Table of Contents
Erik Blazic
In a retail pharmacy, between the food and beverage aisles and the prescription drugs, consumers can find two kinds of health products: over-the-counter medicines and nutraceuticals. These two products could not be any more different from each other when it comes to their market landscape, the degree of innovation happening and the implications for retail pharmacies.
As nutraceuticals grow in popularity, the questions that emerge for retail pharmacies are:
- What is the right balance of O-T-Cs and nutraceuticals on store shelves?
- What is the right product assortment within O-T-Cs and nutraceuticals, and how could the assortment of products be customized by store location?
- How can pharmacies educate consumers on new products to help them find the right health and wellness drugs, O-T-Cs or nutraceuticals?
O-T-Cs: critical commodities
O-T-Cs are and will remain a critical part of the pharmacy offering. These easily accessible, long-proven medicines are important for consumers to address acute and time-sensitive symptoms through self-directed therapy. When a consumer has a headache or is treating a cold, they will continue to look for the tried-and-true O-T-Cs they’re used to.
Danny Elnatour
As O-T-Cs do not undergo substantial R&D to bring forward new therapeutic molecules, innovations within the segment are largely limited to reformulations of existing medicines. For example, there have been new iterations of Tylenol that taste better or are more easily digestible for kids, but the active ingredient remains the same acetaminophen molecule. Meanwhile, new prescription-to-O-T-C conversions will continue to increase accessibility of former prescription-only medications in the form of new O-T-C products, such as Nasonex’s approval to be sold over the counter in 2022. These conversion events, however, cannot be relied on as consistent strategies for innovation as their frequency varies greatly over time, most recently peaking over the COVID pandemic and expected to drop into 2023.
O-T-Cs also have lower margins relative to premium nutraceuticals and face significant challenges from private label options. And the result? Pharmaceutical companies are spinning off or divesting parts of their consumer health business.
Despite the low degree of innovation with the products themselves, there are still opportunities in O-T-Cs for merchants, primarily in key high-growth categories like sleep aids and emergency contraception, which are forecasted to grow at a 6.5% and 5.5% CAGR (compound annual growth rate) respectively through 2026. Additionally, direct-to-consumer and e-commerce are primed to continue their growth, with most O-T-C categories experiencing about 40% CAGR through the past few years via those channels. Though retail pharmacies will continue to have the largest share of sales, it will continue to be important for operators to focus on channel strategy, either through their own operations or via partnerships with innovators.
Nutraceuticals: a new frontier
On the other side of the aisle, nutraceuticals loom large as a high-growth category, fueled by product innovation and flourishing interest from consumers. They are not just vitamins anymore — a focus on health, wellness and self-care has led to a rapid expansion of products, ingredients and innovative new formats. The list of products on the nutraceuticals aisle is long: gummies, powders, tonics, supplements, effervescents, herbals, sports nutrition, apple cider vinegar, and many more.
As illustrated below, if prescription drugs fall under the “Medicate me” category and O-T-Cs are in the “Treat me” category, nutraceuticals land in the “Enhance me” camp. Consumers are increasingly favoring playful product formats, products that fit within an on-the-go lifestyle, and personalized wellness products. In addition, consumers see nutraceuticals as proactive and preventative, while O-T-Cs and prescription drugs are generally reactive, based on symptoms.
Key market dynamics
Compared to O-T-Cs, the nutraceuticals market is less regulated in the U.S., with generally higher margins. This has led to the proliferation of many new entrants and products looking to be the “next big thing” in nutraceuticals in satisfying increasing consumer focus on holistic wellness. At the same time, these consumers also have heightened wariness of the stereotypical “snake oil.” Part of the challenge for consumers lies in distinguishing between the many different products that fall under the broad nutraceuticals umbrella. Certain nutraceuticals, like electrolytes and creatine, have clinically demonstrated benefits, but the benefits for other products are murkier, especially for herbal supplements. As a result, e-commerce marketplaces and new nutraceutical products place higher emphasis on clearly communicating clinically demonstrated benefits to consumers to inform purchase decisions.
