Dropping by Your Local.com – The Merging of Channels of Distribution for OTC Drugs

With brick-and-mortar stores and online retailers already heavily competing for the consonline_drugsumer dollar in nearly all segments, OTC drug marketers should also be poised to take advantage of expanding sales and markets through both traditional channels and e-channels. The lines between these channels are blurring as online OTC drug retailers are offering brick-and-mortar store pickup, and mass merchandisers increase their presence online.

For example, Amazon.com now offers consumers the possibility to collect their online purchases at selected Staples and 7-Eleven stores, while mass brick-and-mortar merchandiser Walmart expects to earn $9 billion in 2013 in global sales through its website (Walmart.com), making it the fourth largest online retailer. 

With a vast nationwide network of 4,000 stores and two-thirds of the U.S. population living within 5 miles from the store, Walmart has a huge competitive advantage compared to online retailers. Consequently, Walmart intends to leverage its substantial physical presence as fulfillment centers, where local store employees can fill online orders and either ship from the store directly to consumers or simply prepare orders for in-store pickup. Walmart is also expanding its test markets for a locker system where shoppers can order online and collect their order 24 hours a day. Furthermore, Walmart is using in-store fulfillment of merchandise purchased online via “scan and go” apps on smartphones and tablets, as well as testing same day online purchase delivery in four U.S. cities.

An additional impetus for the greater integration of a physical and online presence concerns Target’s policy of matching online and store prices, and thereby seeking to minimize “showrooming” where by consumers browse merchandise at Target stores and then make online purchases at lower prices. Target previously offered this price match policy during the Holiday shopping season of 2012, but, as of January 2013, had decided to extend the policy year-round.

An estimated 35% of OTC drug purchases are made through the mass brick-and-mortar merchandise channel, with some 51% of OTC consumers patronizing Walmart. However, there is a trend of increasing online OTC drug purchases.

In consumer research conducted by Kline & Company for the OTC Consumer/Shopper Insights report, approximately 15% of consumers note they buy OTCs online with 10% shopping for OTCs at Internet-hosted sites, such as Amazon.com, and 5% buying OTCs directly from OTC-branded websites. However, variations were noted between OTC categories with vitamins and minerals, and herbal products enjoying a relatively high level of online sales. By contrast, antacids, cold medications, and allergy medications see higher sales through the drug store channel since they tend to be bought more often when someone is sick and has a more immediate need.  Among various factors why consumers shop for OTCs online or at mass merchandisers, low pricing, regardless of OTC category, is the most compelling.

Kline’s OTC Retailing: U.S. Alternate Channel Analyses and Opportunities study reveals sales of OTC drugs through alternate channels of distribution (other than drug, food, and mass merchandisers) offer attractively high growth rates for some categories of OTC drugs. For example, online retail sales of OTC drugs are estimated to have grown by a CAGR of 16.1% from 2006 to 2011, which is over six times the rate for the overall industry through all retail outlets. Specialty stores, including GNC and The Vitamin Shoppe, have posted strong sales of vitamins and minerals, herbal products, and nutritional supplements at a 11.0% CAGR from 2006 to 2011. Sales of OTC drugs through warehouse clubs, including Costco, Sam’s Club, and BJ’s, are by far the largest among alternate retail outlets for OTC drug sales with retail sales up by a CAGR of 8.6% from 2006-2011. Dollar stores also represent a significant opportunity for OTC drug sales, with sales up by a CAGR of 10.9% over the same timeframe.

OTC marketers are operating in an evolving and challenging environment where pricing remains crucial, but the melding of distinct channels of distribution is offering greater consumer convenience and flexibility and more sales potential for marketers. Shifts in media used by OTC marketers are likely to be seen, in order to draw and – better target consumers to their brands. There will likely be more digital advertising and promotions for OTC brands in the future as more consumers buy online. Successful companies will be those that can do each of these separate functions well while managing their brand in a holistic way to be sure that the most important aspects deliver a consistent brand message to retailers, consumers, and healthcare professionals.

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