Drug Wars at the Big-Box Stores

Huge retailers like Wal-Mart and Target are cutting prices for selected prescription generics. How long can they keep it up?

by Pallavi Gogoi

In 2004, when the patent for the popular allergy drug Claritin expired, 20 pills of the generic version sold anywhere from $10 to $30, depending on the region of the country. Today, the same amount is $4 at the 4,000 Sams' Club and Wal-Mart Stores (WMT) and 1,500 Target (TGT) stores.

Price programs like that have boosted sales at both discount retailers in the latest quarter. Through them, customers can fill a 30-day prescription on drugs such as Paroxetine, the generic version of the antidepressant Paxil, and cholesterol-lowering Mevocor's generic, Lovastatin, for just $4.

The Right Prescription for Growth

In the first quarter, Minnesota-based Target saw profits jump 18%, to $651 million in the first quarter that ended Apr. 29, while sales increased 9.2%, to $14 billion. The retailer's pharmacy sales were hopping, and the increased number of folks at the pharmacy helped boost sales of other products, too.

"We are getting substantially more new guests and new prescriptions," Target President Gregg Steinhafel said May 23 on a conference call with analysts to discuss earnings. Earlier this month, Wal-Mart reported a similar sales bump. "Our pharmacy area continues to see benefits from the $4 generic prescription program," said Eduardo Castro-Wright, chief executive of Wal-Mart's U.S. operations, citing prescription sales growth that "continue to run in the mid-teens."

For Wal-Mart, the generic drugs initiative presents fertile ground for growth. Most people need monthly prescription refills, making drug sales a great way to lure customers to stores more often. "You're looking at a loss leader—the idea is they come in to buy one product and will buy three more," says Robert Passikoff, president of New York brand consultant Brand Keys.

However, Wal-Mart executives have insisted they won't sell the drugs at a loss. That's in part because the company recognizes that the generic drugs are a low-price commodity. As a result, it can employ its highly efficient logistics and technology—and the famous Wal-Mart pressure on suppliers—to squeeze out even the smallest margins that make a difference to profits at the high volumes Wal-Mart can sell.

Over at Target, though, the additional customers have come at an important cost. "Obviously [$4 generics] is putting strain on the margin rate within our Rx and pharmacy business group," says Target's Steinhafel. But he notes that the increased numbers of customers have helped sales of over-the-counter drugs and other products throughout the store.

For now, Target isn't cutting any of its pharmacy staff, despite lower margins. However, Passikoff says that lover the long term, many of these retailers might find it difficult to continue to offer such low-priced generics. "It's a game of marketing poker, and the one who can wait the longest and has financial wherewithal to invest in that strategy will win," says Passikoff.

A Scramble by Retailers

The effect has been widespread. Wal-Mart's mid-September announcement that it was launching a test program to sell 291 generic drugs for $4 a prescription in the Tampa area set off a scramble among all pharmacy retailers. Target matched Wal-Mart's offer immediately, and K-Mart (SHLD) publicized its 90-day generics for $15. Other regional supermarket stores like Giant Eagle of Pennsylvania and Meijer of Michigan even started offering a handful of generic antibiotics for free.