Parry and Thrust
In one of my recent pay-to-read Five Forces analyses I wrote whether Wal-Mart's generics-for-$4 program will lead to increased rivalry in the retail pharmacy sector. In Note on the Structural Analysis of Industries Porter hypothesized that:
"In most industries competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation or efforts to counter the move…This pattern of action and reaction may or may not leave the initiating firm and the industry as a whole better off. If moves and countermoves escalate, then all the firms in the industry may suffer and be worse off than before." .
Two factors that influence the degree of rivalry experienced are the degree of product differentiation and switching costs. Concerning the first Porter said that “when a product or service is perceived as a commodity or a near-commodity”, then consumer choice is largely determined by two things- “price and service.” Product differentiation is, then, a way to “create layers of insulation against competitive warfare” because buyers are presented with clear choices and thus afforded the opportunity to develop preferences for and loyalties to particular producers.
Switching costs are the “one-time costs of switching brands, or switching from one competitors’ product to another.” When switching costs are low or non-existent we should expect that consumers can and will have little resistance to changing products and producers. It would seem almost axiomatic that switching costs for generic drugs are little or non-existent.
How it is that low product differentiation and low switching costs increase rivalry is made very clear in recent news reports about Wal-Mart’s generic drug program. In article entitled “Wal-Mart hurries $4 prescriptions into Michigan”, Mary Radigan of The Grand Rapids Press describes how Wal-Mart’s low-cost generic drug program was rapidly countered by Meijer with a free program and then how quickly Wal-Mart responded again.
Three days after Meijer stores announced free generic drugs to customers, Wal-Mart today launched its $4 prescription program in Michigan months earlier than expected. Company leaders said public demand, not Meijer, prompted them to roll out the program here and in 11 more states today instead of sometime after January, as first promised. "We were planning on rolling this out, and this is just our next step to add additional states," Wal-Mart spokesman David Tovar said. "This has nothing to do with Meijer."
Interstingly. Meijer officials have no problem stating that their moves were in response to Wal-Mart:
Meijer President Mark Murray said today that he "fully expected" Wal-Mart to move the drug program into Michigan. "They clearly have accelerated their rollout nationwide," Murray said. "This is a competitive business."
Here are some recent examples of countermoves by other national, regional, and local competitors. According to the Washington Business Journal:
Wegmans Food Markets of Rochester, N.Y., unveiled a cost-cutting plan for nearly 200 generic drugs and will make them available in a three-month supply. The supermarket chain says customers will be able to purchase the medicine in a 90-day supply for $11.99. The program will be implemented Oct. 26 in all of the company's stores in Maryland, Virginia, New York, Pennsylvania and New Jersey. Kmart has also announced plans to reduce the cost of some generic drug prescriptions.
Perceptions of an responses to Wal-Mart's moves seem to vary across by region and industry. For example, while pharmacies in Alabama remain unphased...
“They’re just trying to get more traffic in there,” said Ray McDiarmid, owner of Dixie Drugs in Sylacauga. “I don’t think it’s going to make any difference either way.” Tommy Hebson, owner of Palace Drug in Sylacauga, said he doesn’t believe Wal-Mart’s new policy is going to have an impact on his business. He said the majority of Palace’s customers are on Medicaid and the new Medicare Part D, so $2 is often the highest they ever pay.“Right now, I think it’s just a kind of publicity stunt and they’re just trying to get more business,” Hebson said. Still, area pharmacists say it’s a wait-and-see deal and only time will tell if the $4 discount prices are enough to cause them to worry. Right now, they say it’s not an issue. “We’ve always tried to give our customers the lowest prices,” Hobbs said, “so I don’t think we’ll have a problem.”
...in Madison Wisconsin, carping, rather than competing, seems to be the order of the day:
Madison’s Community Pharmacy told WMTV News, the NBC affiliate in Madison, Wisconsin. Criticism also came from the National Community Pharmacists Association (NCPA). “It’s a loss-leader type program that is solely aimed at getting people in the door at Wal-Mart. Most people going to get their prescriptions filled will be disappointed,” said Charlie Sewell, NCPA’s executive vice president of government affairs.
Don't be surprised to see them next seeking legal and regulatory remedies and/or teaming up with anti-Wal-Mart activists and other non-market actors. In fact the seeds of these potential alliances have already been sown when one reads comments like this from Wal-Mart Watch:
While the advent of competition in the prescription drug market is a major victory for consumers, there are plenty of critics. The group WakeUpWalMart called the move a “publicity stunt,” and others were concerned that the decision to sell the generic drugs at such low prices would drive small pharmacies out of business. “They are closing down lots of pharmacies and lots of stores all over the United States because of their unfair practices.”
My guess is that rivalry won't become much more intense. Even though the products themselves are generic- and thus undifferentiated and characterized by low switching costs- firms can differentiate themselves through the way they structure their low-cost generics programs. All programs need not and will not look alike. As such, this could be an opportunity for small, regional, and national competitors of Wal-Mart to further differentiate themselves from the Behemoth of Bentonville, something that should benefit them and consumers both.
Tags: WalMart| five forces | rivalry |
Comments
I like the fact that Meijer seems quite confident in its ability to compete with Wal-Mart. A lot of the political blowhards here would have you think Wal-Mart destroys any competition in any market it enters. Meijer apparently disagrees.
Posted by: Jeff D | October 29, 2006 1:23 PM