SIC 5912

Establishments in this industry are engaged in the retail sale of prescription drugs, proprietary drugs, and nonprescription medicines and may also carry a number of related lines, such as cosmetics, toiletries, tobacco, and novelty merchandise. These stores are included on the basis of their usual trade designation rather than on the stricter interpretation of the commodities handled. This industry includes drug stores that also operate a soda fountain or lunch counter.

NAICS Code(s)

446110 (Pharmacies and Drug Stores)

Industry Snapshot

In 2001 drug stores posted revenues of $169.2 billion. Chain drug stores, which account for 51 percent of the industry's over 43,000 stores, took in 73 percent of the income. The industry's top four chains—Walgreen Co., CVS Corp., Rite Aid, and Eckerd—controlled more than 60 percent of the market, up from just 30 percent in 1990.

This industry saw rapid growth throughout the 1990s, encouraging powerful supermarket and mass-merchandise chains to enter traditional drug store markets and forcing the independent drug store industry to compete with these larger companies. In addition, the drug store industry faced narrowing profit margins due to the general push to reduce health care costs in the United States, and as a result, acquisitions and consolidation became prevalent. These factors combined have forced drug stores to concentrate on customer service, expand into niche markets, form partnerships with suppliers and health care providers, and automate operations for increased cost-efficiency.

Drug stores face a future that holds potential for significant growth and harbors unique challenges. The average age of the U.S. consumer is increasing rapidly as the Baby Boomer generation grows older. With an aging population comes increased health care and prescription needs, thus providing a growing customer base for drug stores. However, paper-thin profit margins on prescription drugs, a shortage of pharmacists, and challenges from grocers and discounters may make the road ahead perilous.

Organization and Structure

As drug stores faced increasing competition from other retailers, chains and independents alike began to vary their store formats in order to differentiate themselves from competitors and strengthen their image as health care providers. As a result, five main store formats emerged within the drug store industry: independents, chain drug stores, mass merchandisers, supermarkets, and mail order.

In 1998, independents grew 10.6 percent over 1997 with $26.4 billion in prescription sales. In the same year, there were more than 20,644 outlets. According to the National Association of Chain Drug Stores (NACDS), these independent pharmacies filled almost 693 million prescriptions in 1998, an increase of 1.2 percent over 1997. Sales for OTC medications were $1.3 billion in 1998. Independent drug stores are expected to account for 24.4 percent of prescription sales in 1999.

Chain drug stores averaged 8,958 square feet and offered a wide assortment of goods. Typically, to draw traffic through, the pharmacy was placed in the rear of the store. Some well-known chains that operated conventional drug stores were Walgreen Co., CVS Corporation, Rite Aid Corporation, and Eckerd Corporation. According to the NACDS, chain pharmacies filled 60 percent of all prescriptions, more than four million a day and 1.6 billion per year in 1998. Prescriptions accounted for $63.3 billion in sales—61.5 percent of sales for chain stores.

Mass merchandisers accounted for 11 percent of all prescription sales in 1998, with $10.4 million in sales. The growth rate for this portion of the drug store industry was slowing somewhat, with 5,258 outlets—up from 4,914 in 1997. Prescription sales increased by 16.3 percent in 1998 and accounted for 10.1 percent of total sales. This segment dispensed 272 million prescriptions in 1998, an increase of 7.1 percent from the previous year and accounted for 10 percent of all prescriptions.

This market also includes supermarket pharmacies, which operated 6,963 outlets in 1998. These stores accounted for $11.4 billion in prescription sales in 1998, an increase of 16.4 percent from 1997. Supermarkets also controlled 11 percent of total prescription sales in this industry. These food stores dispensed 306 million prescriptions in 1998, 10.5 percent of total prescriptions.

OTC sales in supermarkets have also grown. In 1998, sales were $9.2 billion and projected to increase 7.5 percent in 1999. Mass merchandiser OTC sales were $9.3 billion and projected to increase 11.1 percent in 1999, independent sales were $1.3 billion and expected to rise by 3 percent, and traditional chain sales were $9.7 billion and forecast to be $10.4 billion in 1999.

