Newly released prescription to over-the-counter medications are producing big profits in most supermarkets' health and beauty care departments. New releases such as Axid AR heartburn remedy from Whitehall-Robins Healthcare, Madison, N.J., and Nicotrol nicotine patch from McNeil Consumer Products, Fort Washington, Pa., may command margins of 20% or more, eclipsing in profit potential older OTC remedies, which are sometimes sold by grocery stores and their competitors as loss leaders, said supermarket merchandise managers.
Reaping the profit potential of the new OTCs requires, however, regular promotion, especially in the first two years when consumer awareness and sales volume are highest.
"Our retailers have been very astute in making sure that the price they go out with is -- not an everyday low price -- but an everyday fair price, augmented with promotional activity," said Patrick McGivern, vice president of nonfood procurement for Supervalu, the Minneapolis wholesaler.
"Many consumers are used to paying a lot more for the drug when it was available only as a prescription. They are not so price-sensitive that you have to give these items away," agreed Patrick Gallagher, buyer and merchandiser at Market Basket Stores, Nederland, Texas.
Indeed, food store retailers' pricing has continued to make the OTC switches a bright spot in the HBC segment of their business.
"A lot of the key established OTC items [such as Tylenol and Advil] are being used as loss leaders out there. The sales and profit opportunity is in the recent prescription-to-OTC items where retailers have been able to make a decent margin. That's what makes them so key," said Steven Lauder, general merchandise category manager at Supervalu.
Whether food store price points will erode over time depends on a store's philosophy. A discounting giant like Wal-Mart, Kmart or Target has the space to mount an eye-catching display, and the leeway to sell items below cost. Groceries don't have to try to play that game, it was said.
"We have no interest in price-matching Wal-Mart because we don't sell shotguns, bicycles and imported clothing to offset the loss of gross profits from low-balling OTC drugs," said a merchandise director at a Midwestern warehouse food and pharmacy chain, who asked to remain anonymous.
"As long as people feel they are getting a fair price from us and they aren't getting ripped off, they will pay that additional 'x' percentage for the convenience of not having to go over and shop another outlet," he said.
"But it requires that you have to heavily promote. You can't be afraid of the fact that maybe Wal-Mart is at 87 cents and you're at 99 cents," he added.
Promotion along with competitive pricing, effective display and prompt distribution of adequate stock are the key "Best Practices" for groceries seeking to benefit from the prescription-to-OTC switch phenomenon. Indeed, food stores that aggressively promote the switches can increase store profit by $30,000 a year, the General Merchandise Distributors Council, Colorado Springs, Colo., has estimated.
Yet not all retailers feel they have great leeway on pricing of these products. Market conditions and the retailer's choice on who his competitors will be play a role.
At Brookshire Grocery Co., Tyler, Texas, "the gross markup on OTCs has not been that high [because] the competition here doesn't allow you to make a lot of money," said Jim McCarty, grocery and HBC buyer. "If there is any profit to be made," he added, "it's from the volume sales."
The advent of two more H2 antagonist remedies this year with Zantac 75 and Axid AR hasn't brightened the profit picture much at one Midwestern chain that has responded in kind to stiff pricing pressure from Wal-Mart and Kmart.
"In the prescription pharmacy arena there was not a high profit margin in H2 antagonists, but there was a profit in it. In OTCs, the profit is almost all gone because of the competition. We are selling many of the H2 antagonist OTCs below cost," said the chain's pharmacy director.
Yet "direct" profits from the OTC sales are not the only revenue source from OTCs, noted Terry Ballinger, director of general merchandise and HBC at K-VA-T Food Stores, Grundy, Va., which tries to closely follow mass merchants' pricing, "staying right with them as much as possible."
There are indirect profits to be made from these items, for which manufacturer advertising and promotion create strong demand. "If people aren't buying these at your store they are going somewhere else. You can't afford not to have these units up," Ballinger said.
With Axid AR's arrival last month K-VA-T "got the product out on the shelf at the launch and shippers went out to all the stores," Ballinger said. Chain advertising coupled with Whitehall-Robins' freestanding insert coupons gave the product away almost free to consumers.
Yet it has been Johnson & Johnson\Merck's Pepcid AC, which became the first OTC H2 antagonist out of the block in April last year, that has been most responsible for driving antacid sales, chain merchandisers said.
"They hit it with a bang [when it first came out] and they just haven't let it go. You would think they were last [in sales] rather than first," said Ballinger.
"Pepcid has been a shining star in sales -- our leading seller," said Sonny Ellis, director of HBC and general merchandise at Associated Grocers, the 233-store cooperative in Baton Rouge, La.
Continuing television spots coupled with promotions have fueled sales of the 10-milligram famotidine product, which has had an edge by being the first of the OTC H2 antagonists on the market. Further, Tagamet was hurt by the fact it requires a two-pill dose compared with Pepcid's one pill, said Lauder at Supervalu.
Firming its position after the launch of Zantac, Pepcid debuted a six plus four count with four free doses and continued unique merchandising programs such as outposting a six-count trial size in the salsa aisle where the retailer can offer free salsa with the Pepcid purchase, said Lauder.
