Judy Zakreski and Fred He
Cover by Greg Berger Design, Inc
Cover Photo by Gregory S.Heslin
Purveyors of personal-care products can benefit by selling their goods through retail pharmacies As long as they do not face competition from supermarkets, department stores, and warehouse stores, retail pharmacies are willing to stock just about any product that is classified as a cosmetic or healthcare product and that will generate a healthy margin for the pharmacy. In general, state-operated stores make better partners than private ones because they usually have better locations, boast higher sales volumes, and pay on time. They are also more stable and less likely to be scrutinized by local authorities. The tradeoff, of course, is that they can be bureaucratic and difficult to deal with on business matters. Promotions set up just outside a pharmacy, featuring an expert who performs free evaluations of skin or hair type, attract passers-by in high-traffic areas. "Advertorials" written by similar experts and placed in selected magazines are also quite effective, as are promotions incorporating giveaways of some type. And "club-card" programs help retain customers. Under planned reforms, China's retail pharmacies will begin selling a much higher volume of prescription drugs, and hospital pharmacies will eventually be restricted to dispensing prescriptions for inpatient use.
Judy Zakreski is manager of business development for Chindex International, Inc., in Bethesda, Maryland. Chindex is a US-based distributor of medical instrumentation and healthcare and personal-care products in China.
Fred He is manager of business development for Chindex's products distribution group, in Beijing.
Many consumer-product manufacturers have long dreamed of selling products to each of China's 1.3 billion consumers. Those who have thoroughly researched China's market potential understand that the appetite for imported consumer products is considerably smaller. With nearly 70 percent of the population living in rural areas, and many city dwellers not earning enough to afford imported "luxuries," the real potential market for imported consumer goods is limited to a population of about 60 million, roughly equal to that of France. These emerging middle and upper classes encompass people from all walks of life, from entrepreneurs, employees of foreign-PRC joint ventures, and taxi drivers, to senior-level government officials, tour guides, celebrities, and chefs. Nearly all have small families and low fixed expenses, leaving them with ample disposable income. In fact, a recent Gallup survey indicates that housing, including rent and utilities, in any of China's 10 major urban centers accounts for (on average) only 9.1 percent of annual household spending.
Demand for imported consumer healthcare and personal-care products is growing among these middle- and upper-class consumers. According to the most recent (1999) US Department of Commerce study of China's cosmetics market, women in Beijing spent an average of $11 each per month on cosmetics in 1997, and this spending was forecast to grow at an average rate of 10 percent per year. The same study notes that parents are spending more than ever on skin-care products and toiletries for children and estimates that spending on men's cosmetics products could account for 35 percent of total future cosmetics sales. China's retail pharmacies, which have their own storefronts rather than locations inside hospitals, offer manufacturers and distributors of imported healthcare and personal-care products the opportunity to reach these consumers.
Why retail pharmacies?
About 120,000 retail pharmacies operate in China. Most of them are quite small--less than 200 m2--but a few are as large as 1,000 m2 or more. The majority are licensed to carry Western medicines (prescription and over-the-counter [OTC]), traditional Chinese medicines, health foods (designated by the jian shi characters at the beginning of the registration certificate), and family planning products. Some retail pharmacies are also licensed to carry cosmetic products. Even if they are not, it is relatively simple to add products the Chinese government classifies as cosmetics to a pharmacy's operating license. Chinese retail pharmacies do not carry products frequently found in US pharmacies, such as shampoo, diapers, nail polish, and batteries. China's pharmacies can, however, be ideal locations for selling products such as imported skin creams, specialty hair-care products (such as dyes or masks), and feminine-hygiene products.
All retail pharmacies by law must be government-owned. In reality, many of the state-owned pharmacy companies are consolidating to establish chains or franchises, and many more have contracted day-to-day management to an entrepreneur who pays a small percentage of the profits to its hands-off government owner. In Beijing and Shanghai, the government stopped approving applications for new pharmacies about three years ago, but is allowing chain stores to increase their number of outlets. Therefore, any "new" retail pharmacy in these markets must be affiliated with an existing outlet. In Shanghai, pharmacies must also contend with a rule that prohibits chains from opening outlets within a certain distance of existing pharmacies.
