Foreign Companies Hesitate to Enter China’s Retail Medicine Sector

Since the middle of December, China’s medicine retailing market has been fully open to foreign companies. Predictions that foreign medicine retailers would take this opportunity to pour investment into the country have proven to be overly optimistic. Low profit margins and a lagging logistics sector have caused many potential investors to take a wait-and-see approach.

Current market share for Chinese medicine retailers stands at 15%. Chinese hospitals, which have the power to both prescribe and dispense medicine, make up the remaining 85%. China’s retail drug stores suffer from extremely low profit margins. Of the roughly 200,000 medicine retailers in China, an estimated 50% of them were operating at a loss in the past year. Contributing to this is the small scale structure of China’s medicine retail market. There are currently very few larger drug store chains in China with a nation-wide presence. Foreign retailers must also compete with the popularity of traditional Chinese medicine (TCM). It is estimated that TCMs represented nearly 25% of all pharmaceutical sales in 2004.

Despite the above situation, the long-term potential for the Chinese medicine retail market exists. Two Chinese companies have recently invested nearly $85 million dollars to construct what will be two of the largest modern medicine distribution centers in China. Hopes remain that the Chinese government will speed up its reforms and reduce the number of hospitals from the medicine distribution system. The number of large, nation-wide drug chains should continue to grow in the future. By early 2004, the total sale of the top 100 drug chains had risen 37% year-on-year. A forecast on China’s drug retail market shows that by 2010, its size will reach as much as $50 billion dollars, with drug chains expected to capture about half of the overall market share.