What leverage does Wal-Mart have?

September 21, 2006 11:48 AM

Wal-Mart is going to start offering many common generic drugs for $4. What's stopping CVS or Walgreens from doing the same?

We were talking about this at work, and no one has a good answer. Obviously Wal-Mart has a better barganing position, but it can't just be volume... can it? My best guess is that because of Wal-Mart's extensive data mining they don't have to hold much extra inventory of a drug, but I'm not convinced.

What are we missing?

posted by sbutler to work & money (19 comments total)

They probably lose money selling the drugs, but then plan on making it up when people make a trip to Wal-Mart to buy drugs and also pick up groceries or a pack of socks or something else that they do make a profit on.
posted by martinX's bellbottoms at 11:51 AM on September 21, 2006

Wal-mart has insane power.
posted by Matt Oneiros at 11:54 AM on September 21, 2006

Drugstores make their money selling drugs. Walmart makes money selling you other stuff while you're there to pick up your drugs.
posted by muddylemon at 11:54 AM on September 21, 2006

Wal Mart gets many suppliers to provide wholesale pricing that is at or below cost. Yes, some people lose money selling to WalMart. The alternative is to get put out of business when they go with your competitor. Walmart's buying power is unparalleled.

Also, they may be dumping. Not everyone want to join in a race for the bottom.
posted by GuyZero at 11:56 AM on September 21, 2006

Walgreens & CVS make plenty of money selling you other stuff while you're there to get your drugs.

Wal-Mart is just an 800 pound gorilla. CVS & Walgreens don't have the same buying power.
posted by drstein at 11:56 AM on September 21, 2006

Wal-Mart's extensive data mining

Well, it's not really data mining-- it's statistical economies of scale (and the resultant lower working capital intensity) of Wal-Mart's inventory, distribution, and logistics systems.

That's not to say that WMT couldn't lean on the manufacturers, however. Many of the leaders have double-digit ROEs and operating profit margins. That being said, the central question in these strategic situations is whether your competitor is able and willing to do something that you're not. Given the financials of the manufacturers, it looks like they have been able to avoid the price wars that one might expect from such an industry.
posted by Kwantsar at 12:07 PM on September 21, 2006

Wal-Mart = nearly incomprehensibly ginormous in nearly all aspects, most of all probably (tapped if not owned) supply chain.

A family t-shirt manufacturing company I worked for supplied for them briefly. They nearly killed us. They tapped 110% and more of our not-lackluster operating capacity for months on end, and we were suppling some insane fraction of their T-shirt supply - not even including any other garment segments in the tally. Heck, we went triple-shift for a while. Endless stream of 50 foot trailers.

All while whipping the pants off of us on the price points and margins. It's insanity. Doing business with them is like trying to shake hands with the sun.
posted by loquacious at 12:11 PM on September 21, 2006 [4 favorites]

its not a new Wally World strategy either, as they were sued for this in Wal-Mart Stores, Inc. v. American Drugs, Inc.
posted by yeahyeahyeahwhoo at 12:28 PM on September 21, 2006

Well under 10% of people pay cash in the average pharmacy these days. They're a good way to bulk up your bottom line, though, because generics are sooo cheap (I'm talking like 50 cents cheap) and you can change prices at will, unlike when you're locked into a contract with an insurance company. My dad ran a pharmacy for a decade or so that undercut everyone else in the area by charging cost + $5 for all generics; he ended up being 40-50% cash customers, incredibly incredibly high.

A larger-than-average percentage of Wal-Mart's customer base paid in cash, but now are part of the Medicare Part D program. Most simply, this could be an attempt to recoup the loss of these customers to an insurer, with later attempts to raise prices across the board, which isn't difficult. People who pay cash are (or at least at my dad's store) used to price fluxuations from month to month. It could also work a lot like gas stations, though, where you draw the customers in with one thing (gasoline, prescriptions), then hit them with a bunch of other products. It really wouldn't suprise me if Wal-Mart just wanted to extend their hegemony.

They also could have an interesting pricing schedule, selling some drugs at a low cost where other oft-related drugs are at a higher price - the $4 drugs just serving as bait to get them to purchase something you know they'll need anyway. Pet the customer with one hand, smack 'em with the other.

