retail pharmacies: Urban retail pharmacies’ demands are increasingly differentiated, where pharma companies need targeted strategies to address, including Patient Traffic Attraction, Patient Management Service, Consumer Data Analytics and Targeted Marketing, Pharmacy Management and Personnel Training, and Gross Profit/Transfer Price.
• Escalating needs for effective coverage in county markets: With opportunities and challenges coexisting in county markets, pharma companies need to design diverse and innovative models to enhance effective coverage. Over the past two years, some pharma companies have tried a new “brain-muscle” collaboration model with distributors, which has supported them to provide better promotional and value-added services for retail chain customers in county markets.
• Emerging usage scenarios for online drug sales: While patients typically purchase drugs online under four usage scenarios – Direct Purchas, Urgent Purchase, Online Hospital, and Online Rx outflow, pharma companies need to prepare themselves in advance particularly for scenarios of “Online Hospital” and “Online Rx Outflow.” They need to design appropriate business models and allocate suitable resources for different online usage scenarios.
• Diversifying collaboration models with retail distributors: The industry needs to explore more innovative models such as exclusive distributorship, pharmaco-distributor-pharmacy cooperative mechanisms, and the “brain-muscle” partnerships in county markets. In these ways, the pharma companies can establish specialized, diversified pharma retail distributorship in both urban and county markets, further uplifting the growth of retail business. And this is the fourth key winning theme of pharma companies in the retail market.

The above four transformations present both opportunities and challenges for pharma companies. However, pharma companies’ success in pharma retail will be assured so long as they can uphold patient- and customer-centric principles, improve the strategic priority of retail business, gain deeper insights into chain pharmacy customers' evolving needs, provide tailored service offerings as per customer archetype, and upgrade their organizational capabilities and structures accordingly.