At first glance, the $4 generic programs offered by Wal-mart, Costco and some other Big Box retailers may not seem to make a whole lot of sense. However, it is precisely a few cents on the dollar these Big Box retailers spend to make their generics programs highly profitable. This is how they do it:
- Big Boxes source from low-cost wholesale resources and have the purchasing power of sheer volume behind them. Their cost-structure smartly takes into consideration the expense of an individual pharmacist and spreads that number across the total number of prescriptions filled and sold by that single pharmacy. In addition, even when generics are filled at $4 each, the store still makes a sizeable profit, assuming each Big Box pharmacy fills dramatically more prescriptionsthan independent pharmacists and small chains together and the cost to the Big Box retailer is miniscule (source: IMS Health, IMS National Prescription Audit™, May 3, 2007).
- Big Box retailers cut out the middlemen. In fact, they eliminate many middlemen with a cost structure that secures inexpensively everything from transportation to labor to packaging, and leads to a cost savings your typical hometown drugstore—and even smaller retail chains—either do not have the purchasing power to implement or which do not have a similar cost structure in place.
This all makes sense—and a lot of cents—when you figure that many customers who shop at these stores have no insurance at all or have limited prescription benefits. Wal-Mart, for example, estimates that 30 percent of customers who filled prescriptions in its $4 generic program are uninsured (source: Wal-Mart Live Better Index, www.livebetterindex.com). And, these retailers depend on these same customers buying two-to-three other items while in the store picking up their prescriptions. In this way, Big Box retailers maximize, as all retailers do, inherent retail strategy: the dollars come from the additional purchases, and the cents come from the generics.
