Pharma O2O: Disrupting Traditional Pharmacies or Forging Win-Win Partnerships?

On the surface, pharmaceutical O2O appears to be a low-frequency, low-unit-price “grind” that industry insiders reveal is almost invariably loss-making. Yet it has become a major hotspot. Is this driven by capital encouragement? Or an overflow of entrepreneurial idealism? Is it a forceful push into pseudo-demand? Or a restructuring of the pharmaceutical distribution ecosystem?

(Analysys Intelligence, as of October 31, 2015)

For retail pharmacies with limited capital and somewhat traditional business models, the fierce competition for the “last mile” in retail channels—characterized by a diverse array of players and rapidly evolving strategies—has left them somewhat at a loss. Particularly in the first half of this year, collaborations with medicine-delivery apps failed to yield results as ideal as originally envisioned. However, in the second half of 2015, JD.com and Alibaba regrouped, and their newly launched initiatives, JD Health At Home and Alibaba Health, reportedly achieved surprisingly strong progress in their partnerships with pharmacies.

Nowadays, with the “self-reflection” and “restructuring” of disruptors such as Alibaba Health, significant changes have occurred in both the mindset of pharmacy owners and the integration models between offline retail pharmacies and pharmaceutical O2O platforms.

Are Pharmacies Becoming Supporting Players?

Some retail pharmacy owners have stated that the telephone-based home delivery service for medications has existed for many years and, to some extent, also constitutes O2O (Online-to-Offline). As for pharmaceutical O2O derived from e-pharmacy platforms, it is reported that the earliest example was “Jinxiang One-Hour,” a service launched by Jinxiang.com in March 2012, which promised delivery of 100 types of medications within one hour but ceased operations after only one year.

It was not until 2015, after O2O startups in various consumer services sectors had gained significant momentum, that apps specializing in rapid medication delivery suddenly emerged in large numbers.

VCBeat once compiled statistics on 14 projects specializing in rapid medication delivery: U Yi U Yao, Kang Kang Mai Yao, Kuai Fang Song Yao, Sou Yao Song, Online Pharmacy, Yao Gei Li, Song Yao 360, Yao Kuai Hao, Hao Yao Shi Yao Ji Song, Baidu Yao Zhi Da, Ding Dang Kuai Yao, Ali Health, JD Health Dao Jia, and Ping An Good Doctor Yao Ji Song. (Note: In fact, VCBeat’s coverage did not include projects such as Yao Kuai Dao, Sou Sou Song Yao, and Yao Qu Na.) Except for two based in Shanghai and one in Wuhan, the remaining projects were concentrated in Beijing, with promised delivery times ranging from 2 hours, 1 hour, 30 minutes, to 28 minutes.

An examination of the origins of these projects reveals four primary categories. The first category comprises internet-based “grassroots” ventures that entered the market solely through medication delivery services, such as Yaogeli and Kuaifang Songyao; eight projects fall into this group. The second category includes projects backed by major internet platforms, such as Ali Health, Baidu’s Yaozhida, and JD Health’s Daojia service. The third category consists of extension initiatives by traditional pharmaceutical manufacturers and distributors, exemplified by Dingdang Kuaiyao and Haoyaoshi’s emergency delivery service. The final category is represented by Ping An Good Doctor’s emergency medication delivery, which serves as a hallmark of insurance giants’ efforts to close the loop in mobile healthcare ecosystems.

These rapid medication delivery apps initially partnered almost exclusively with pharmacies, positioning themselves as platforms for online order taking and precise dispatch. In terms of delivery, some projects relied entirely on pharmacy staff, while others established in-house delivery teams or outsourced to third-party logistics companies.

In this system, it is not difficult to see the “passivity” of pharmacies; hardly any app projects have been led and launched by pharmacy chains. Moreover, in the words of industry insiders, these rapid-delivery medication apps almost clearly demonstrate a trend of drawing customers away from physical pharmacies toward online platforms. Free first orders, free delivery, and subsidies are all familiar tactics used to cultivate consumer habits.

