As if industry consolidation was not enough of a challenge to companies in the Consumer Healthcare industry, there is now an additional threat looming on the horizon. This is the traction being gained in Europe and North America by online players. The first movers were online pharmacies which captured market shares from brick-and-mortar pharmacies as well as mail order suppliers. The trend is particularly visible in the UK and Germany, which together reportedly account for almost 80% of online OTC sales in Europe (source).
Thus far, the online threat has primarily been to non-prescription medicines and other healthcare products. But as other countries catch up and more branded products become available online, the scenario will change even more drastically. It has been reported that online retail giants like Amazon have already obtained pharmaceutical wholesale distributor licences in many US states, perhaps as a prelude to entering the lucrative online pharmacy retailing space (source). Such large players can buy directly from manufacturers in much larger quantities, giving them greater bargaining power in terms of pricing, priority supply, packaging etc. Their deep pockets don’t hurt either!
Even as consumers benefit from greater choices, faster delivery, lower prices etc., these changes will surely set the cat amongst the pigeons, as far as the Consumer Healthcare industry goes.
How should Consumer Healthcare companies respond?
Consumer healthcare companies need to prioritise their strategic responses and act quickly. They now have little choice but to fast-track their programs to “Go Digital”. This is not only about responsive web sites and mobile apps or putting their software “on the Cloud”; it also has back-end implications such as beefing up omnichannel capabilities both for forward and reverse supply chains (i.e. purchase/delivery as well as returns/refunds). Just as important are to create capabilities like real-time store level inventory visibility and empowerment of store level employees to make alternative procurement decisions, keeping in mind customer profile (annual spend, loyalty etc.) and the incremental logistics costs.
Sometimes, M&A may be a quicker (albeit more expensive) route to acquiring the above capabilities. It is thus not inconceivable that a GSK or Reckitt Benckiser acquires an online pharmacy. By doing so, they acquire a lot of the capabilities they can integrate with their own online businesses, giving them a possible edge. This strategy may become harder to execute because large pharmacy chains like the Walgreens-Boots alliance, Zur Rose of Switzerland, Euro Apotheek Venlo of the Netherlands or Poland’s Apteki Dbam o Zdrowie may also be looking at acquisitions to gain market share in emerging European markets. The biggest winner will be those who can quickly- and successfully- integrate the acquisition with their existing business operations.
Another strategic step Consumer Healthcare players might consider taking is to use technology-enabled personalization to a higher level. Although patient compliance per se may not be an issue for non-prescription drugs, in markets like France, Italy, Sweden, Poland etc. where online retailing is still relatively nascent, companies can use technology to track consumption and estimate reorder dates and trigger reminders. With an ageing population, such reminders can also be set on smartphones of family members who may or may not live in the same town/country. Such strategies will also serve to cement the emotional connection between companies and their consumers- the so-called plank of “caring” that brands in this space so keenly seek to build and nurture.
Till such time that the separation of pharmaceuticals and OTC consumer healthcare lines of business is complete through various M&A transactions, companies that straddle both segments must be cognizant of the fact that they have other customers too, beyond the end consumers of their products. For example, given the differences in healthcare systems in Europe and the US, Consumer Healthcare companies with significant business interests in the US will also need to renegotiate contracts and other terms with mega pharmaceutical distributors like McKesson and AmerisourceBergen as well as Pharmacy Benefit Managers (PBMs) like Express Scripts.
Undoubtedly, effecting all such transformation needs the appropriate technology applications and adequately scalable infrastructure. Technology is a skill area that requires large numbers of programmers, architects etc. so companies tend to focus on hiring the right complement of people for this function. But successful transformation also needs talent in new areas such as Analytics and IoT. Even more critically, experienced talent will be needed in non-technology areas to envision, implement and fine-tune the changes needed to processes, operating procedures, policies etc. Such expertise can only come by hiring experienced people who have worked in these industries and hence understand their nitty-gritties. Amazon, for example, has reportedly hired a former Director of Operations at Express Scripts. Smart companies will move quickly so that they get to choose from the cream of the crop, besides also being able to start the process sooner.
But as with everything Digital and Online, there are risks that will need to be managed. Customers could well order products from across national borders, where regulatory requirements are different. Apart from the ethics and safety aspects, regulatory compliance will be a challenge that needs to be addressed. Online purchases will involve transmission and storage of sensitive personal information such as credit card details, addresses etc. Data protection thus becomes critical- especially as regulations continue to tighten around the world.
Consumer Healthcare companies would do well to live by the motto of the Boy Scouts: Be Prepared!