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Cablegate: Reinventing the Russian Drug Store

VZCZCXRO7369
RR RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD
DE RUEHMO #5765/01 3440345
ZNR UUUUU ZZH
R 100345Z DEC 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5771
INFO RUEAUSA/DEPT OF HHS WASHDC
RUEHYG/AMCONSUL YEKATERINBURG 2895
RUEHVK/AMCONSUL VLADIVOSTOK 2562
RUEHZN/EST COLLECTIVE
RUEHPH/CDC ATLANTA GA

UNCLAS SECTION 01 OF 02 MOSCOW 005765

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR OES/IHA
USAID FOR GH, E&E
HHS FOR OGHA

E.O. 12958: N/A
TAGS: TBIO ETRD EINV EIND RS
SUBJECT: REINVENTING THE RUSSIAN DRUG STORE

REF: A. Moscow 4043

B. Moscow 976
C. 06 Moscow 12814

MOSCOW 00005765 001.2 OF 002


THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT
ACCORDINGLY

1. (SBU) SUMMARY: Much like Russia's booming pharmaceuticals market
(Ref A), the Russian pharmacy business is rapidly expanding. Major
Russian drug store chains are consolidating their market-leading
positions, but the industry is still relatively unconcentrated, with
the leading drug store chain only accounting for a 6.5 percent
market share. Observers expect the wave of consolidations to
continue for years to come, and some believe a major European firm
will enter the market soon. Small, independent drug stores and
kiosks that are not computerized and not particularly concerned
about customer service still remain, but we believe they will
increasingly be swept aside by the bigger, savvier chains. The
industry is still evolving, and the jury is still out on the
potential impact of changes in the drug store business on access to
drugs and improved health and wellness for the average Russian.
Even so, the rise of big drug store chains concerned about quality
and their reputation holds some promise that Russians will
increasingly have access to higher quality and more effective
medicines. END SUMMARY.

-------------------------
Drug Store Market Sizzles
-------------------------

2. (U) Like the pharmaceuticals industry (Ref A), Russia's drug
store sector is booming. While Russian pharmacy sales figures are
not publicly available, the Russian market analysis firm DSM Group
estimates that retail sales at drug stores during the first half of
2007 exceeded five billion dollars, a 23 percent increase over the
same period in 2006. Russia's biggest drug store chains have been
expanding at a feverish pace, but the market still remains
relatively unconcentrated, with the largest drug store chain only
controlling an estimated 6.5 percent of overall sales. Although
Russian drug stores may once have been known for displaying products
behind glass and Soviet-era customer service, the leading chains
have adopted open, Western-style floor plans and carry more consumer
products beyond basic medicines.

---------------------------------
Big Chains on an Acquisition Tear
---------------------------------

3. (U) Russia's largest drug store chain, "36.6" (the normal human
body temperature in degrees Celsius), has rapidly expanded over the
past year, mainly by acquiring over 350 existing drug stores from
regional pharmacy chains. Using innovative financial mechanisms to
bankroll its acquisitions (Ref A), 36.6 now boasts 1,100 drug stores
across 26 regions, outstripping its nearest rival, Rigla, which owns
650 drug stores in 22 regions. The other major players are the
Moscow Oblast Pharmacy chain (517 stores), Raduga (455 stores), and
Doctor Stoletov (420 stores). 36.6's retail sales growth has risen
82.9 percent during the first nine months of 2007 compared to the
same period in 2006. Russia's biggest drug store chain has been
rated the Best Consumer Sector Company in Russia for two years in a
row by Global Finance Magazine. The very biggest chains have a
particularly strong position in Moscow. In a recent survey of
Moscow consumers, 55 percent said they routinely bought medicines at
36.6, while 23 percent said they shopped at Rigla.

4. (U) The rapid growth of 36.6 is being mirrored by other top
drugstore chains. Rigla became the second-largest pharmacy network
in December 2006 after absorbing the Ozone drug store chain. Dr.
Stoletov became the fifth-largest druggist following the January
2007 acquisition of the Efedra pharmacy chain in Saratov Oblast.
Although other chains are smaller and less regionally diverse than
36.6 (Dr. Stoletov only has stores in 10 regions, as opposed to
36.6's coverage in 26 regions), they are also enjoying high sales
growth. Dr. Stoletov, for example, had a 92 percent increase in
sales during the first half of 2007 compared to the same period in
2006, according to market analysts.