Mail order drug stores also play an important role in this industry. In 1998, mail order constituted 13 percent of the prescription and OTC market with more than $13.4 billion in sales. Mail order dispensed 368 million prescriptions in 1998. A move that started in 1995 and continued to factor into the success of mail order was convincing federal government retirees, who are part of a managed health care program, to order prescriptions through discounted mail order outlets. By using the mail order system, retirees were able to avoid paying the usual 20 percent co-pay. If the retirees decided instead to fill their prescriptions at local drug stores, they were responsible for the co-pay.

The drug store industry relied on four core product categories for a large percentage of total sales in 1998: prescriptions, OTC medications, toiletries, and cosmetics. The chain pharmacy had sales of $135 billion in 1998 from these segments. Other categories commonly sold in drug stores included tobacco, consumables, stationery, and housewares. In general, however, drug stores responded to competition by strengthening core product areas in the late 1990s.

Total prescription sales were $103 billion in 1998, with 2.7 billion prescriptions written. By 1999, that number should increase to 2.97 billion, reflecting growth of 8 percent over 1998. Since 1992, prescriptions have grown by 23 percent. The growth in prescription sales was explained by the fact that prescription rates and prices increased. In 1998, the average cost for a brand name prescription was $53.51, an increase of 8 percent over 1997. The average cost for generic was $17.33, an increase of 2 percent over 1997. Some factors that contributed to the increase in prescriptions written were: the aging of the American population; an increase in the percentage of prescriptions reimbursed by third parties, such as insurance companies or government programs; the introduction of new products by pharmaceutical companies; and the availability of generic substitutes for brand-name drugs.

Sales of OTC medications—which included external remedies, cough/cold/flu medicines, and analgesics/digestive—was forecast to increase 8.3 percent to $32 billion in 1999, or just under 30 percent of drug store industry sales. In 1998, OTCs made up 27 percent of all sales in chain stores, accounting for $29.5 billion.

Sales of toiletries or health and beauty aids (HBAs) in drug store chains claimed 26 percent of their total sales, or more than $28.4 billion in 1998. The product mix for a traditional chain drug store in 1997 was as follows: prescriptions, 48.4 percent; OTCs, 12.5; consumables, 8.7; toiletries, 6.2; cosmetics, 3.8; general merchandise, 5.2; photography, 4; and tobacco products, 2.8 percent.

Background and Development

The drug store industry originated in the mid-1800s, when Americans began using "patent remedies" to treat illnesses. Some early pharmacists operated out of village apothecaries, where they purchased chemicals in bulk and mixed them on the premises to fill prescriptions. Following the Great Depression, pharmaceutical companies grew rapidly and opened sophisticated research facilities. The number of patents issued for drug products increased from fewer than 100 before 1940 to more than 4,000 by the 1950s. Medicines began to be marketed in final-dosage form under a manufacturer's brand name rather than in bulk as generic ingredients. As a result, the number of drug stores increased, while pharmacists adopted a service-oriented role in dispensing prescriptions.

The drug store industry more than doubled its sales volume during the 1990s, and several factors pointed toward continued growth into the next millennium. For example, the two demographic groups that used the greatest amount of medication—adults over 65 and children under 10—were the fastest growing segments of the American population in the late 1990s. In fact, the number of people 65 and older increased at twice the rate of the general population, while this age group received an average of 12 prescriptions per person compared to about five for the 20 to 40 age group.

A total of 39,754 traditional drug stores existed in the United States in 1998. There were 19,110 traditional chain drug stores and 20,644 independent stores. The drug store industry as a whole posted a sales volume of $106.7 billion in 1998. These figures include not only prescriptions and over-the-counter (OTC) drugs sales, but also general merchandise. Prescription sales and OTCs, however, had total sales of $103 billion in 1998 and made up almost 61.5 percent of all sales in a traditional chain store. Chain drugstores accounted for 40 percent of those sales, while independents took 26 percent of the market. Mass merchandisers and supermarkets claimed 21 percent of the market, and mail order totaled 13 percent. The number of retail prescriptions increased from 2 billion in 1992 to 2.7 billion in 1998.

While this sector of the retail industry continued to see gains, consolidation swept through drug store chains towards the late 1990s, leaving a handful of strong players. CVS acquired Revco and Arbor Drug; Rite Aid purchased Thrifty Payless, Marco, and K&B; and J.C. Penney bought Eckerd Drug, merging it into its Thrift Drug operations. This merger activity was caused by increased competition to offer a variety of merchandise at low costs and the availability of convenience in terms of pharmacy outlets.

