The Surge of 'Internet + Pharma': How Traditional Pharmaceutical Distribution Hubs Are Embracing E-commerce

Everyone in the pharmaceutical industry knows that China has four major traditional Chinese medicine (TCM) hubs: Bozhou in Anhui, Anguo in Hebei, Zhangshu in Jiangxi, and Yuzhou in Henan. Since the founding of the People's Republic of China, six major pharmaceutical distribution centers have emerged due to traditional practices, geographic location, transportation infrastructure, and other factors: Taihe in Anhui, Zhangshu in Jiangxi, Puning in Guangdong, Chengdu in Sichuan, Dingxi in Gansu, and Zherong in Fujian.

In recent years, policy adjustments, the impact of e-commerce, and advancements in logistics have broken down the regional attributes of pharmaceutical distribution. Are traditional pharmaceutical distribution hubs still thriving? How can commercial companies in these regions align with the new model of pharmaceutical wholesaling?

First, let us examine the largest standalone pharmaceutical distributor, Anhui Fuyang Taihe Huayuan Pharmaceutical. Data shows that by the end of 2010, Anhui Huayuan’s highest single-day sales reached RMB 75 million, with annual sales totaling RMB 34 billion in 2018. For comparison, Hubei Xiaoyaoyao, a new “Internet + Pharmaceuticals” platform, reported an average daily sales volume of RMB 70 million in 2018. In the same year, during Yaoshibang’s November promotional campaign, the single-day sales of certain commercial companies on its platform exceeded RMB 10 million, with monthly sales reaching RMB 500 million.

This data pertains to a single enterprise. Next, let us examine the performance of the platforms: Xiao Yaoyao was established in December 2015 and achieved total sales of RMB 200 million in 2017. Zhang Buzhen, Founder and CEO of Yaoshibang, stated, “After more than three years of exploration and continuous refinement of our products and platform, Yaoshibang achieved rapid development in 2018, reaching an annual GMV target of RMB 10 billion, with monthly orders exceeding one million and coverage of 200,000 terminal outlets, including pharmacies and clinics.” By comparison, internet pharmaceutical platforms are growing at a faster pace.

It is evident that the pharmaceutical distribution industry, from top to bottom, is in a state of anxiety due to the impact of new pharmaceutical wholesale e-commerce platforms. In such an environment, how should traditional pharmaceutical distribution enterprises, such as Huayuan Pharmaceutical, respond?

In fact, Huayuan Pharmaceutical’s e-commerce business had already taken shape as early as 2008. Huayuan Pharmaceutical is ideally suited for pharmaceutical e-commerce, with its “sourcing nationwide and selling nationwide” model embodying typical platform and sharing mindsets. As we know, over the years, Huayuan Pharmaceutical has accumulated resources from 3,000 manufacturers and more than 4,000 distributors. Stripped of its traditional commercial company attributes, such resources would be regarded as a gold mine by any platform in today’s context.

Looking back, Anhui Huayuan Pharmaceutical E-Commerce Co., Ltd. was officially established in 2003, initially focusing on addressing internal electronic informationization needs. The company began exploring online transaction businesses in 2007, and its “Pharmaceutical Entrepreneur Model,” launched in 2009, gained widespread acclaim at the annual Huayao Conference.

The entrepreneurial model is a new mode of pharmaceutical procurement and sales that leverages electronic means and third-party pharmaceutical transaction tools to achieve growth in drug value. Third-party transaction tools include pharmaceutical e-commerce terminal procurement systems, pharmaceutical e-commerce sales management systems, and supplier pharmaceutical e-commerce management systems.

Such a description may seem confusing. In reality, the “entrepreneur model” is a business format in which intermediaries in pharmaceutical sales leverage an e-commerce platform to conduct drug sales operations. The system’s backend treats entrepreneurs (part-time sales representatives) as virtual commercial entities, granting them the authority to customize products and set prices. Consequently, entrepreneurs are responsible for customer acquisition, drug sales, and market expansion on the front end, while Huayuan E-commerce Branch handles back-end tasks such as compliant invoice processing, qualification filing, unit-dose repackaging, and logistics fulfillment.