Oh, and CVS doesn't do this because they probably have the highest cash prices out of most every chain. People don't go there because they're looking for a deal, they probably just don't know any better. High prices cover low volume!
posted by soma lkzx at 12:34 PM on September 21, 2006

Drugstores make their money selling drugs.

Don't the large drug stores in the US make you wait 10-20 minutes to pick up your prescription? Haven't you ever wondered why?
posted by Chuckles at 12:36 PM on September 21, 2006

($4 is still so cheap it barely makes sense, though)

Chuckles: If nothing else was happening, sure, 5 minutes easy with counting+checking+insurance+typing+printing, but 10-20 minutes because they've got a bunch of other pill-counting to do, and Mrs. X's insurance card didn't work because it had the wrong birthdate on it so you've gotta call the insurer, and you're still waiting for a callback from Dr. Y, and plenty other stuff is going on. We always told people the wait was going to be 25 minutes so they'd just come back later instead of milling about (20 seemed to be the limit on that one).
posted by soma lkzx at 12:42 PM on September 21, 2006

I think Chuckles is proffering the idea that the pharmacy purposely stalls the customers in the stores so that they'll be more inclined to buy something else. I know when I have to wait (not usual because I renew my scripts online) I tend to browse. I don't usually buy anything, but still.

While a tantalizing thought, I'd have to see a written policy (a la Best Buy) to believe it's an actual tactic.
posted by friezer at 12:59 PM on September 21, 2006

I've seen it written up, but it is a hard thing to google..

There is obvious financial incentive to do it, in the words of Shoppers Drug Mart, at the Ontario Legislature in 1994:

The fastest-growing sector of retail pharmacy business in the last several years has been mass merchandising. We are very similar to other retailers in that the majority of purchases are made as a result of in-store decisions, and almost 40% of purchases are impulse items.

A plausible sounding excuse for the wait just makes it more perfect for the retailer.
posted by Chuckles at 1:25 PM on September 21, 2006

As soma mentioned, the current insurance system provides very little incentive for insured consumers to comparison shop drugs by prince. A little casual googling or just some phone calls will demonstrate this - numerous magazines and newspapers have documented the tremendous variety in drug prices, generic and prescription.

If this link doesn't work, go over to costco.com and pick the pharmacy link on the top, then 'pricing information' and you can get their prices on drugs. Now call a pharmacy that's near that Costco and ask them a few prices. I am sure they'll be notably higher. Why? The membership fee is only part of the story - I'll also bet that if you asked 100 of the people walking into that Costco if they use the Costco pharm you'd only get a yes on less than 1 in 10.

There's no motivation for an individual to find the lower price when all they shell out is their $12 copay anywhere they go.
posted by phearlez at 1:55 PM on September 21, 2006

Check out the awesome analysis of buying stuff at wal-mart vs. drugstores they've got over at omninerd.
posted by Mr. Gunn at 3:02 PM on September 21, 2006

As soma mentioned, the current insurance system provides very little incentive for insured consumers to comparison shop drugs by prince.

Everything you wrote was true, but the above comment is maybe a bit misleading.

Prescription-drug-insured customers don't need to shop on price because their insurance company has already negotiated the price. The insured pays the same copay wherever he goes, and the payments between the druggist and the health plan are dictated by contract. That doesn't mean that all druggists always get the same deal from the insurer, but the numbers are usually identical.

Of course, the biggest scam around is the drugstore that sells 30 generic pills for $12 cash, but happily collects a $20 co-pay from insured patients without telling them about the lower available price. I don't know whether they're shafting the insurer or the insured, but such practices (until recently, if not today) are commonplace.
posted by Kwantsar at 4:22 PM on September 21, 2006

On second thought, yeah - my comment didn't make much sense.
posted by muddylemon at 5:52 PM on September 21, 2006

The drugstore I typically use (RiteAid), charges me less than my copay for drugs that cost less than the copay. That is, if I get some insanely commonplace sulfa-based antibiotic that costs $10, RiteAid charges me $10, not my $20 copay.
posted by lhauser at 9:49 PM on September 21, 2006

According to the articles I read about the Wal-Mart deal, the company did not negotiate lower generic prices from its suppliers. Instead, it looked for ways to cut its own costs and then selected generic drugs that it could still make a profit on for its $4 generics list.
posted by croutonsupafreak at 9:53 PM on September 21, 2006