Time is ripe to explore cross-border trade

Drug Store News, April 5, 1993 by Edward Pope

This is the first of a bimonthly series of articles providing an overview of global developments affecting American pharmacy-related industry.

In this revolutionary era of economic globalization and trade-interdependence, all sectors of the American pharmacy-related industry (suppliers, wholesalers/ distributor and retailers) can benefit from international business opportunities of unprecedented dimension.

At a time when the domestic market is becoming saturated and profit margins are getting squeezed, American chain pharmacies and related industries should assess the exceptional opportunities in cross-border trade and certain high-growth markets overseas.

The primary impediment to pharmacy-related American companies (except pharmaceutical manufacturers) exploiting these new markets rests upon the traditional "stand-alone" view of Americans of their vast domestic market.

The traditional outlook is compounded by an underlying fear of venturing beyond one's border of security - whether it is defined by city, state, region or national boundaries. Much of this, of course, is rooted in America's dominating sense of isolation: safely protected behind two ocean barriers, a small Canadian neighbor to the north and an underdeveloped Mexican neighbor to the south.

Suddenly, with the breakdown of East confrontation and the emergence of a global economy, ocean barriers have become highways for overseas trade. A once-small Canadian neighbor is becoming economically large, and the Mexican neighbor is experiencing one of the most brilliant economic transformations in modern history. Negative factors have become positive within one brief decade.

So all sectors of pharmacy-related industry can now profit by positively transforming what may have been negative attitudes about these markets. The challenge is to examine the many different ways to conduct cross-border business. In an era of foreign competition penetrating the U. S. market, we can no longer avoid world competition by staying at home.

American pharmaceutical manufacturers have penetrated foreign markets successfully for years: first with exports, then licensing agreements, then manufacturing subsidiaries, joint ventures, mergers, capital investment, acquisitions, shared research and every conceivable form of business relationship. Their success has been a model of American ingenuity and enterprise.

These manufacturers learned from cross-border experience the vital importance of associating with reputable national companies that know local customs, regulations, tastes and the marketplace. In such multinational affiliations, the combined strength leverages geometrically, not just arithmetically.

However, many American retailers, wholesalers and distributors amazingly have convinced themselves - perhaps in their struggle to generate positive quarterly reports in a saturated domestic market - that that the manufacturers' success story overseas could not apply to them.

Seizing the opportunity

Recently several drug store chains have seized the opportunity and proved the profit-ability of overseas trade to retailers and wholesalers.

At first, they exported their private labels and discovered that the American name offers a marketing plus to foreign consumers. They found that expanded utilization of existing manufacturing facilities reduces unit cost and maximizes plant operations. A broader base also spreads risk and generates economy from volume. Exports also compensated for cyclical and other downturns in the American marketplace.

The experience of profitable export of private label products by some pharmacy chains then opened other doors to international business opportunities: becoming partners in an existing Japanese pharmacy chain, selling shares in American chains to obtain foreign capital, creating a major mass merchandising (with pharmacy) chain throughout Mexico as a joint venture between Wal-Mart and Cifra, establishing a Russian-American joint venture pharmacy chain and distribution system in Russia with supplies sourced in the U.S., and developing a Mexican-American distribution system in the southern belt of the U.S.

Markets vary

What are the best overseas markets for American retailers and wholesalers/distributors to prospect? A later article will evaluate in detail four regional blocs:

* European Community: This 12-nation market has been difficult to penetrate due to a structured, tightly licensed system and (except in the United Kingdom and Ireland) a monopoly whereby only a pharmacist can own a pharmacy (and only one pharmacy), and only a pharmacy can sell prescription and OTC drugs. This monopoly is now eroding.

* Eastern Europe: The gigantic potential to create distribution systems and pharmacy chains in the former Soviet Union and Eastern Europe is exceeded only by the magnitude of inherent problem.

Pacific Rim: American business has been largely responsible for the meteoric success of Pacific Rim economies, which account for a third of U.S. exports and 40 percent of imports.