Local administrations for industry and commerce and local health bureaus oversee and regulate the pharmacies. Their monitoring of retail outlets includes spot checks of the types of products being sold, follow-ups on consumer complaints, and verification that retail prices match registered prices. Government monitors also verify that products comply with government regulations on labeling and other matters, and that merchandising and advertising materials are compliant and registered.
Many manufacturers and distributors of personal-care and healthcare products tend to gravitate to supermarkets, department stores, or warehouse stores when looking for outlets in China. But these outlets often suffer from intense competition among manufacturers and distributors wrangling for shelf space and are frequently difficult and expensive partners. It is not uncommon for these larger outlets, for instance, to require price discounts for storewide promotions, with the price reduction absorbed by the manufacturer or distributor. Though such locations often generate more sales, many also fail to pay their suppliers on time.
In contrast, retail pharmacies generally have ample advertising and floor space and are happy to fill it with imported products that generate higher revenues for the pharmacy than the low-margin items, such as traditional Chinese medicines, that have dominated their shelves in the past. And as long as they do not face competition from supermarkets, department stores, and warehouse stores, retail pharmacies are willing to stock just about any product that is classified as a cosmetic or healthcare product and that will generate a healthy margin for the pharmacy. Because they are smaller and generally more appreciative of the business they gain from stocking imported personal-care and healthcare products, retail pharmacies are more flexible, loyal, and dependable than the other types of outlets, and thus tend to make better partners.
Moreover, Chinese consumers generally perceive imported health- or hygiene-related products sold exclusively in retail pharmacies as having a certain cachet, separating them from other similar products and identifying them as treatment products rather than cosmetics. For instance, customers may view the claims of a health-oriented skin cream that advertises benefits in the treatment of acne or in the reversal of the aging process as more legitimate if it is not found in every large supermarket. This air of exclusivity also helps to justify the higher prices that these products carry compared to similar products manufactured domestically and sold in other types of outlets.
Bureaucratic and management barriers
Despite the advantages of using a retail pharmacy distribution model, surprisingly few foreign companies have launched their products in these outlets. This is due to several factors. First, as discussed earlier, the most common and familiar channels for selling these types of products are through supermarkets or department stores, and when looking to launch a new product, most manufacturers and distributors simply turn to these retailers without considering alternatives.
Second, breaking into the retail pharmacy market is often time-consuming and frustrating. One of the most difficult obstacles to overcome when approaching a pharmacy about a new product line is to convince the pharmacy owner or decisionmaker to carry products that are not drugs. The process of convincing the pharmacy to carry a new type of product can take several months. If the manufacturer or distributor is successful, the next step--negotiating for prime counter space, especially for low or no cost--can be equally difficult. Because pharmacies in China are state owned they tend to be bureaucratic, and working with them is not unlike working with other government-run entities in China.
Finally, most pharmacies lack a sophisticated inventory system, so if the manufacturer or distributor wants to receive regular feedback on sales and inventories, it must work with the pharmacies to implement a reliable system for recording and managing consignment stocks. None of these obstacles should prevent an experienced manufacturer or distributor from reaping the benefits of marketing their products through a retail pharmacy, however, and the potential benefits are well worth the effort.
Selecting a pharmacy partner
With 120,000 retail pharmacies in China, how does a manufacturer or distributor go about selecting the best partners? As with most sales outlets in almost any country, the best initial criteria to use when selecting a pharmacy partner are revenue and location. A pharmacy should also give the manufacturer or distributor ample access to good counter space. It is important to make sure the pharmacy has a reputation for paying on time, obeying the laws, and stocking genuine products--not counterfeits--and has a relationship with local law enforcement.
Sometimes, however, the pharmacies with the best reputations for prompt payment are not those with the largest revenue bases or the prime locations. State-operated pharmacies, for instance, are more likely to pay on time, while pharmacies contracted to entrepreneurs--which are more receptive to new ideas and products for sale in their outlets--are more likely to fall behind in their payments. Finally, clean, well-lit outlets are preferable for showcasing relatively expensive imported products.
In general, state-operated stores make better partners than private ones because they usually have better locations, boast higher sales volumes, and pay on time. They are also more stable and less likely to be scrutinized by local authorities. The tradeoff, of course, is that they can be bureaucratic and difficult to deal with on business matters.
Though the top state-owned pharmacies with the largest revenues, such as Shanghai No. 1 Dispensary Co., Ltd., Beijing Golden Elephant Pharmacy, and Beijing Wangfujing Medicine & Apparatus Co., often make the most profitable partners, they are harder to work with and demand more incentives. Many of the top pharmacies will expect the manufacturer or distributor to pay for counter space and to hire dedicated staff to sell their products. These requirements, however, are usually negotiable.
