Marketing Drug Products [Reprint 2022 ed.] 9781978815193

Citation preview

MARKETING

DRUG

PRODUCTS

MARKETING DRUG

PRODUCTS BY

Paul C. Olsen

New Brunswick R U T G E R S

U N I V E R S I T Y

1U8

P R E S S

C O P Y R I G H T , RUTGERS A L L

I 9 4 8 ,

BY

COLLEGE RIGHTS

M A N U F A C T U R E D

THE IN

TRUSTEES

N E W

JERSEY

RESERVED

IN

THE

U.

S.

A.

OF

PREFACE

T H I S BOOK is intended to be a description and analysis of the marketing methods and principles which are of special interest and use in the d r u g trade. T h e d r u g trade supplies the materials and equipment employed in the practice of the profession of pharmacy. I n the United States and Canada the practice of the profession of pharmacy is carried on mostly in drugstores. These retail establishments are therefore a meeting place for marketing problems of the d r u g trade and for professional problems of pharmacy. A knowledge of the marketing methods and principles of application to the d r u g trade is therefore of interest and value to pharmacists and to students who have taken u p the study of pharmacy, to persons who are suppliers of the materials and equipment used in the practice of pharmacy, and to persons who are suppliers of other articles sold in d r u g stores. T h e pressure of competition is going to make it more and more difficult for pharmacists to continue as proprietors of drugstores if they operate their stores in an indifferent and routine manner. Pharmacists who are determined to succeed as proprietors of drugstores must know about and use acceptable management methods in their stores. T h e y also must be acquainted with trends and prospects in the d r u g trade and in the profession of pharmacy. Those who have dealings with drugstores also should have this knowledge.

vi

PREFACE

I am indebted to Dr. Paul H. Nystrom, Professor of Marketing in Columbia University School of Business and President of the Limited Price Variety Stores Association, for the wise counsel and helpful advice he has graciously and generously given me. I am grateful to Messrs. Bert R. Mull, J. Warren Lansdowne, and Eugene N. Beesley of Eli Lilly and Company for the experiences in the drug trade and in pharmacy which they have shared with me and from which I have profited. Dr. Robert L. Swain, Editor, and Mr. Dan Rennick, Editorial Director of Drug Topics have been ever willing and able helpers and critics. I am grateful to Dr. Ernest Little, formerly the Dean, and to Dr. Thomas D. Rowe, now the Dean of Rutgers University College of Pharmacy who have been understanding leaders and guides to me. I also am thankful to Dr. E . Fullerton Cook, now Emeritus Professor of Pharmacy at the Philadelphia College of Pharmacy and Science and Chairman of the United States Pharmacopoeia Revision Committee under whose preceptorship I began twenty-five years ago to teach the material which is now the subject matter of this book. His unflagging enthusiasm has been always an inspiration. I am indebted also to my students at Rutgers University College of Pharmacy and at Columbia University School of Business. Their alert and critical minds have been a constant stimulation and have been responsible for many new ideas on the subject of marketing drug products. I am grateful also for the help of members of the Limited Price Variety Stores Association, the Institute of Distribution, and other business associates. They have responded unfailingly and willingly to requests for information and advice. The opportunity to discuss the subject matter of this book with them has enabled me to enlarge its coverage greatly.

VÜ

PKEFACE

Helpful editorial assistance has been supplied by Miss Ella M. Clarke, Mrs. Ellen P. Gilligan, and Miss Jewel M. Deehan. PAUL August, 1947

C. OLSEN

CONTENTS

1. Marketing Drug Products 2. Early History S. Resale Price Control Regulation of Trade Practices 5. Cost Analysis 6. The Retail Drug Trade 7. Kinds of Drugstore 8. Successful Drugstore Management . . 9. Other Retailers 10. The Wholesale Drug Trade 11. Manufacturers in the Drug Trade. 12. Manufacturers' Marketing Methods and Problems 13. Organizations and Publications Serving the Public Health Professions Index

