A Study on the Impact That Generic Brands Have On Organizational Profit Margins

Subject: Marketing
Pages: 10
Words: 2784
Reading time:
10 min
Study level: PhD

Subject of Study

The proposed research originated after several conversations with store managers at different grocery chains and a CVS drugstore owner. The managers of the concerned firms were extremely happy to know which of their generic products were selling and the actual effect these products had on their profit margins. In today’s tight economy, store managers need current and accurate analyses of their product lines and the relationship each has on their profit margins. This research will answer the common question of what impact, if any, do generic products sales have on profit margins. This study will answer whether generic brand sales actually increase or decrease profit margins given the current economic conditions.

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The five generic brands that will be used in this study are common everyday items that are considered fast selling items. These are CareOne toothbrushes (versus Reach and other more expensive toothbrush brands) found at Publix Supermarkets and King Kullen stores. The second generic brand is Family Dollar window cleaner (versus Windex brand), a common product purchased at Family Dollar. Thirdly, Sun’s OxyMagic all purpose detergent and cleaner (versus the Oxiclean family of products). The fourth generic product that will be studied is Publix’s own generic brand of toilet paper with the same name (versus more expensive brand names such as Charmin and Scottie’s). Last, CVS Skin Relief Body Wash will be studied as a popular generic brand at CVS drugstores (versus the more popular Neutrogena Body Wash).

A question arised as to whether these generic products really increase store profit margins. In other words, the raging debate revolves around whether generic products really increase the sales volume at each store and subsequent added expenses for the generic product manufacturer. For example, does the sale of generic Cola in Walmart stores increase the actual profit margin for the Cola producer or is there no difference in margin? The same argument holds true if the generic product is an everyday medical drug.

There are several reasons why generic products are cheaper. Generic good manufacturers never really start from scratch in the creation of a product. They normally depend on the process of reverse engineering. Here, these companies will take a well known or FDA approved drug or generic product. Then scientists analyze its chemical constituents and work backwards so as to discover the active ingredient and other components that gave the brand name drug its characteristics. After making that discovery, the generic drug manufacturer will then create a similar product with the same degree of strength and dosage as the prototype. It will also possess the same effect and safety procedures that the original product had. Even the manner of administering the generic drug should be the same as the brand name.

History of the Generic Drug Industry

As seen in the history of the generic drug industry, several legislations have been passed in order to regulate the quality and safety of drugs in the market. However, most of these regulations apply only to the brand name companies. Generic drugs are not recognized as new drugs so they need not go through all those rigorous procedures. The Abbreviated New Drug Application as passed in 1963 required all pioneer drugs to go through a process of safety and efficacy approval. This legislation still applies until today and any brand name drugs that have been investigated and found to be wanting in terms of an ineffective active ingredient are supposed to be removed from the market. This implies that pioneer companies have to wait for long periods of time before these procedures are completed.

Retailers themselves tend to focus on these generics because not only is their profitability going to be higher, but they also get more allowances through the generics. The table below illustrates what retailers stand to gain by selling generic drugs instead of focusing on branded ones. It should be noted that pharmaceutical retailers normally quote the prices of those generic drugs by combining a range of factors. First there is the invoice price which they get either from distributors or companies themselves. Then they can add the allowable mark up to the invoice price. They are also required to charge a dispensing fee to consumers. This is normally the same price for both branded and generic drugs. However, allowable mark ups vary depending on the type of drug.

In traditional high volume, branded products, it is usually quite easy to sell the product to a wide range of retailers because that brand is already well known and belongs to a large company. Retailers often prefer large companies because it means that they can be relied upon. Generic manufacturers may find it difficult to distribute their products using the traditional structure so they have to employ a new one. Some new generic high volume entrepreneurs may not have the financial backing needed to secure a contract with a big time retailer. In these circumstances, it may become necessary for them to use a contract manufacturer who already has the necessary experience and expertise in creating the product. Eventually, this can contribute towards better sales.

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The proposed research originated after several conversations with store managers at different grocery chains and a CVS drugstore owner. Each manager was very interested in learning which of their generic products were selling and the actual effect these products had on their profit margins. In today’s tight economy, store managers need current and accurate analyses of their product lines and the relationship each has on their profit margins. This research will answer the common question of what impact, if any, do generic products sales have on profit margins. This study will answer whether generic brand sales actually increase or decrease profit margins given the current economic conditions.

