①The growth rate of total sales revenue of retail pharmacies has slowed down, and the competition continues to intensify. In the first half of this year, it was difficult for the major leading chain pharmacies to increase revenue and profit; ②In the future, the focus of pharmacy competition will shift to product extension and services. According to Zhongkang Industry Research Institute, the overall terminal growth rate of pharmaceuticals is expected to decrease to 4.9% in 2024, compared with a decrease in 2023.
On September 2, Financial Association News (Reporter: Huang Lu) Due to multiple factors such as oversaturation of pharmacy numbers, the return of medication demand to normal, downward individual payment capacity, and increasingly cautious consumer spending, the total sales of retail pharmacies for all product categories has slowed down, and the stock competition continues to intensify. In the first half of this year, it was difficult for the major leading chain pharmacies to increase revenue and profit.
Industry insiders told Financial Association reporters that this year will be a turning point for the high growth of pharmacy store numbers. The number of stores is expected to decline in the future, and the industry is entering a period of differentiation and accelerated mergers and acquisitions. After experiencing a reshuffle, the number of stores will reach a reasonable level, and the focus of pharmacy competition will shift to product extension and services. "The fundamental indicators that determine whether a business can continue to survive in this industry are single-store sales and net profit margin."
Industry news: Difficult increase in revenue and profit for leading pharmacies in the first half of the year
The semi-annual reports of the six pharmacy chain listed companies, Yifeng Pharmacy (603939.SH), LBX Pharmacy (603883.SH), Dashenlin Pharmaceutical Group (603233.SH), Yixintang Pharmaceutical (002727.SZ), Shuyu Plain Folk (301017.SZ), Yunnan Jianzhijia Health-chain (605266.SH) have all been released. Overall, the operating pressure on the chain pharmacies this year has not decreased. While the number of stores continues to expand, it is difficult to increase revenue and even more difficult to increase profits.
Comprehensively comparing the six listed pharmacy chains, their H1 revenues have all achieved positive growth. The year-on-year revenue increases for Shuyu Plain Folk, Dashenlin, Yifeng Pharmacy, Yixintang, Yunnan Jianzhijia, and LBX Pharmacy are 13.08%, 11.29%, 9.86%, 7.26%, 3.4%, and 1.19% respectively.
In terms of net income, only Yifeng Pharmacy achieved growth. In the first half of the year, the company achieved a net income attributable to shareholders of the listed company of 798 million yuan, a year-on-year increase of 13.13%; Shuyu Plain Folk saw the largest decline in net income, with a year-on-year decline of 82.6%; Yunnan Jianzhijia, Yixintang, Dashenlin, and LBX Pharmacy all saw year-on-year declines in net income of 60.23%, 44.13%, 28.32%, and 2.05% respectively.
Why is the net profit of H1 for pharmacy chain industry mostly negative? The influencing factors are manifold. Shuyu Plain Folk stated that the continuous deepening and adjustment of medical reform policies, as well as the normalization of drug procurement, have affected the behavior of end consumers, leading to a slowdown in overall operating income, further decline in the original commodity profit margins, and a significant decrease in net profit compared to the same period last year.
According to the interim report by Shiou Yuming, the company's main source of income is Chinese and Western medicine, with a gross margin of 21.59% in H1, a decrease of 3.04 percentage points year-on-year.
Dashenlin's H1 net profit and non-recurring net profit decreased by 28.32% and 26.65% year-on-year respectively. The company explained that this was mainly due to the decrease in consumer spending, the large number of new stores in the cultivation period, and the decrease in gross margin as well as the increase in sales expenses. The gross margin of Dashenlin's Chinese and Western medicine in H1 was 30.64%, a decrease of 1.88 percentage points year-on-year.
In addition, the growth rate of the pharmaceutical market is lower than the increase in the number of stores, leading to severe competition within the industry. According to Zhongkang's statistics, in the first half of 2024, the average sales of national pharmacies decreased by 10.6% year-on-year, with the average transaction value decreasing by 8.9%. In addition, Mineweb data shows that in the first half of 2024, China's physical pharmacy retail scale (pharmaceutical + non-pharmaceutical) was 298.6 billion yuan, a decrease of 3.7% year-on-year.
