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Costco Pharmacy

Analysts have tracked closely the huge impact Costco has had on the grocery industry in recent years, but have paid scant attention to the chain's pharmacy operations. As the chain continues its relentless growth, it's moved quietly into the ranks of the top pharmacy retailers in the country.

Total pharmacy sales at Costco boomed in 2002 as new prescription drugs and an aging population of baby boomers put the industry into overdrive. Pharmacy operations at Costco generated $1.4 billion in sales last year, with about $800 million in over-the-counter sales and $600 million in sales of prescription drugs.

"Our prescription sales increased 28 percent to 30 percent in 2002 and OTC sales were up about 15 percent," said Costco senior vice president of pharmacy Charles Burnett. "We experienced solid growth and we were pretty fortunate." And that growth will continue in 2003 as Costco adds new stores and sales improve at maturing stores. "We're probably going to see 20 percent to 25 percent growth overall," said Burnett.

One of the challenges Costco continues to face--given the fact it doesn't advertise--is getting people to think of its stores as a place to purchase prescription drugs and other pharmacy products. "We've been opening about 30 new stores a year, and many are in new areas where we're really not known for pharmacies," said Burnett. To help get the word out, Costco now publishes a quarterly magazine on health-related issues.

Costco is a relative newcomer to the pharmacy industry compared with veterans like Walgreens and CVS. The company entered the business in 1986 when Burnett opened the first pharmacy in a store in Portland, Ore. He had been running a small chain of drug stores in San Diego when he ran into Costco founder Jim Sinegal at a convention in the early 1980s.

"He [Sinegal] was just starting Costco and he told me he wanted to make pharmacies a part of his stores as soon as they got up and running," said Burnett. "Costco has all kinds of ancillary businesses now but pharmacy was the first one." Burnett operated the stores as an independent contractor for a year before they were made a part of the company in 1987.

The chain now has 293 pharmacies and they're a part of every store except the few that don't have room for them. "We experimented with a smaller store format a few years back in places like Alaska and Wyoming and they're the only stores that don't have pharmacies," said Burnett.

The standard pharmacy is open six days a week, has four employees (two pharmacists and two technicians) and is open during store hours every day except Sunday. The volume varies from location to location but some stores fill up to 1,000 prescriptions a day.

To handle that kind of volume, Costco is using new technology to process orders A "bin management" system in place at most stores tracks prescriptions from the time they're made to the point where they're handed over to customers. "Every order is assigned a number and we can locate and keep track of every one at any point it the process," said Burnett.

Costco is also expanding its pharmacies to accommodate a separate room dedicated to customer service and education. Burnett said the introduction of new prescription drugs and new health technology has made education and hands-on service a top priority.

"We do a lot more consulting than we did in the past and we need a private area where that can be done," said Burnett. "And we have a large film library for our customers on subjects such as how to use inhalers or new blood glucose monitors for diabetes." Consulting rooms are in more than 60 Costco pharmacies and they're being added as a standard feature in new stores and in store remodels.

Like most pharmacy retailers, Costco has had to deal with the chronic shortage of pharmacists that has dogged the industry for several years but has managed to keep its stores fully staffed by offering competitive wages and benefits. And Costco has gradually rolled out its Kirkland private label products in the pharmacy area, which range from vitamins to analgesics. "We have about 40 items right now and they represent a great value," said Burnett.

Over-the-counter products now account for nearly 60 percent of total sales but that percentage is shrinking as aging baby boomers continue to drive sales of prescription drugs. "The breakdown will probably be closer to 50-50 in a few years," said Burnett.

That's because millions of Costco customers are already in the baby boomer bracket or will soon be at an age where they will be paying more frequent visits to the pharmacy. "Warehouse club consumers tend to be a little older and wealthier with a lot of couples who are empty-nesters," said Todd Hale, an analyst for AC Nielsen. "So they represent a large group of consumers that will likely have an increasing need for pharmacy products in the next few years.

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