The drug store industry also benefited from the trend toward self-medication, and a healthier attitude among consumers in the late 1990s. Drug stores controlled 44 percent of the vitamin market in 1999, and the baby boom generation, which some experts called the most informed in history, often purchased OTC medications, vitamins, and herbal remedies to treat their own symptoms. In addition, the increased availability of generic substitutes for expensive, brand name drugs expanded the overall market for pharmaceutical products.

The continuing success of OTC products prompted regulators to get involved in that segment. According to a March 1999 NACDS press release, "Vice President Al Gore announced a new federal regulation by the Food and Drug Administration designed to make OTC labeling easier for consumers to understand. The new regulation also requires OTC medicine manufacturers to revise product labeling to reflect the importance of consumers consulting with physicians and pharmacists on proper OTC usage." This action also pointed to the trend of enhanced consumer care in pharmacies and the involvement of pharmacists in consumer purchases. The NACDS reported that with "fewer hospitalizations leading to more and more procedures being performed on an out-patient basis, as well as the continued discovery of new and more complex drug therapy, there will be an increasing reliance on community pharmacy to educate and monitor patient therapy."

Another factor that continued to affect the drug store industry into 1999 was the growing emphasis on controlling U.S. health care costs. In 1999, only 8 percent of health care costs were pharmacy related. National health care policies insured more Americans and expanded the market for drugs, but also increased pressure on drug stores to reduce costs and operate more efficiently.

While traditional chain and independent drug stores remained dominant in the late 1990s, supermarkets, mass merchandisers, and warehouse clubs posted gains in prescription sales. Attracted to the industry's growth, competition from these stores presented significant challenges to drug stores and led to a shakeup among independents and regional chains, evident by the merging or buying out of 35 chains since the early 1990s. Supermarkets continued to hold an important advantage over drug stores in consumer exposure, since the average person visited a supermarket 2.2 times per week compared to once per month for a drug store. Many supermarket chains began competing aggressively for sales of HBAs by cutting prices, increasing advertising, and emphasizing the convenience of one-stop shopping. In addition, supermarket chains opened in-store pharmacies, which they felt increased store traffic and provided a community service. Mass merchandisers such as Wal-Mart, Target, and Kmart entered traditional drug store categories—claiming a 10 percent share of prescriptions in 1998—supported by their superior distribution networks and technology.

Drug stores also faced a growing challenge to their profitability as third party payment accounted for a larger percentage of prescription sales in the late 1990s. Third parties included health maintenance organizations (HMOs), preferred provider organizations (PPOs), unions, government programs (Medicare and Medicaid), and other systems that covered costs by prearranged agreement with health care providers. Prescriptions represented the largest out-of-pocket expense for consumers, so third party payment increased substantially over the past ten years as part of the drive to control health-care costs. This trend affected drug store profitability since third parties typically applied a discount of 20 percent to the average wholesale price of a drug, plus allowed dispensing fees, which covered administrative and labor costs of only $3.00 per prescription as opposed to the actual cost of $4.50. Drug stores struggled with the low margin sales and costly paperwork but appreciated the large prescription volume third party systems could provide.

Consumer demands for lower health-care costs also affected drug stores' ability to raise prices. In the past, prescription prices generally increased at twice the rate of the Consumer Price Index, and drug stores turned this trend to their advantage. Drug stores would often forward-buy inventory of pharmaceutical products at low prices and usually passed along price increases to consumers with little negative effect on sales. In 1998, brand name prescription costs increased 8 percent while generic increased by 2 percent. The average cost for a prescription was $34.43 in 1998, with 74 percent going to the manufacturer, 3 percent to the wholesaler, and 23 percent of cost being allocated to the retailer. Stores also had to remain price competitive in HBA's. Many stores focused on "Everyday Low Pricing" and beefed up advertising to lure customers.

