This Pharmaceutical E-commerce Company Turns Profitable, Signaling the End of the Long-tail Strategy

Shortly after the Spring Festival holiday, rumors circulated that a leading-tier pharmaceutical e-commerce company was looking to divest itself and seeking a buyer at a significant discount. However, the sale plan was soon canceled.

Compared with the departure of several representative e-commerce professional managers in 2016, this rumor is indeed more worrying about the differentiation direction of a group of pharmaceutical e-commerce companies at the turning point: the 2VC stage has basically been completed, and now it depends on their ability to generate blood and be self-reliant.

Over the preceding two years or so, the pharmaceutical e-commerce sector experienced a fervent period akin to a funding arms race. Amidst this industry transformation—described by some as “Internet + Healthcare” and by others as “Healthcare + Internet”—pharmaceutical e-commerce was regarded as a critical link in both health service delivery and commercial monetization, driven by optimistic expectations for decentralizing care away from large hospitals.

In September 2014, Kang Aiduo was acquired by Tai An Tang for RMB 290 million. Shortly thereafter, in early 2015, the B2C sector began to gain rapid momentum. This trend started with Qilekang securing RMB 300 million in financing, followed by Yiyaowang announcing RMB 450 million in funding. Subsequently, financing amounts became increasingly staggering, with frequent injections of tens of millions or even hundreds of millions of US dollars flowing into the major pharmaceutical B2C giants. Meanwhile, the pharmaceutical B2B sector also experienced successive waves of heating up slightly later on. Numerous companies, including Yaoshibang, Weiming Penguin, Fufang Technology, and Yaopin Zhongduan Wang, secured financing, with some even achieving multiple rounds of funding within a short period.

However, when money comes in too quickly, some people feel happy and joyful, while others fall into anxiety—especially pharmaceutical and medical device retailers with strong offline physical operations. They originally had rapidly expanding and highly profitable offline businesses, but facing the price wars of e-commerce, they suddenly found themselves trapped in a dilemma of internal competition between their online and offline channels.

For instance, Kangfu Zhijia, China’s largest medical device retailer. In fact, Kangfu Zhijia entered a period of adjustment starting in 2014. Over the following three years, although its online business started late, it quickly broke into the top tier and successfully established itself. However, the company also experienced continuous offline store closures, financial losses, and an e-commerce operation that achieved scale but continued to burn cash, leading to tight group-wide funding conditions. Even investors’ valuation of Kangfu Zhijia’s overall business—including its offline retail stores—was lower than that of comparable pure-play pharmaceutical e-commerce companies. All these factors once caused Bai Yu considerable anxiety.

In the first half of 2016, Kangfu Zhijia successfully secured RMB 170 million in financing to replenish its capital, thereby alleviating its cash flow constraints.

“Over the past year, our offline chain has charted a course of bottoming out and rebounding, achieving a remarkable turnaround—from product development to store expansion, from halting losses to generating profits, and from a defensive stance to an offensive strategy.” This statement was made by Bai Yu, founder of Kangfu Zhijia.

In fact, the diversified business layout of Kangfu Zhijia has been reported by numerous media outlets. More importantly, however, its non-service revenue exceeded RMB 700 million in 2016, representing a year-on-year growth of over 40%. Furthermore, the company returned to profitability in early 2017, a development that may warrant even greater attention. How, then, did Kangfu Zhijia—particularly its Dekai Pharmacy and e-commerce operations—manage to turn losses into profits?

Co-President of Kangfu Zhijia Group, Xia Yu

At the end of 2015, Xia Yu, who had ten years of experience in pharmaceutical e-commerce operations and was among the first generation of pharmaceutical e-commerce professionals in China, joined Kangfu Zhijia. He had previously participated in the founding of Jinxiang.com and served as CEO of Baiji Xinte Network and Souyao Song.

As one of the three co-presidents of Kangfu Zhijia Group, Xia Yu is primarily responsible for Dekai Pharmacy, one of the group’s five core business pillars, in addition to participating in major strategic decisions such as corporate strategy and external investments. The other four core businesses are: Kangfu Zhijia medical device stores; the equipment rental services pioneered by Jianzubao, which recently secured tens of millions in investment; chronic disease management and internet hospital services operated by Beijing Shi’en Traditional Chinese Medicine Hospital; and chronic disease dietary nutrition services provided by Baishi Shian.

Dekai Pharmacy currently focuses on pharmaceutical e-commerce and offline pharmacies (including DTP pharmacies), with a total of 17 offline stores. According to Xia Yu, Dekai Pharmacy’s annual revenue exceeded RMB 300 million in 2016. The company also achieved monthly break-even in 2017.

Xia Yu stated that early pharmaceutical e-commerce and mobile health ventures largely operated under a “to-VC” model, prioritizing scale to attract investor attention and funding. However, the ultimate measure of a business lies in its revenue and profitability. “Since last year, a significant number of pharmaceutical e-commerce companies have shifted their focus toward profit generation. The ‘to-VC’ approach is undergoing adjustment, as those capable of securing funding have largely done so, while those unable to find capital face dwindling opportunities. To survive, transformation is imperative,” Xia Yu remarked.