Opportunities in both markets
Tonny Huang
While O-T-Cs and nutraceuticals are very different, retail pharmacies can position themselves as a catalyst for opportunities within both markets.
There is some O-T-C innovation to watch: Various players are driving O-T-C product innovation through dosage formats, treatment focus, severity of ailments, technology connectivity and holistic care models. Retail pharmacies could partner with manufacturers to identify optimal formulations and product designs for retail and e-pharmacy delivery, as well as accelerating value from new prescription-to-O-T-C conversions that may come to market. Additionally, retail pharmacies should continue to focus on category management and assortment optimization. Pharmacies can use consumer data to optimize the assortment of O-T-C products and cater to the local population.
Lastly, retail pharmacies should continue to explore e-commerce opportunities for O-T-Cs that could further free up in-store shelf space for more profitable and popular products. For example, e-commerce continues to grow rapidly for analgesics with around 50% growth sales between 2019 and 2021. As pharmacies continue to expand home-delivery services, they will simultaneously free up shelf space in stores for other high-growth and popular products (e.g., emergency contraception and sleep aids).
As O-T-C assortments and shelf space become optimized, retail pharmacies further have the opportunity to focus more on nutraceuticals and premium health and wellness experiences.
First, identify the top conditions and product categories that are synergistic with O-T-Cs. Strong nutraceuticals categories may include sports nutrition, respiratory and digestive health, and sleep aids; the majority of these products can provide complementary benefits to O-T-Cs, such as bundling sleep aid nutraceuticals with typical analgesics and painkillers during flu season.
Then, consider how nutraceuticals could be elevated as premium products, similar to cosmetics in marketing and merchandising with eye-catching and informative in-store signage (e.g., highlighting product benefits, slogans to incentivize daily usage and celebrity endorsements) and options to personalize care. As the pharmacy integrates more into the care process, there is a conceivable future where the pharmacy team guides consumers through their options for O-T-Cs and complementary nutraceuticals for holistic health. Beyond in-store, consider e-commerce and DTC models to deliver nutraceuticals. Pharmacies may partner or collaborate with e-commerce players to develop DTC subscription models (e.g., consistent delivery of nutraceuticals at home) and create seamless omnichannel and digital offerings.
For all the interest in the category, there is also a need to balance the push toward nutraceuticals. Nutraceuticals are not as clinically proven as O-T-Cs, and consumer trust in the products may lag behind. Retailers should gauge the levels of local demand, interest and trust and use that insight to drive the messaging about nutraceuticals. Nutraceuticals and O-T-Cs should not be conflated or comingled. Instead, nutraceuticals should be presented as a complement to O-T-C medicines.
A balancing act
The challenge for retail pharmacies? Balancing these two very different product categories to meet consumer interest and needs, offer innovative solutions, and improve margins. There’s an opportunity to streamline the shelf space for O-T-Cs in order to free up space for nutraceuticals. Pharmacies also have the opportunity and challenge to successfully educate consumers about what nutraceuticals can and can’t do, while still opening the door for consumers to explore these innovative products.
A potential customer journey could look something like this: A consumer goes to their retail pharmacy to pick up their prescription drugs for a nasal infection. The consumer seeks guidance from the pharmacist or pharmacy technician on recommended O-T-Cs to treat complementary symptoms such as sinus congestion. Beyond the O-T-C aisle, the consumer can be prompted to think about their holistic health and wellness; they turn to elderberry tonics and vitamins to boost their immune system. The consumer may learn about nutraceuticals through a self-service kiosk that enriches their experience (such as those seen in orthopedic and sportswear markets). At the end of the visit, the consumer leaves the pharmacy feeling medicated, treated and enhanced.
There are as many ways to offer the right products, experiences and guidance to consumers as there are symptoms to treat. The opportunity ahead is ripe for retail pharmacies to play a key role in shaping that journey for consumers.
Erik Blazic is a partner in the health practice at Kearney, a global strategy and management consulting firm. He can be reached at erik.blazic@kearney.com. Tonny Huang is a manager in the health practice at Kearney. He can be reached at tonny.huang@kearney.com. Danny Elnatour is an associate at Kearney. He can be reached at danny.elnatour@kearney.com.