Another challenge to the drug store industry was the advent of Internet drug stores. While Internet sales represented only 1 percent of industry sales, that number was forecast to grow along with other retail sectors. These sites, such as, offered prescription and nonprescription drugs, cosmetics, and health and beauty aids. Many offered email access to pharmacists as well. Large drug chains followed suit, and customers could refill prescriptions on store Web sites such as This industry, however, was expected to see advantages from the Internet as well. In a Drug Store News editorial, Anthony Cuti, chairman and CEO of Duane Reade, stated that "the bottom line is that personal medical consultations will grow more toward the individual pharmacist and less toward impersonal, less responsive communication vehicles such as the Internet. The Internet, however, will be a great provider of increased general health information that will probably promote a greater number of visits to both physicians and pharmacists to interpret and apply the technical information retrieved from the Internet."

Current Conditions

The American population is aging. Those 50 years old or older group was expected to surpass 95 million by 2010, compared to 75 million in 2002. In 2002, people aged 65 and over totaled approximately 35 million, or 12.6 percent of the U.S. population. By 2030 that number was expected to double, and by 2050 almost 90 million Americans were projected to be 65 and older, representing 30 percent of the U.S. population. The significant increase in older consumers meant a rapidly growing customer base for drug stores. In 2002, older Americans accounted for more than 30 percent of all prescription medicines by unit and 42 percent of prescription sales. The NACDS reported $165.2 billion in retail pharmacy sales in 2001, an increase of 17 percent over 2000. In addition, the Centers for Medicare and Medicaid Services predicted that the upward trend would continue with double-digit annual growth at least through the mid-2000s.

Increased prescription sales would not, however, leave drug stores unchallenged as reimbursement by third party prescription administrators, which had come to dominate the market, was cut drastically. The biggest hit came in Medicaid-funded prescriptions, in which the profit margin might be as low as 2 percent. "The demand is going up and up, and we're keeping pace and delivering services, but we keep on getting squeezed because no one wants to pay for the service," Crystal Wright of the NACDS told Supermarket News. One bright spot for pharmacy departments was the impending end to patent protection by a number of widely used drugs. Once the patent protection period expires, generic brands are available, which usually provide a higher profit margin.

Drug stores were not the only ones to recognize the potential prescription explosion, and grocery stores and discounters were eagerly entering the market for prescriptions and other health-care products. According to Drug Store News, in 2002 mega-discounter Wal-Mart operated 2,977 pharmacies, compared with Eckerd's 2,641 stores. In addition, at least five supermarket chains reported pharmacy revenues over $1 billion. Traditional drug stores were starting to give ground to grocers and discounters. According to the NADCS, prescription volume growth slowed for drug stores, increasing by 5.8 percent in 2001, compared to 10.4 percent in 2000. At the same time, discounters and grocers increased prescription counts in 2001 by 5.9 and 7.3 percent, respectively.

To compete with mass merchants and grocery chains, drug stores market themselves as uniquely equipped to service the "quick-trip" shoppers. According to Chain Drug Review, the average trip to a drug store takes ten minutes, eight minutes if the customer is not picking up a prescription. Drug stores are also adding food items such as milk, frozen foods, and other staples to bring in time-pressed women and older shoppers who buy for smaller households and may not need to stock up at the grocery store as often but may run low on basic food items.

Industry Leaders

As a result of the consolidation in the industry, the drug store sector was dominated by four leaders in the early 2000s. Walgreens, CVS Corp., RiteAid Corp., and Eckerd Corp. accounted for two-thirds of total chain drug store sales. American Drug Stores and Longs Drugs Stores were ranked five and six respectively in the industry.

Walgreens, the number one drug chain, operated approximately 4,000 stores in 43 states and Puerto Rico and posted sales of $28.7 billion in 2002. The company expanded into new areas, both geographically and with products. In addition to adding photo-finishing departments to its stores, the company started its own pharmacy benefit management firm, which is actually run through the chain's mail-order business, Healthcare Plus. The store offered an online pharmacy and had 141,000 employees in 2002.

CVS Corp., the number-two drug chain, reported a net income of $717 million on sales of $24.2 billion in 2002. The company grew with its purchases of Revco, Arbor, and Soma, an online pharmacy, and had more than 4,100 stores in operation in 2002. Its subsidiary, PharmaCare Management Services, provided managed care drug programs to its customers. CVS had more than 105,000 employees in 2002.

RiteAid Corp., the number three drug chain, had sales of $15.2 billion in 2002, resulting in a net loss of $828 million. The company operated more than 3,400 stores in 28 states across the United States and employed 75,000 in 2002. Financial difficulties led the company to curtail its expansion activities and move to reduce its debt load.