Chindex International, Inc., a US-based distributor of medical instrumentation and healthcare and personal-care products in China, currently works with pharmacies in 14 cities to sell a line of health-oriented skin-care products. In the formal contractual agreements that it signs with its pharmacy partners, Chindex is generally able to build in different incentives for its pharmacy partners and thereby avoid paying for counter space or hiring dedicated workers. For instance, Chindex and the manufacturer regularly negotiate and pay for window advertising or in-store lightbox advertising, which generate separate revenue for the pharmacies. Chindex also convinces its pharmacy partners to assign one or more staff members to sell its products, and then provides ongoing training for these salespeople. Chindex actively trains the pharmacies' managers to keep detailed records of sales and rewards management for timely payment.
Reaching the target consumers
Import duties, value-added tax, and other taxes applicable only to imported goods make imported healthcare and personal-care products at least 50 percent more expensive than similar domestically produced products--before any margin for the pharmacy or distributor is added. Once all costs are added--including higher foreign production costs--the retail prices of imported healthcare and personal-care products are generally three to four times higher than domestic alternatives. The positioning of the product is therefore extremely important in attaining market share. Since pharmacies generally serve fewer customers than supermarkets, warehouse stores, or department stores, marketing efforts must attract shoppers not only to the specific product or product line but also to the pharmacies themselves.
Yet the costs of television and newspaper advertising in China's major markets--where the bulk of the target consumers for imported products live--are extremely high. Some of the larger multinational corporations nonetheless use these media when launching a product and for follow-on advertising. In the personal-care and healthcare market, however, other methods of advertising are far more cost effective. For instance, promotions set up just outside a pharmacy, featuring an expert who performs free evaluations of skin or hair type, attract passers-by in high-traffic areas. "Advertorials" written by similar experts and placed in selected magazines are also quite effective, as are promotions incorporating giveaways of some type. And "club-card" programs help retain customers.
The retail pharmacy distribution pipeline
Once a company has established a network of retail pharmacy partners, reached agreements with its partners, and cemented relationships with those partners, the process of inserting new products into the "pipeline" is relatively simple. The launch of subsequent product lines, if using the same pharmacy partners, thus becomes easier, even if the products are completely different. The most demanding work in setting up distribution through retail pharmacies comes first--establishing the relationship.
This contrasts favorably with supermarkets, department stores, or warehouse stores, where intense competition, obligatory discounts, and pressure from store management will exist regardless of how many products a manufacturer or distributor sells to a particular store or chain. Although the manufacturer or distributor's clout may increase as sales volumes rise, larger outlets rarely offer the same type of partnership as retail pharmacies. Of course, as with any business relationship, companies must continually cultivate and maintain the retail pharmacy partnerships. But because of the nature of the partnership, which tends to be closer and on a more equal footing, maintaining relationships with retail pharmacies is generally an easier task than maintaining relationships with larger and more adversarial supermarkets, department stores, or warehouse stores.
Significant reform ahead
Retail pharmacies will certainly continue to evolve as China's economic growth and transformation proceeds. The model of a "Chinese" pharmacy, with a Chinese pharmacist who concocts traditional medicinal prescriptions, is quickly being replaced by more "Western" pharmacy models that sell prescription and OTC drugs, health foods, family planning products, and various healthcare and personal-care products. Under planned reforms, China's retail pharmacies will begin selling a much higher volume of prescription drugs, and hospital pharmacies will eventually be restricted to dispensing prescriptions for inpatient use. Retail pharmacies' businesses will consist more and more of high-volume prescription drug sales and high-margin healthcare and personal-care products, including OTC drugs and beauty products, similar to a European or North American drugstore model. Manufacturers and distributors who begin to lay the groundwork now to place their healthcare and personal-care products in retail pharmacy outlets are poised to benefit as these reforms take shape.