--------------------------------------------- ----
Consumer Goods Come to Russian Drug Store Shelves
--------------------------------------------- ----

5. (SBU) One pharmaceutical industry representative told us that the
recent tremendous growth in drug sales and the concomitant strong
growth in fast moving consumer goods (e.g., toiletries, soaps,

MOSCOW 00005765 002.2 OF 002


cosmetics, toothpaste, shaving needs, and detergents) are both
persuasive signs that Russians in the coming years will spend lots
of money on both over-the-counter and prescription drugs.
Naturally, drug stores have benefited from these overall trends in
consumer buying. Pharmacies are realizing more profits from
cosmetics and bathroom goods and expanding their marketing base
beyond medicines. Although still a far cry from the broad range of
goods and services offered at dominant American chains like CVS and
Walgreens, the biggest Russian chains carry household and bathroom
items, and cosmetics and perfumes. 36.6, for instance, is the
exclusive Russian distributor of FCUK (French Connection United
Kingdom) cosmetics and UK-based Early Learning Centre toys. The
chain also produces its own private label bath products, including
shampoo, facial care items, toothbrushes, and combs.

---------------------------------------
Will a Foreign Player Enter the Market?
---------------------------------------

6. (SBU) Observers expect the wave of acquisitions among Russian
drug store chains to continue over the next few years. There was
press speculation in the past few months that Rigla and Dr. Stoletov
were engaged in serious merger discussions (their combination would
create a network of drug stores almost as big as 36.6). Many
analysts have also been expecting that a major Western European drug
store or pharmaceutical company would enter the market, probably
through the acquisition of one of the big Russian chains. Most of
the speculation has centered on the German-based Celesio AG, which
has openly expressed interest in acquiring Russian pharmacies, and
UK-based Alliance Boots, which already owns a handful of Russian
drug stores. (NOTE: The Finnish-based Tamro Group already has a
significant minority stake in Raduga, Russia's fourth largest
druggist. END NOTE.)

--------------------------------------------- ---------
Is There an Impact on Access to Drugs and on Wellness?
--------------------------------------------- ---------

7. (SBU) A senior health consultant at the Open Health Institute,
one of Russia's leading health NGOs, told us it was a complex
question whether the changes taking place in the pharmacy business
are improving access to medicines or might ultimately lead to
improvements in health. He noted that big drug store chains tend to
have higher quality control standards, as they are generally more
concerned about maintaining their commercial reputation than smaller
pharmacies. Some big chains have tried to discourage consumers from
shopping at smaller drug stores by implying that their medicines are
safer and less likely to be counterfeited. He cautioned, however,
that there was no real evidence about whether smaller, independent
drug stores served as the major outlets for the significant volume
of counterfeit drug sales in Russia (Ref A). Thus far, he had not
seen any indication that competition among drug stores had lessened,
or that big chains were colluding on prices or attempting to gouge
consumers. In his view, many big drug stores chains carry the same
range of medicines as independent pharmacies, including offering
strong antibiotics over the counter that would only be available
with a prescription in the United States. The big chains do,
however, more actively sell dietary and nutritional supplements.

8. (SBU) As some chains have expanded, they have shifted to
appealing to a more well-off customer base, raising questions about
whether drug store consolidation has had an impact on improved
access to medicines for less well-off customers. For example,
Russia's fifth-largest druggist, Dr. Stoletov, started off as a more
affordable pharmacy chain, but with its recent expansion, has
shifted to selling more expensive drugs. Most big chains also do
not distribute medicines under the government's free drug benefits
program for veterans, pensioners and the chronically ill, which is
known as the Additional Drug Supply or DLO (Refs B, C).

9. (SBU) COMMENT: The consolidations and acquisitions among Russia's
drug stores are a sign of a modernizing industry that is doubly
benefiting from the rapid growth in the overall pharmaceuticals
market (Ref A) and in fast moving consumer goods, such as cosmetics,
perfumes, and household and bathroom products. As the big chains
keep expanding, we expect that the days are numbered for smaller,
independently-owned and non-computerized drugs stores and kiosks.
Although the industry is still evolving and the jury is still out on
the potential impact on access to drugs and improved health, the
rise of big drug store chains concerned about quality and their
reputation does hold some promise that Russians will increasingly
have access to higher quality and more effective medicines.

BURNS

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