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America vs. The World

The big trouble with dumb bastards is that they are too dumb to believe there is such a thing as being smart. — Kurt Vonnegut, Jr.

Thursday, September 21, 2006

Love, hate and low prices

(updated below)

Despite my dislike for Chicago's big-box-retailer law, among my friends and family I'm a well-known Wal-Mart hater. The only two times I've ever shopped there were in Scottsbluff, Nebraska and White Sands, New Mexico — sometimes, there's just nowhere else to buy firewood.

But ever since I first heard the argument that Wal-Mart's low prices actually help the poor more than enough to make up for its low wages, I've been a bit waffly. I love the idea of capitalism making people's lives better just by letting the market work its magic.

Hear yea, hear yea, behold the power of the free market: $4 prescription drugs!
Wal-Mart, the nation's largest retailer, said it would begin selling generic versions of widely prescribed drugs to its workers and customers at sharply reduced prices, a move that could force rival pharmacies to do the same.

The giant discount chain, which has used its size to knock down the costs of toys, clothing and groceries, will sell 300 generic drugs for as low as $4 for a one-month supply. On average, generic drugs cost between $10 and $30 for a 30-day prescription.
I'm big on the power of technology to improve the lives of the world's less fortunate, whether they're living in the inner city or Sub-Saharan Africa. Though most its ability to offer lower prices comes from the leverage of being the world's largest retailer, Wal-Mart has also done a lot to revolutionize logistics. You can guarantee no one knows how to move toilet paper from California to Connecticut for less than they do. That's what's happened here — Wal-Mart claims the drug savings are coming from making the supply-chain more efficient, rather than from pressuring manufacturers.

Since the federal government abdicated its role in bargaining with drug companies for lower Medicare drug prices, I guess it's up to Wal-Mart to save our healthcare system. Maybe they can start offering $10 checkups, too.

Goddamn you, Wal-Mart. Life was so much easier when I could just hate you in peace.


Target is going to match Wal-Mart's generic drug prices. Boo-ya.

I guess we shouldn't get too carried away with the significance of this. The discounted drugs will mainly benefit those who pay for their drugs themselves, rather than through insurance. CVS, the nation's largest drugstore chain, says that cash sales represent less than less than 0.5 percent of its pharmacy sales. But it's a start.


Blogger Mandasaurus said...

Walmart isn't really doing this out of kindness at all. It's just math. They can afford to "squeeze" out costs and increase business in massive proportions.

Let me try it out:

Manda's Makebelieve Walmart pharmacy currently sells the same generic drugs for $10 each and sells 200 each day and covers costs for the drugs by making $2,000. The price change makes these generics cheaper and increases sale. Makebelieve Walmart sells 700 prescriptions of these $4 drugs daily netting $2,800. That's an additional $800 to cover the $6 decrease, most of which was probably just "squeezed" out by cutting costs.

I am not sure what Walmart's cost-cutting measures are - probably questionable.

Buck, I think it's important to see Walmart's decision as good business math and that alone. Walmart doesn't care about helping regular people with the enormous cost of healthcare - if they did they'd cut costs for the pricier name brand drugs too. This $4 drug move is also a challenge to stores like Walgreens and CVS and small-town pharmacies which cannot afford to keep up because their volume can't possibly rival that of Walmart.

Walmart is smart, if fickle and gross. Nobody is going to get their $4 generics at Walmart then stop off at another pharmacy for their namebrands.

Certainly Walmart sports a good business model. But I truly believe those low prices and what comes along with them do more harm than good.

Blogger Gordon the Gnome said...

I dunno about that, Mandasaurus... way I see it, "good business math," however selfish, has accounted for greater quality of life improvements worldwide than every piece of poor-friendly legislation in history put together. And the nice thing about it is that you don't have to question their motives: they're making a fortune. Just so long as they're not a monopoly, godspeed.

Blogger Buck B. said...

Pharmacy profit margins are extremely low, usually between 1-3 percent, which is even lower than Wal-Mart's company-wide 3.5 percent.

So out of that $800 extra from selling 700 prescriptions instead of 200, your profit is actually going to be around $16 — certainly not enough to cover the $4,200 decrease in revenue caused by selling them for $4 instead of $10.

No one can reduce costs enough to make this profitable, not even Wal-Mart; their pharmacies will almost certainly be operating at a loss, if they aren't already. You're right, the main goal of this change is probably to get people into the stores, so they'll pick up both their higher-priced name-brand prescriptions and their candy bars, Diet Coke and diapers.

It is good business. Thank God for the invisible hand.

Blogger Buck B. said...

So, uh... yeah. This is all wrong, for several different reasons. No wonder it took me three tries to pass advanced microeconomics.

But the central point remains: the new cheap generics will almost certainly be a loss leader for Wal-Mart.

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