The five generic brands that will be used in this study are common everyday items that are considered fast selling items. These are CareOne toothbrushes (versus Reach and other more expensive toothbrush brands) found at Publix Supermarkets and King Kullen stores. The second generic brand is Family Dollar window cleaner (versus Windex brand), a common product purchased at Family Dollar. Thirdly, Sun’s OxyMagic all purpose detergent and cleaner (versus the Oxiclean family of products). The fourth generic product that will be studied is Publix’s own generic brand of toilet paper with the same name (versus more expensive brand names such as Charmin and Scottie’s). Last, CVS Skin Relief Body Wash will be studied as a popular generic brand at CVS drugstores (versus the more popular Neutrogena Body Wash).

Research was considered to be an effective tool that provides a linkage between the corporate environment and the organization. It could thus be viewed as a most important tool used as an aid for tackling various problems. Research could be formally defined as the objective and formal process of systematically obtaining, analyzing and interpreting data for optimal decision making. Furthermore, the above definition of research layed emphasis on two important aspects. They were objectivity and systematic process in data collection and analysis. Moreover, there also existed an implicit assumption with regards to research that the ultimate findings of the research should have the actionable quality. To be more specific, the user of the research data was able to make use of the results for the purpose of effective decision making. In absence of such actionable quality, the utility of the research findings could be significantly undermined.

The sale of generic products was different in various market outlets in the USA. Some retails like Walmart were making huge sales of these products unlike in the past. Comparing financial statements from 2000 to 2009 and examining the revenues in comparison to sales volume reports on the sale of generic toilet paper, toothbrushes, a can of corn and pharmaceutical drugs gave an insight. The purpose of this research was to focus on explaining the above mentioned reasons and recommend remedies to handle the scenario.

The fundamental objective of this research study, as already stated, was to Compare financial statements from 2000 to 2009 and examine the revenues in comparison to sales volume reports on the sale of generic toilet paper, toothbrushes, a can of corn and pharmaceutical drugs from both theoretical and practical perspectives. The main objective was to identify the performance of generic products in retail outlet such as Wal-mart. The research will examine account for the retails from the year 2000 – 2009. The study attempted to elaborate how sales affect earnings per share of the company as well as final earnings.

Unit of analysis for this study was the effects that generic brands have on organizational profit margins. Sales volumes of branded products and of generic brands, production expenses, and net income (loss) were also units examined for each of a 12 month period from January 1, 2009 to December 31, 2009.

Research Results

The researcher used a combination of random and stratified sampling techniques. The survey was carried out in a four retail outlets. The stores are Publix supermarkets, a nearby CVS drugstore (in New York), a New York King Kullen grocery chain, and a Family Dollar store. This was selected through the stratification technique. All the stores in the researcher’s city was to be stratified in accordance to their sales volume. The researcher selected that store which has high volume of sales. The stores were also be stratified into those that sell generic brands along side the branded counterparts and those that do not. Those stores selling generic brands together with the branded counter parts were selected for the study.

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After the store was selected, the researcher were then randomly select the generic brands that were sold there. A list of all the generic brands in the store was made, and random selection was made from this list. Five items wee selected as explained earlier.

The mixed research method in this study serves the purpose of the research and allows best approach to meet the research goals and objectives. This can also be achieved within the available resources, timeframe and best abilities of the researcher. Researcher intends to focus on the subject and data requirement of the subject matter. It is evident that sufficient matter for the research is available to the researcher in the secondary resources.

This study is based on the use of sales reports and financial statements. Sales reports on one health provide the information on the performance health of the product category or organisation whereas the financial report provides insights on overall financial health of an organisation. Sales reports helps companies to identify the demands of particular product segment, performance of product categories and helps organisation in keeping the level of inventories to the optimum level. This helps in keeping those products on the shelves which have shorter shelf lives. Since this study is a comparison for the impact of discount sales on the sales of brands of toothbrush generics versus reach and generic medicine versus popular brands such as Claritin, this approach helps in tracking changes in sales performance, identify the shelf life duration which is not possible through the primary research.