How to Bring a Product to Market: Product Registration and Other Legal IssuesA discussion of the sale of healthcare-related products in China, whether through retail pharmacies or another type of outlet, would be incomplete without a discussion of the regulatory hurdles involved in registering products with the appropriate authorities in China so that they can be legally imported and sold. In China, the State Drug Administration (SDA) regulates products classified as devices and pharmaceuticals. The Ministry of Health (MOH) regulates products classified as cosmetics, specialty cosmetics, disinfectants, and health foods. The regulations discussed here apply to all products classified as devices, cosmetics, specialty cosmetics, disinfectants, or health foods, regardless of whether they are sold through retail pharmacies or a different channel. SDA regulations Products classified as devices are divided into one of three classes, with the least-stringent regulations for Class I products and the most stringent for Class III products. Briefly, Class I devices are those for which safety and effectiveness can be ensured through routine administration. Class II devices require further controls to ensure safety and effectiveness. Class III devices are implanted into the human body, used for life support or sustenance, or pose a potential risk to the human body and are therefore strictly controlled. All personal-care products sold in a retail pharmacy would be Class I or Class II products. The documentation requirements for imported Class I and Class II products are similar--and not insignificant. Original documents or notarized copies of numerous licenses, approvals, formulations, specifications, authorizations, and guarantees are required and must be translated into Chinese and submitted in multiple copies. Class II products must also be submitted for type testing, a three-part process consisting of safety testing, technical specification review and testing, and environmental testing. The whole registration process for a device can take up to 90 working days. For items made in China, SDA rules require the same documentation and testing as for items made elsewhere, but the approval levels are different. For instance, domestically produced Class I and Class II products can be approved by provincial governments, whereas those that are made abroad must receive national-level approval. All Class III products, however, even those that are domestically produced, must be approved by SDA at the national level. MOH requirements Imported products classified as cosmetics, disinfectants, health products, or health foods are all subject to a two-phase registration process, entailing testing and documentation review by MOH at the national level. MOH also requires original documents or notarized copies of numerous licenses, approvals, formulations, specifications, authorizations, and guarantees, in addition to product label and packaging samples and detailed schematic drawings of the manufacturing facility. The process of registering a product with MOH frequently takes more than nine months, primarily because the experts committee that meets to review applications convenes only once quarterly and does not always have time to review all of the pending applications. A registration dossier submitted for a September MOH experts committee meeting may not be reviewed until December. In addition, it may take up to six months after the experts committee has approved a product for MOH to issue a registration certificate. As with many other bureaucratic procedures in China, guanxi, or personal relationships, can help shorten this process somewhat, but it will still take at least several months to complete. The MOH rules for domestically produced products are similar to those for imports, but domestic cosmetics only need to be approved at the provincial level. Products classified as "specialty cosmetics," however, must be approved by MOH at the national level. This "specialty cosmetics" category is actually more onerous for domestically produced products, since both provincial and MOH approval is required before the product can be registered. Local rules In addition to these national-level registrations, many consumer healthcare and personal-care products are also subject to local regulations, which require separate local registrations. For instance, certain products, including cosmetics and health foods, must receive approval from the local State Bureau of Quality Supervision, Inspection, and Quarantine. This approval has been required since China implemented regulations in 1998 to limit smuggling. Some products, such as disposable medical products, are also subject to the local health bureau's registration requirements. Companies can submit copies of the documents used for national-level approvals for most of the local-level registrations, but the registration processes are nonetheless time-consuming and often cannot begin until companies have received the national-level registration certificate. Regulations in flux The regulations governing product registration in China are in a nearly constant state of flux. It is common to receive different answers to the same question from two people in the same organization. The many gray areas in the regulations sometimes make it difficult to pinpoint how a particular product will be classified in China. Some products that are new to China have not been classified at all, while others may be separated by a "dotted line" between drugs and health foods, for instance. Some products, such as certain shampoos, that may be classified as cosmetics in the United States might be classified as pharmaceuticals in China because of different classifications of certain ingredients. All of these factors raise the potential for delay, so manufacturers and distributors must consider the time required for product registration, with some cushion on either end, when planning the timing of a product's launch. Distribution rules The rules governing distribution of these products generally allow for foreign participation. Products classified as pharmaceuticals, however, although also regulated by the SDA, are subject to different rules that effectively prohibit the direct participation of foreign companies in their distribution. Distribution of pharmaceutical products will open gradually to foreign participation after China's World Trade Organization entry, but for now the only way that foreign companies can participate legally is to have a local partner that has a three-license (san zheng) permit, which allows participation in pharmaceutical distribution activities. Other issues Other regulatory issues that manufacturers and distributors should consider include: --Judy Zakreski and Fred He |
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