Eckerd Corp., the fourth largest drug chain, is a struggling subsidiary of J.C. Penney Corp. Eckerd Corp. posted sales of $14.6 billion in fiscal 2002, but poor performance led to the closure of 200 of the company's 2,650 stores during 2000. Eckerd offered an online pharmacy for refills and employed 75,000 workers.


The drug store industry employed nearly 694,000 people in 2001. The NACDS forecasted that between 1998 and 2005, the number of community pharmacists would increase 6 percent, although there was a 50 percent increase expected in the number of prescriptions dispensed—2.7 billion in 1998 to 4 billion in 2005.

While chain drug stores employed almost 96,000 pharmacists in 2001, the major concern for this industry was the shortage of qualified pharmacists. In February 1999, there were 3,421 jobs available in this sector. Thirteen percent of drug stores were understaffed in 1999. Of 96,000 employed pharmacists, 80,000 worked full time. Over half of those full-time pharmacists were men. According to the U.S. Department of Labor, Bureau of Labor Statistics, the mean annual salary for a pharmacist in 2001 was $73,060. A pharmacy technician earned a mean annual salary of $20,530.

Research and Technology

Faced with managed care and an aging population with increasing needs for prescriptions, drug stores turned to technology to increase productivity. According to Drug Store News , "drug chains are turning increasingly to pharmacy technology to automate the workflow, speed the filing process, and take the guesswork out of nearly every aspect of prescription dispensing. In the process, they have poured tens of millions of dollars into high-speed pill and tablet counters, new prescription tracking software, robotic devices, work-station terminals and interactive voice response systems (IVR) for phone-in refills."

IVRs became increasingly popular in the late 1990s. With the growing number of prescriptions, these systems allowed the pharmacy staff to concentrate on filling prescriptions and talking with in-store customers instead of taking orders over the phone. CVS, for example, has implemented these systems throughout the company's chain stores.

Some new technologies emerging in the late 1990s included: AutoScript III, which integrated robotics, labeling, and pill counting into a touch screen system; QuickScript System, used for automating the entire filling process including labeling, filling, and capping, and streamlined the paperwork and inventory process—it can fill 90 prescriptions per hour; and RX-90 by Condor Corp., which simplified the inventory process.

In addition to these technological advances, many stores instituted a satellite network to allow prescriptions to be filled anywhere in the United States. Drug store chains also began using electronic data interchange (EDI) systems to share information with suppliers. Although relationships between drug stores and suppliers were traditionally somewhat adversarial, intensified competition in the industry led to the formation of alliances.

Further Reading

"Analysts: Outlook Optimistic for Drug Stores." Drug Store News, 23 March 2003, 4.

"Chain Drug Retailers Ready for Challenges: The Aging of the Population Will Help Drive Sales Increase." Chain Drug Review, 29 April 2002, 76-78.

"Drug Chains Preferred by Aging, Aching Consumers." Chain Drug Review, 18 February 2002, 36.

Frederick, James. "Walgreen's Steers Solid Course in Weak Economy." Drug Store News, 7 April 2003, 1-2.

Frederick, James, and Diane West. "Bumpy Ride for Drug Chains May Smooth Out by Year's End." Drug Store News, 29 April 2002, 59-60.

Loughran, Stephanie. "The Squeeze on Pharmacy." Supermarket News, 10 March 2003, 21.

Pinto, David. "Chain Drug Industry in State of Flux." Chain Drug Review, 29 April 2002, 75.

"Replacing a Trip to the Food Store." Chain Drug Review, 11 November 2002, 43.

"Sector in Midst of Transition." Chain Drug Review, 14 October 2002, 81-82.

Tosh, Mark. "Retail Lines Lose Definition." Drug Store News, 29 April 2002, 54.

U.S. Department of Labor, Bureau of Labor Statistics. 2001 National Industry-Specific Occupational Employment and Wage Estimates, 2001. Available from .

"A Vital Contributor to Bottom Line." Chain Drug Review, 20 May 2002, 55-56.

Walden, Geoff. "Drug Chains Intent on Winning Larger Share." Chain Drug Review, 3 March 2003, 41.

User Contributions:

Comment about this article, ask questions, or add new information about this topic: