Flood of generics slows Costco's pharmacy growth

ISSAQUAH, Wash. Costco reported slower growth at pharmacies during its first quarter due in part to an influx of lower-priced generic drugs. Total sales increased 4 percent to $634 million for the three-month period ended Nov. 25.

Costco reported a 1.2 percent increase in prescription sales of $306 million for the quarter and a 6.8 percent jump in over-the-counter sales of $328 million. The company ended the quarter with 383 pharmacies. Costco’s vice president of pharmacy, Vic Curtis, said sales of generic versions of such popular drugs as Zocor and Norvasc had a greater impact on Costco than on most other retailers.

“It was really magnified for us because our prices on generics are so low,” Curtis said. “So, having so many drugs [make the] transition to generics at the same time is taking a toll.”

Curtis estimates the higher volume of generics “took about 9 percent off of our top line” compared with 4 percent or 5 percent at other chains. “It’s a bit of a struggle right now,” Curtis said.

He also said Costco is close to announcing the site of its second central fill center and could have a deal finalized in time to open the center in 2008. Costco hasn’t discussed where it plans to build the center, but it’s likely to be in one of the chain’s large West Coast markets. Its first central fill in Everett, Wash., opened in 2006 and currently fills prescriptions for online orders and for 40 pharmacies in Washington and Oregon.

Overall, Costco produced another strong showing with sales of food and electronics leading the way. Costco posted earnings of $262 million for the quarter and total sales of $15.81 billion compared with $14.15 billion last year. Same store sales at its U.S. stores increased 6 percent for the quarter.

Costco’s 6 percent increase in sales was far better than the low-single digit gains posted by such mass merchants as Wal-Mart and Target, reflecting a customer base of higher-income consumers who are more immune to high gas prices. One area where sales increased more than expected was at Costco.com, where online sales jumped 45 percent in the first quarter and are on pace to exceed $1.5 billion in fiscal 2008.

Costco opened 10 stores during the quarter and ended with 529 stores. It expects to open seven stores in the second quarter and 30 stores for the full year, along with nine relocations.

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