On the other hand, market research indicates that a significant number of pharmacy owners have publicly announced plans to increase their investment in Online-to-Offline (O2O) models in 2016. One pharmacy owner stated that his primary objective in joining O2O medicine delivery platforms was to enhance consumer services, rather than to create new revenue streams. Meanwhile, many pharmacy owners privately express caution regarding O2O development, particularly showing reluctance when required to manage last-mile delivery operations themselves.

Coexistence, or Revolution?

Despite the ongoing controversies and skepticism surrounding the home medication delivery service, and despite reports that some projects have shut down, other initiatives—backed by strong sponsors and ample funding—continue to announce record-high daily order volumes to counter claims that such services represent a pseudo-demand. Moreover, some projects have already begun constructing new business models for the post-delivery phase.

Let’s first look at the only two projects in this camp that have announced securing tens of millions, or even hundreds of millions, in financing: YaoGeili and KuaiFang SongYao.

Yaogei, which announced in June 2015 that it had secured tens of millions of RMB in Series A financing, released operational data in early November showing that its user base had exceeded 1 million, with daily order peaks surpassing 10,000. The company is no longer content with merely helping pharmacies sell products; it also aims to assist them with procurement by launching a group-buying service for pharmaceuticals.

In late October, Ren Bin, founder of Yaogei Li, revealed to the media that Yaogei Li had partnered with China Resources Sanjiu to officially launch its B2B business. The initiative aims to consolidate procurement demands from partner pharmacies and centralize purchasing from higher-tier wholesalers upstream or even directly from pharmaceutical manufacturers, thereby helping pharmacies reduce their procurement costs. Ren Bin stated that pharmaceutical manufacturers and higher-tier drug wholesalers support this model, as it eliminates the high channel costs associated with negotiating individually with numerous small pharmacies.

If Yaogeli still bases itself on coexistence with pharmacies and optimizes its supply chain with pharmacies as the service target, then Kuai Fang Songyao is a thorough “revolutionary” in the retail pharmacy industry.

According to public information, Kuai Fang Song Yao has raised a total of more than RMB 250 million in financing (it received several million U.S. dollars in investment from Jihe Venture Capital in December 2014; secured RMB 50 million in Series A financing in June 2015; and obtained RMB 200 million in Series B financing from Tiantu Capital in September 2015).

When Kuai Fang Song Yao first went public, it also focused on developing partnerships with pharmacies. However, whether due to issues of “integrity” or inconsistencies in “standards,” the company faced nearly all the widespread skepticism directed at the pharmaceutical O2O sector. Founder Gao Yue later revealed that while the joint venture model with pharmacies was launched rapidly, it was fraught with problems, including untimely deliveries, drug shortages, and conflicts between online and offline operations.

For instance, partner pharmacies handled 10–20 orders per day, maintaining a relatively stable collaborative relationship. However, any further increase in volume exposed staffing shortages at the pharmacies, causing competitive tensions to outweigh cooperative ones. As business volumes surged, many pharmacy owners directly informed Kuai Fang Song Yao (Fast Prescription Delivery) that they would no longer cooperate. Media reports have noted that this was not unique to Kuai Fang Song Yao; nearly all medicine-delivery apps that launched around the same time faced the common challenge of partner pharmacies “walking away” after experiencing their initial performance boom.

However, as serial entrepreneurs, they may have had the confidence—given that Dekai Pharmacy, co-founded by the two founders, had already been sold to Kangfu Zhijia—or certainty about securing financing, prompting Kuai Fang Songyao to embark on a “capital-intensive” model.

During the announcement of both the June and September funding rounds, emphasis was placed on accelerating offline expansion. The strategy focuses on establishing self-operated pharmacies within a 50-square-kilometer radius, implementing “Internet-enabled transformation” of these pharmacies based on online business models, and building large-scale warehouses as the primary supply source to continuously replenish inventory for regional pharmacies.

This “pharmacy + internet” model enables each self-operated pharmacy to handle a 15-fold increase in orders, with the 17 self-operated pharmacies in Beijing capable of processing between 34,000 and 51,000 orders. Gao Yue previously stated to the public that they anticipate half of the pharmacies in first-tier cities will disappear under the impact of this new model (dedicated O2O pharmacies).

