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Executive Summary

McKesson is currently serving approximately 40% of the independent drugstores operating in the U.S., the wholesaler noted in its recently issued annual report for 1987. "McKesson Drug [in fiscal 1987] . . . concentrated on attracting new independent drugstore customers, adding more than 1,000 for the third year in a row," the annual report states. "Of the nation's 35,000 independent pharmacies, McKesson serves about 14,000." Calling the independents "critical to McKesson's success as they fill about 60% of all retail prescriptions," the wholesaler noted that independent drugstore customers accounted for nearly 55%, or $2.6 bil. of the company's total $4.8 bil. wholesale drug business in fiscal 1987 (year ended March 31). Indicative of McKesson's emphasis on its core independent pharmacy business has been the recent growth of the wholesaler's Valu-Rite program, the largest voluntary retail drug chain association of its type, according to the company. Membership has increased by approximately 500 members in each of the last two fiscal years to a current total of about 2,500. Valu-Rite members made up over 10%, or roughly $525 mil., of the wholesaler's $4.8 bil. 1987 drug volume, an increase of 17% over fiscal 1986 levels. The Valu-Rite sales increase mirrors the growth in McKesson's overall drug wholesale business, which was up 18% for the 12 months. "The dollar amount of business from Valu-Rite pharmacies is growing about 33% faster than our other independent retail accounts," McKesson Drug President Joseph Polastri pointed out. "That's evidence that independents are finding that Valu-Rite programs and products boost their sales and profitability." The company said it plans an additional 20 Valu-Rite product introductions for the current fiscal year, bringing the total number of Valu-Rite private label items to 170. McKesson began the program in 1979 with 75 products. "Private-label products offer shoppers good values while yielding better margins for our customers, a major incentive for retailers to display and promote them," Polastri commented. The wholesaler has also expanded its Medalist private-label line for independent pharmacies and strengthened its "Great Value" programs, the annual report notes. The latter provide special-buy merchandise and in-store promotional support to help independents compete more effectively. A second business focus in the wholesale drug area is the emerging hospital market, where McKesson generated sales of about $650 mil., or about 18% of total drug volume. "The hospital industry is very attractive in spite of the fact that it is a narrow-margin business with ongoing pressures to reduce costs while providing quality care," Polastri noted. "Wholesalers have a 65% share of the pharmaceutical business in the hospital drug market today, and that share is expected to continue growing." Since the mid-1970s, the report adds, McKesson has cut its number of distribution centers almost in half, from 90 to 54. In addition, the wholesaler recently opened the first of a "new generation" of combo warehouses in Memphis, a 270,000 sq. ft. facility that will house the firm's drug, Valu-Rite, veterinary services and office products operation.

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