UK pharmacy retail group Alliance Boots announced early this week that it has entered into an agreement to purchase a 12% stake in Nanjing Pharmaceutical Group, subject to regulatory approval. This comes over four years after establishing a 50:50 joint venture with Guangzhou Pharmaceuticals Corporation, in January 2008. Both of these interests in China are focused on wholesale distribution of pharmaceuticals in the country, but as Mintel discusses in its new report on Pharmacy Retailing in China, the pharmacy retail sector looks set to undergo very rapid expansion in the coming years, given ongoing changes to the regulatory environment.

According to Stefano Pessina, Executive Chairman of Alliance Boots, the company will “further strengthen (its) commitment to the country”, and that Alliance Boots is set “to play an active role in the evolution of the market” in China. While currently only being involved in wholesaling in the China market, the retail market remains highly fragmented, with very few significant foreign players actively engaged due to the regulatory restrictions on foreign company shareholding in pharmacy retail joint ventures, and this makes it ripe for further development.

How is Alliance Boots positioning itself in the Chinese market?

By positioning itself in the wholesale market, and establishing formal links with leading competencies in that wholesale market, Alliance Boots seems to be preparing for further network expansion. Already established in Southern China, this new partnership will give the company strong distribution across Eastern China. The company is also likely waiting for further regulatory loosening in the domestic pharmacy retail sector for foreign involvement that may allow it to convert its existing wholesale business interests into retail ones.

Currently, Chinese regulations limit any foreign investor’s stake in a domestic pharmacy retail chain in China to 49% for a chain greater in size than 30 stores selling a variety of pharmaceutical products sourced from different suppliers. However, there are signs that the regulations may be relaxed. IN December 2011, the National Development and Reform Commission (NDRC) of China removed pharmaceutical distribution from a list of restricted sectors into which foreign companies could operate, meaning that they can now be approved by local government authorities, rather than by central government.

Further easing of regulations could lead to a reduction of the capital share limits on foreign ownership in pharmacy retail chains in China. If this does happen, it will give the green light for much more foreign involvement in the sector. Already, the likes of Hong Kong’s Watson’s and Mannings are both active in China selling only non-pharmaceutical health and beauty products, and by avoiding selling pharmaceuticals are not subject to the same shareholding limits that are faced by other foreign companies already involved in China’s pharmacy retail sector, such as Jo-Jo Drugstores and Nepstar – both of which are listed in the US.

By building a wholesale business in China, Alliance Boots could then make the transition from wholesaler to retailer, given further loosening of regulation on foreign shareholding. This would not necessarily mean “Boots” branded stores appearing across the High Streets of China, as the company would be more likely to invest in a stake in a leading existing chains (or chains) in key regional markets, and develop the brand equity already developed by those chains.

It is unlikely that Alliance Boots would rush into the retail market, and would be wise to time carefully any entry into pharmacy retailing in China, given the current high levels of fragmentation. As an already active wholesaler in the market, it is in a position to develop working relationships with key regional retail chains in order to better gauge their relative strengths, and make investment forays into the retail realm based upon strong local, regional market understanding.

In the meantime, it will be interesting to see how quickly Alliance Boots continues to expand its wholesale pharmaceutical business further to cover a wider territorial range, thereby increasing its interest across more of the country.

Read Mintel’s Pharmacy Retailing in China report or contact us for more information about how Mintel can help your business understand the Chinese market.