Core Summary
The pharmacy industry, once hailed as an "ever-blooming sunrise industry," has seen a dramatic decline from its peak of nearly 700,000 stores (almost 200,000 more than bubble tea shops) to 39,000 closures in 2024 and a net reduction of 22,000 stores by 2025. It has become commonplace for business owners to flee their businesses overnight. The essence of this wave of closures is that the industry's past success was fueled by policy loopholes (such as the separation of medical services from pharmaceutical sales and the associated gray income from medical insurance), exorbitant drug prices, and aggressive capital expansion. These factors have collapsed under the combined pressures of over-supply, price competition, online competition, and stricter policies. The industry is now transitioning from a situation where profits came easily to one where survival depends on providing valuable health services to the community.
Detailed Analysis
1. The Three Secrets Behind the Former Profitability of Pharmacies
The rapid expansion of pharmacies relied on three main sources of revenue:
- Policy Loopholes for Customer Acquisition: In 2017, public hospitals abolished price markups on drugs, prompting patients to shop at pharmacies. Additionally, pharmacies with medical insurance designated status could accept medical insurance cards, ensuring a steady stream of customers. For example, many people used their insurance to buy groceries and health products, which accounted for over 30% of some stores' revenue—forming a significant source of "gray profit."
- Exorbitant Drug Prices: Before centralized procurement, the prices of common medications like cold remedies and antibiotics increased significantly from the factory to the pharmacy, with gross margins exceeding 50%. Pharmacies profited by selling well-known brands (e.g., Ganmaoling) and niche, high-margin drugs. Even small family-owned businesses could make substantial profits.
- Capital-Driven Expansion: Leading chains (such as Dacolin and Laibǎixing) expanded through direct operations, acquisitions, and franchising. Some new stores were even established with the intention of being acquired later on, as expansion could boost stock prices and enable further financing for more acquisitions, creating a cycle of "expansion → increased valuation → additional expansion." The surge in demand during the pandemic in 2022 (with monthly sales increasing by 82%) helped the industry reach its peak of 700,000 stores.
2. Over-Supply: The Harsh Reality of a Surplus of Pharmacies
There are simply too many pharmacies! At its peak, there was one pharmacy for every 2,000 people nationwide, and in core cities, even one for every 1,000 people—more than three times the ratio in developed countries like Europe and the United States (where there is one pharmacy for every 6,000 to 10,000 people). Industry experts estimate that the optimal number of pharmacies would be around 450,000, meaning there are 250,000 excess stores.
As a result, the limited patient base has been stretched thin, leading to declining revenues per store. In 2024, the average daily revenue of physical pharmacies was less than 3,000 yuan, with more than half of them operating at a loss. The more pharmacies there are, the harder it is for them to survive. For example, in second- and third-tier cities, there may be five pharmacies within a hundred meters, and in small towns with tens of thousands of residents, there could be eight pharmacies competing for the same customer base.
3. Price Wars and Online Competition: Profit Margins Are Being Eroded
- Fierce Price Competition: To attract customers, pharmacies offered discounts, free promotions, and even a "bottom-price" model (Chongqing Xinhufu Pharmacy added only a 1%-14% profit margin on drugs, compensating for the difference with membership fees). This has pushed suppliers to terminate their partnerships, further reducing industry-wide gross margins.
- Online Disruption: Platforms like Meituan and JD Health offer low prices and instant delivery, attracting young customers. The online price of common medications is often lower than the in-store price (with discounts of 30%-70% due to platform subsidies). Additionally, price comparison apps allow customers to compare prices across all nearby pharmacies, eroding the profit margins that pharmacies once enjoyed.
These factors combined led to a 10.6% decline in average store sales and an 8.9% drop in average customer spending in 2024, forcing many pharmacies to close.
4. Policy Changes: The Final Strain on Exorbitant Profits
The pillars of past profitability have all collapsed:
- Stricter Medical Insurance Regulations: In 2023, medical insurance inspections became more frequent, and penalties were imposed for activities such as swapping drugs or using insurance to purchase non-medical items. In 2026, a new policy will prohibit the use of insurance for health products and daily necessities, eliminating any remaining gray income sources.
- Centralized Procurement: The state has started centralized procurement of medications (both prescription and OTC drugs), resulting in price cuts of up to 50% for hundreds of products. Gross margins on chronic disease medications have dropped from 30%-50% to less than 10%, eliminating high-profit opportunities.
- Increased Compliance Costs: New regulations require the tracking of all drug shipments and the presence of licensed pharmacists at all pharmacies, adding significant annual costs that small and medium-sized businesses cannot afford. Many pharmacies have voluntarily withdrawn from medical insurance programs (172 in Sichuan did so in the first quarter). Without this source of revenue, their survival becomes even more challenging.
5. The Future of Pharmacies: From Selling Drugs to Providing Health Services
The industry must return to its fundamental role as community health centers, rather than just places that sell drugs. Leading companies are already transitioning to offer additional services:
- Chronic Disease Management: Regular monitoring and medication guidance for patients with conditions like hypertension and diabetes.
- Professional Services: Licensed pharmacists provide consultations to address patients' medication questions.
- Traditional Chinese Medicine (TCM) Services: Acupuncture, massage, and herbal remedies.
Over the next 3-5 years, the number of pharmacies is expected to shrink to less than 500,000. Smaller, less capable stores will be eliminated, leaving behind those that are more efficient and provide higher-quality services.
This wave of closures is not a sign of the industry's failure but rather a purge of inefficiencies and outdated practices. The era of profiting from policy loopholes and information asymmetries is over, giving way to a new era where expertise and quality service determine success. For consumers, this means more standardized and professional medical care; for pharmacy owners, it means either adapting or facing extinction.