When discussing the transformation and turnaround of Dekai Pharmacy, Xia Yu first addressed the overall development trends of pharmaceutical e-commerce.

In the early stages of e-commerce development, the focus was on long-tail business models, where the more products offered, the better—featuring a vast number of SKUs, or even an unlimited assortment. However, this model demands substantial capital investment: maintaining 10,000 SKUs requires inventory for all 10,000 items, and scaling to 100,000 SKUs necessitates corresponding funding for each. Moreover, the pharmaceutical sector has unique characteristics; for instance, medications have expiration dates, unlike some other product categories that are less time-sensitive.

Xia Yu stated that by 2014 and 2015, the strategy of focusing on large SKUs had already become less viable, as major platforms already possessed a sufficient number of SKUs. At that point, an overabundance of opportunities emerged as the biggest challenge for e-commerce, leading to the proliferation of numerous non-core business segments.

Consequently, subsequent developments continued to center on refinement. Determining which products are most suitable and which align with the company’s internal capabilities requires leveraging big data analytics to explore niche market segments. In other words, category adjustment and SKU rationalization have become the guiding strategies for Dekai Pharmacy’s transformation.

One consequence has been workforce restructuring. On one hand, headcount was reduced due to the downsizing of non-core product lines; on the other, there was redundancy within the core business itself. During the launch and incubation phase of a business unit, various approaches and methods are typically trialed. However, once effective strategies have been identified and validated, the team inevitably becomes bloated. According to Xia Yu, one-third of Dekai Pharmacy’s staff were either reassigned to innovation roles or laid off in 2016, leaving the current team with just over 150 employees.

Following the adjustment, Dekai Pharmacy has categorized its business into three main segments. The first is its core business, which is to be streamlined; staffing is aligned with revenue from core operations, with a focus on calculating return on investment (ROI) and ensuring profitability. Currently, core business revenue accounts for over 90% of the total, within which medical devices contribute more than 80%, making Dekai the leading online retailer of medical devices in China.

Currently, the best-selling categories for Beijing Dekai Medical Science and Technology Co., Ltd. are primarily medical devices and pharmaceuticals required for the long-term management of chronic diseases such as hypertension and diabetes. However, bulky items like wheelchairs are also showing a significant increase in sales volume.

In the early stages of e-commerce development, sales were primarily driven by low-end products that attracted consumers with price advantages. However, over time, users found that cheap items often delivered poor experiences, and the high repair rates associated with low-end products proved uneconomical for merchants as well. Consequently, consumers ultimately shifted their preference toward more reliable options. As Kangfu Zhijia (Rehabilitation Home) predominantly offered mid- to high-end products, it emerged as a beneficiary of this shift in consumer behavior.

Next is innovative business, which is also the result of structural adjustment. This involves reallocating personnel from non-core businesses to innovation roles. However, requirements are also imposed on the innovation segment: it must achieve profitability. While losses are permitted for a certain period, they cannot persist indefinitely.

Another aspect is seed businesses. Only a small number of seed businesses are prepared, with specialized measures in place for tracking and control. They are nurtured through refined budget management to ensure that the investment does not escalate indefinitely.

“Both our company and other peers have experienced this situation: we are reluctant to abandon innovative ventures even after they incur losses for one or two years, which can easily drag a company into failure. Therefore, from a cash flow perspective, we prioritize profitability above all else,” said Xia Yu.

If the gross profit margin of pharmaceutical e-commerce reaches 18%–24%, it may enter a break-even range, but this specifically depends on each company’s operational management level. Xia Yu revealed that Dekai’s current gross profit margin is approximately 20%, and in fact, they can achieve break-even as long as they reach the lower threshold of an 18% gross profit margin.

The so-called "Five Carriages" of the Rehabilitation Home aim to comprehensively meet nearly all the needs of patients with chronic diseases. Dekai Pharmacy has also established synergies with other business lines. For instance, bulky equipment such as oxygen concentrators and ventilators is referred to offline medical device stores for home delivery and installation services. Moreover, these home services for medical devices go beyond simple delivery by ordinary couriers; they require a significant level of professional expertise.

Because many users are unable to install or operate these large devices, they often lack knowledge of specific operational details. For instance, there have been cases where a ventilator was turned on but a critical tube remained closed, rendering the device ineffective after considerable troubleshooting.

Conversely, offline consultation demands can also be redirected to online platforms. This is because staff at every physical store may not possess the professional expertise to provide authoritative answers to specific specialized questions.

According to Xia Yu, the chronic disease management system of Kangfu Zhijia (Rehabilitation Home) is still in the process of product refinement. For instance, the company has partnered with insurance providers and major pharmaceutical manufacturers to develop insured coverage products tailored for stroke patients, offering related services such as medications and medical devices. Although specific pricing has not been disclosed, Xia Yu indicated that it would not be excessively high, as patients already incur costs for purchasing medications; now, by paying only a modest additional amount, they can secure this insurance coverage.

Given that the new product involves multiple partners and related approvals, as well as requiring preliminary small-scale testing before its official launch, it is expected to be released within the year.