Since 2016, the entrepreneurial model has also evolved into a commercial entrepreneurship format, gradually transitioning to a pure platform model. Leveraging existing resources, Huayuan Pharmaceutical’s e-commerce business has remained consistently profitable overall—a rarity in the pharmaceutical e-commerce market, where cash burn is as rampant as burning paper.

Take Hanning Pharmaceutical Network, which relies on the strong backing of Huayuan, as an example. Since its entrepreneurial model was finalized in 2015, its business scope has covered more than 700 county-level markets annually, with online GMV exceeding RMB 1 billion. Its sustained profitability can be attributed to several inherent advantages: first, access to Huayuan’s resources; second, a cleverly designed sales model that is rooted in and respects traditional practices; and third, an early-mover advantage in e-commerce layout.

However, in recent years, as national healthcare reform and e-commerce policies have evolved, the competitive advantages once held by Hanning have weakened. Huayuan Pharmaceutical’s 16-year journey toward digitalization has been marked by a gradual shift from a B2B semi-e-commerce model to a platform-based approach. In fact, traditional enterprises represented by Huayuan Pharmaceutical are constantly seeking innovation and exploration. This same spirit is evident in Pan Qinping, Chairman of Puning Tailong Pharmaceutical.

Some time ago, I organized a salon for exchanges in pharmaceutical e-commerce distribution, welcoming distinguished guests from Tairong. Subsequently, I paid a return visit to Puning Tairong Pharmaceutical. Tairong Pharmaceutical is a professional supplier integrating traditional Chinese medicine (TCM) production, pharmaceutical trade, and related services. It offers diversified services including product supply, promotion, distribution, customization, and training. Its product portfolio primarily covers TCM decoction pieces, Chinese and Western pharmaceutical preparations, health supplements, medical devices, general food products, foods for special medical purposes (FSMP), cosmetics, innovative and specialty drugs, daily necessities, and exclusive products.

My initial awareness of Tairong stemmed from encountering its e-commerce app in Fujian, which left a favorable impression. What intrigued me most about Tairong, however, was its location in Puning. In the context of new policies and evolving distribution landscapes, have commercial enterprises in Puning, akin to Anhui Taihe Huayuan, already engaged with and integrated into e-commerce? This was the question I was eager to answer upon engaging with Tairong.

Mr. Pan of Tairong Pharmaceutical, together with Mr. Zeng, General Manager of the Terminal Business Division, and Mr. Ji, who oversees e-commerce operations, introduced our delegation to Tairong Pharmaceutical’s corporate history and the development trajectory of its e-commerce business. Tairong Health currently operates a pharmaceutical e-commerce segment (comprising Platform A operations and its self-built online store) and Guangzhou Huarong Health Technology, which provides consumer-facing services for pharmacies.

It is understood that Tairong Pharmaceutical’s e-commerce business was the earliest to be established in the Puning region and ranks among the top commercial companies in terms of e-commerce sales revenue. Supporting infrastructure for its e-commerce operations, including CRM (Customer Relationship Management), WMS (Warehouse Management System), and smart shelving systems, has been fully deployed, enabling the fulfillment of 5,000 e-commerce orders per day. Currently, Tairong Pharmaceutical’s monthly order fulfillment volume and GMV (Gross Merchandise Volume) on Platform A significantly exceed those of its peers in the Puning region.

In my view, corporate leaders correctly identified the e-commerce trend at an early stage. However, judging by its development trajectory, the current growth of e-commerce in eastern Guangdong lacks the momentum that the Puning market once demonstrated in driving the national pharmaceutical market.

What is certain is that, impacted by e-commerce, Puning’s large-scale pharmaceutical distribution businesses have lost their former edge and appear somewhat diminished in terms of development potential within the pharmaceutical circulation sector. A preliminary analysis identifies the following reasons:

I. In the early stages of e-commerce, disorder prevailed over order; seizing opportunities was key to success.

In my view, e-commerce in any industry experiences wild, unregulated growth in its early stages. Only after reaching a certain phase of development, when leading e-commerce enterprises undergo market consolidation and are subjected to relevant policy constraints and government regulation, does the sector gradually become standardized. At that point, other companies following the same model will find no opportunities left; if any remain, they must be based on differentiation.