According to the official website, Kuai Fang Song Yao has expanded to Beijing, Shanghai, Guangzhou, Shenzhen, and Hangzhou. However, apart from Beijing, where coverage basically extends within the Fifth Ring Road, service areas in other cities remain quite fragmented. For instance, in Guangzhou, only Tianhe District is covered; Shanghai’s coverage area is also very limited; and in Shenzhen, only the three core districts of Luohu, Futian, and Nanshan are served.

JD.com and Alibaba Ease the Burden on Pharmacies!

Some new players in the medication delivery app space, such as Kuai Fang Song Yao, have rapidly positioned themselves in direct opposition to offline retail pharmacies, with their disruptive “ambitions” being remarkably overt. Nevertheless, industry insiders reveal that pharmacy owners are not particularly concerned about them.

It is also worth noting that the two giants, JD.com and Ali Health, have seen a shift in their dynamics with pharmacies. For instance, although Ali Health’s order-grabbing service, which it heavily invested in launching in 2014, did not go smoothly during its initial collaborations with pharmacies, the two parties revamped their business models in the second half of 2015, seemingly entering a “honeymoon phase” with pharmacies almost overnight.

Taking JD Health At-Home as an example, according to the information it disclosed on November 20, in the approximately three months since its official launch in late August, it has covered 11 cities including Beijing. It has partnered with more than 70 enterprises, including top-100 chain pharmacies and companies in other categories; seven of the top 10 players have already collaborated with JD Health At-Home, bringing the total number of partnered stores to over 1,000.

Its specific collaboration model involves JD Health At Home displaying medication information online, with medications supplied by partner pharmacies near the consumers. JD’s own staff are stationed at these pharmacies to handle delivery, enabling completion of deliveries within one hour.

Furthermore, according to previous research conducted by First Pharmacy News in Zhejiang Province, Alibaba Health’s “Future Pharmacy Partner Program,” launched in October, aims to collaborate with retail pharmacies to establish an online-to-offline B2C+O2O “Future Pharmacy” model. Currently piloted exclusively in Zhejiang, this initiative marks a departure from the company’s previously aggressive expansion strategy, as it now seeks to thoroughly penetrate the Zhejiang market before rolling out to other regions.

Consumers purchasing medications on Alibaba Health can either place orders through the Tmall Pharmacy Pavilion or opt for offline home delivery services. Currently, Alibaba Health has abandoned the order-grabbing model and instead leverages the former Tao Diandian delivery team to pick up medications directly from pharmacies for delivery, generally ensuring one-hour delivery service.

Field research indicates that Alibaba Health can generate up to 200 O2O orders per day for certain stores.

Moreover, pharmacy owners’ attitudes toward JD Health’s home-delivery service and Alibaba Health have changed significantly compared to the past. According to previous posts on WeChat Moments, Ruan Hongxian, Chairman of Yixintang, personally visited JD.com to discuss cooperation in pharmaceutical O2O services.

First, the key to untying the knot is logistics and distribution. Nowadays, both JD Health At Home and AliHealth have liberated pharmacies from their delivery dilemmas, leading to a significant increase in their willingness to collaborate.

Furthermore, app users are predominantly young, whereas the primary customer base of traditional pharmacies consists mainly of middle-aged and elderly individuals, resulting in minimal overlap between the two groups. This minimizes concerns about customer attrition. Conversely, establishing partnerships with JD.com and Alibaba actually expands the customer base and opens up a new marketing channel.

Additionally, Alibaba Health currently charges a commission fee, but the rate is relatively low, at approximately 2%-3%, which has also received satisfaction from pharmacies.

Certainly, the pharmaceutical O2O sector is still in its early stages. Whether it involves expanding B2B operations or Kuai Fang Song Yao’s “Internet + Pharmacy” model, these new business models still need to withstand market validation. However, competition will intensify for chain pharmacies, especially small and medium-sized ones, regardless of whether they temporarily rely on third-party O2O platforms or primarily develop their own local-market O2O businesses independently.

Although many chain pharmacy owners acknowledge the trend toward intelligent transformation in traditional retail driven by new technologies such as mobile internet, they are still experimenting with specific business models. Moreover, a more pressing concern is the pace and trajectory of evolving consumer habits.

By Wang Rifei |