The results of qualitative researches are heavily dependent upon the context of research, environmental factors, personal characteristics of researchers, instruments used in the research, and many other variables. In addition, the impact of such variables on the results is of great magnitude. Therefore it is quite essential that whenever a qualitative research method is employed it should be followed by a systematic, unbiased and neutral analysis and if this aspect of the research is neglected that the findings of qualitative research will not hold any credibility and validity. Although qualitative research is much more reliable and effective than quantitative research, it is much more expensive, laborious and time consuming. In spite of the fact that qualitative researches lack cost and time efficiencies, even then a growing number of researches follow the framework of qualitative research method. In addition, this is in itself a testimony to the effectiveness of qualitative research method.

As it is already discussed in the paper earlier, that both the qualitative and quantitative researches are complementary to one another – first forms hypothesis effectively and latter is used to test such hypothesis efficiently. Thus for the purposes of making a “good” research a combination of these two should be used. Furthermore it needs to be said that qualitative research method is an effective research tool and not, in any sense, an efficient tool. This characteristic of qualitative research is attributed to the fact that it is quite an arduous work to find, gather, analyze and conclude findings of a research whilst using qualitative research method; therefore cost and time efficiencies will be lost.

In this research, mixed research methods are used. Mixed research methods allow use of various research methods under single research paradigm. The qualitative and quantitative research methods are used in this study. This can also be considered as multi-strategic research approach. There are certain benefits from individual methods of research. It is easy to comprehend the quantitative results. Researcher can easily relate the outcome with the subject matter. There are categorised the purposes in five different categories triangulation; complementarity; development; initiation; and expansion. Mixed methods used for convergence, corroboration and correspondence of results falls under the category of Triangulation. In these purposes sampling, implementation and measurement decisions construct the development in a broad manner. The discovery of paradox and contradiction is the primary motive of search in the researches with ‘Initiation’. Expansion is a method where different research methods are used to cover different response components of a research.

Data Reliability is referred to as to how honest or trustworthy the collected data is. When conducting mail interviews, one disadvantage is that the collected data may not be reliable. People upon whom the data is to be collected and the people who actually give the information may be different. That way, the data so collected will lack reliability. It is an inherent characteristic of qualitative research method that the results of a research will change almost simultaneously when any assumption or rather any attribute of the research changes. To better grasp an understanding of the concept, consider the following example: In a face-to-face interview, a respondent replies that he likes rainy days. The interviewer assumes that whatever the respondent has disclosed in the interview is correct and credible. The reply of the respondent might contain sarcasm and his inner feelings might be completely different. These miscommunications, mismatching of context and responses, or any other unnoticed variables create the issue of lack of credibility and validity. However, direct marketing is also a crucial component of IMC since it helps in reaching a substantive customer base. retails’ sales promotion are advertised through, business magazines, newspapers radio and most importantly the television channels which helps in delivering a substantial degree of realism through application of sound, pictures as well as a clear sight of the company products.

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Event studies were powerful tools which were primarily used to assess the gains and or losses obtained by companies involved sales of generic toilet paper, toothbrushes, a can of corn and pharmaceutical drugs for 2000-2009. Event studies were preferred over accounting studies for the following reasons. A store retailing in generic products owns the brand it is selling. However, the name of the brand is not similar to that of the store owning the brand and selling it. This privately labeled product can be sold to other retail outlets. A case in point is the line of supermarkets owned by Safeway Inc. This company has a line of dairy products that it has labeled Lucerne. This means that Lucerne products can be found in other retail out lets been sold under the same name brand.

Another major product that is retailed as generic brands in the United States of America and elsewhere is drugs. After a new drug is invented, the inventor enjoys patent rights for a given period of time. This means that during the patent period, no one else, apart from the inventor, is allowed to manufacture the drug. However, on expiry of the patent, other manufacturers are allowed to manufacture and sell generics. The generic drug has the same quality as the branded one but it is sold at a discount. The selling price is determined after the manufacturer of the generic takes into consideration the patent royalties and expenses incurred during the marketing, if at all marketing was carried out. A consumer may be of the view that a generic tissue paper gives them similar services with the branded tissue paper. This being the case, they will buy the generic, given that the latter retails at a lower price. As such, the customer would have saved on expenses.