Jianzhijia's Secretary Li Heng stated at a recent performance briefing that the company's operating income in the first half of 2024 increased by 3.40% year-on-year, weaker than expected. The comprehensive gross profit contribution from low revenue growth cannot cover the fast-growing number of stores, resulting in a 17.11% increase in expenses during the period.
Where is the turning point for the high growth of stores in the industry?
Currently, the top four chain pharmacies, Dashenlin, LBX, Yifeng Pharmacy, and Yixintang, have entered the era of tens of thousands of stores. In the first half of the year, the number of stores of the six major chain pharmacies continued to grow. Among them, Dashenlin had the fastest expansion speed, adding 2,077 stores. LBX, Yifeng, and Yixintang added 1,625, 1,575, and 1,317 stores, respectively.
According to preliminary statistics from Zhongkang, the number of pharmacies reached 0.701 million at the end of June 2024, intensifying competition within the industry. In the second quarter of this year, the growth rate of the national retail pharmacy store count slowed down, and the number of store closures increased significantly. In the first quarter of 2024, the retail market mainly relied on four types of medicines to drive growth. As medication demand returns to normal, the market will be unable to support such a large number of stores.
In 2019, before the outbreak of the epidemic, the retail market size was 465.7 billion yuan, with a total of 0.53 million stores nationwide and an average annual revenue of 0.88 million per store. If we estimate the retail market size in 2024 to be 500 billion, with approximately 0.7 million stores, the average annual revenue per store will decrease to 0.71 million, a decrease of nearly 20% compared to 2019.
(Data Source: "2023-2024 Annual Report on the Development of Pharmacies in China" "Chinese Pharmacy" Magazine)
Will the total number of pharmacies decrease in the future? Chairman of Yifeng Pharmacy, Gao Yi, recently stated publicly that almost all retail businesses continue to open stores during the peak period, while the profitability per store is declining. In the future, either new models will emerge, or there will be a large number of store closures and industry consolidation. Mergers and acquisitions in the industry will accelerate, and the fundamental indicators that determine whether a company can continue to survive in this industry are the sales per store and the net margin.
"In an era where there are more pharmacies than rice shops, the prices of medicines are greatly reduced through group procurement, and online stores are squeezing physical stores, the profit model relying on the price difference of drug sales is unsustainable." A senior industry expert told Cai Liang reporter, "Closing a batch of stores, the overall cake is still the same size, relatively speaking, the stores that remain can live better."
In the period of stock competition and industry "roll pricing", how to find new growth points? A person in charge of a large chain pharmacy company told Cai Liang reporter, "In the long run, the non-pharmaceutical sector of the big health must be expanded by the company in the future, including functional products and food. In the future, the competition among pharmacies will be based on new varieties of services and products, as well as comprehensive operational capabilities."
The current main profit model of pharmacies is still the sale of pharmaceuticals. Next, how to use the scene of pharmacies to provide comprehensive solutions for consumers' diseases or health problems. From the information revealed in the interim report, some chain pharmacies have made attempts. For example, Yixintang's general health product category initially focused on beauty and personal care, but has now expanded to include beauty, personal care, food, milk powder, and other multi-category development patterns.
LBX Pharmacy chain stakeholders told Cailian reporter that the company has made a lot of efforts in its own brand. In the first half of the year, the sales revenue of the company's self-operated stores reached 1.69 billion yuan, accounting for 21.5% of the revenue, an increase of approximately 1.6 percentage points compared to the same period in 2023.
Stakeholders of Yifeng Pharmacy stated that the company is trying new formats for the development of big health pharmacies through health management services and format extension, in order to maintain and expand its regional competitive advantage.
According to the China Health Industry Research Institute's prediction, the growth rate of pharmaceuticals in all terminals is expected to be 4.9% in 2024, a decrease compared to the previous year. The annual growth rate of pharmaceutical categories in physical pharmacies is expected to be only 2.9%. With the industry growth rate slowing down, some small and medium-sized chain enterprises may be eliminated due to compliance, losses, cash flow, and other pressures.