Today’s Puning pharmaceutical market has long shed the chaotic pricing and disorder that characterized the 1980s and 1990s. This transformation is attributable to the local government’s sustained regulatory efforts under policy guidance. As a result, a cohort of pharmaceutical commercial enterprises committed to lawful operations and standardized development has emerged, including Tai Rong, Pu Rui, Jia De, Jin Yongshun, and Li Feng. Having accumulated experience over many years, these companies have developed certain capabilities in terminal coverage, distribution, and delivery network coverage.

In recent years, the emergence of pharmaceutical e-commerce platforms has captured the attention of commercial distributors. However, as seen in the Fujian market, larger distributors are constrained by sales and purchase restrictions imposed by manufacturers and agents, pressured by operational costs and profit margins, and limited by existing sales models, preventing them from forming deep partnerships with these platforms. Only smaller distributors, whose primary business revolves around agency affiliations and invoice-passing services, have identified opportunities in this landscape.

After all, such small-scale businesses are increasingly squeezed out by GSP, GMP, and tax control regulations, leaving them with little room to survive. Seizing the opportunity of online sales may be their only chance. While pharmaceutical manufacturers and distributors are still catching their breath, these enterprises have already mastered the art of handling high-value prescription drugs and differentiated provincial bid-winning products. This advantage stems from a mere 1-2 year time lag.

II. Lagging selection of operational strategies and improper personnel appointments by operators.

Can we observe that the first wave of e-commerce Platform A and the initial batch of distribution businesses integrating with e-commerce failed to gain traction, whereas two emerging Platform A players, Yaoshibang and No. 1 Medicine City, have risen as latecomers? Within commercial companies, at the beginning of each month, some executives hear reports like this: “Last month, the e-commerce department’s sales revenue increased, but gross profit declined.” To put it bluntly, by the second half of this year, executives may hear increasingly worse news: declining sales revenue and mounting losses. Do not wait until doubts about the e-commerce business arise before making adjustments; online operations require proactive adjustments and rapid trial-and-error.

The human factor is particularly crucial for e-commerce practitioners. I visited another company in Puning, and during our conversation, I found them to be closed-off and self-absorbed, with a mindset as rigid as granite. When I enthusiastically shared my successful experiences, their response was merely, “This doesn’t suit us,” or “Our company can’t operate that way.”

When asked which platforms they are currently operating on, the operations staff stated that they had worked with a certain website two years ago and now focus exclusively on a specific platform. The staff member was even unaware of another rapidly growing platform in their own province. In terms of product selection for e-commerce operations, they adopt a strategy of selling their entire inventory. It is reported that customers from the Guangzhou-Foshan region account for 70% of their user base. These customers require next-morning delivery for orders placed the same day, with substantial demand for injectables and liquid formulations. This has resulted in logistics costs accounting for 5% of expenses. Meanwhile, their operational policy relies solely on a consistent 3% subsidy year-round.

Guided by professional habit, I made corresponding operational strategy adjustments for the enterprise.

• 1. Onboard and launch on multiple platforms. The purpose of this is to reduce reliance on online procurement from customers in the Guangzhou-Foshan region and identify potential clients in other provinces.

• 2. Scientific Activity Strategies. Optimize event execution and move beyond single-strategy approaches while controlling costs.

• 3. Dedicated services for existing customers: For clients in the Guangzhou-Foshan area, we have replaced SF Express with our own logistics delivery to reduce shipping costs.

Success has no single cause, but it can be summarized. As pharmaceutical e-commerce operations professionals, one must be adept at analysis, skilled in leveraging big data from e-commerce platforms, and proficient in monitoring drug market trends. This is even more critical for those managing e-commerce strategies.

Fortunately, the old Puning pharmaceutical distribution hub is experiencing a vibrant resurgence through internet e-commerce. We believe that in the near future, the “Anhui Taihe Model” in the north and the “Guangdong Puning Model” in the south will emerge as leading examples for the transformation of traditional pharmaceutical distribution hubs.

This article was written by Hong Xiuhai of Paiyou Technology, WeChat ID: hongxiuhai.