3 10 21 42 68 98 126 158 188 207 231 255 294 321

MARKETING

DRUG

PRODUCTS

CHAPTER

I

MARKETING DRUG PRODUCTS

The retail drugstore is the best known and most obvious part of the marketing of drug products in the United States and Canada. There are about fifty thousand of these stores in the United States and four thousand in Canada. Each drugstore is in charge of a licensed pharmacist. In most cases he is also the owner of the store. Nowadays a qualification for license as a pharmacist is graduation from a college offering specialized training in this profession. There are about seventy such colleges in the United States and several more in Canada. Some are parts of universities; others are independent institutions. They offer a four-year course for the successful completion of which the degree of Bachelor of Science in Pharmacy is awarded. Some require five years of study. The study of pharmacy as a profession is begun each year by several thousand young men and women. Before World War II the number of pharmacy students in college was about twelve thousand of whom three to four thousand graduated each year. About 90 per cent were men. During the war the proportion of men dropped to about 50 per cent, mostly because of the great number of eligible students who were in military service, but in some part because of an increase in the number of women studying pharmacy. The trend is toward prewar proportions of men and women students. This is accentuated by the retirement to domestic life of a large number of women pharmacists within a few years after completing their studies. In June, 1946, the number

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MARKETING DRUG PRODUCTS

of pharmacy students in college was about eight thousand. By September this figure had increased to almost fifteen thousand. Most of the students in pharmacy are or have been p a r t time employees in drugstores. Many are sons and daughters of drugstore owners. This part-time employment often began while they were of high-school age. In addition to the college training required in the United States as one of the prerequisites for a license to practice pharmacy, experience of a year or more in a prescription laboratory is also required. This is ordinarily received in a drugstore, although hospital pharmacy experience is generally acceptable to the licensing authorities. Most pharmacy students, therefore, continue part-time employment in drugstores while attending college and during school vacations because it serves the two-fold purpose of providing required practical experience in the profession and of partial or even full self-support. There are about one hundred thousand graduate pharmacists in the United States. Close to seventy-five thousand work in retail drugstores, either as owners or as employees. Thus the great majority of pharmacy graduates have remained in this retail field. This is true more frequently of the men than of the women for hospital pharmacies have proved to be attractive sources of employment for women graduates. Although the number of men graduates in fields other than retailing is increasing, it looks as though for a long time to come most will find their careers in drugstores. The laws of every state and of the provinces of Canada require a drugstore to be conducted under the personal supervision of a pharmacist. Prescriptions must be compounded in the store by a pharmacist, or under his immediate and personal supervision. This allows students and apprentices to obtain practical experience in prescription compounding. These laws also provide generally that sales of poisons and other potentially dangerous preparations in a drugstore are to be made personally by a pharmacist and then only if he

MARKETING DRUG PRODUCTS

5

has satisfied himself that the prospective purchaser is aware of the nature of the article he is buying. For the protection of the public health, these laws usually specify that for other articles of a medicinal nature, retail sales are to be limited to drugstores. T h e presumption is that the professional training of the pharmacist permits him to inform his customers of the use of these articles and of the dangers from their misuse. Examining and licensing authorities are established under these state and provincial laws to evaluate the professional training and other qualifications of a pharmacist. These authorities are usually designated as "Boards of Pharmacy." T h e y hold examinations and issue licenses to pharmacists and to the drugstores in which the retail practice of the profession is conducted. In most states and provinces they also enforce the laws regulating this practice. A n y child old enough to make his own selection of a piece of penny candy knows that many of the articles commonly sold in drugstores in the United States and Canada are also retailed in other kinds of stores. Even in the practice of the healing arts, rival marketing methods are to be found. T h e patient who visits one physician receives a prescription to be compounded in a drugstore and used in the treatment of his ailment. A patient visiting another physician in the same community may receive medicine directly from the physician at the time of the visit. This medicine probably reached the physician's office from an entirely different source than the retail drugstore. T h u s retail drugstores in the United States and Canada are in business competiton with other retailers of non-medicinal articles. T h e y also are in the keenest competition with other methods used for the sale of medicinal articles. As long as competitive enterprise continues, there will be ingenious and enterprising inventors who, to make the fruits of their inventions as widely available as possible, will endeavor to interest drugstore proprietors as well as other re-

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MARKETING DRUG PRODUCTS

tailers in the sale of their products. They are but one of thousands of different kinds of supplier with whom the drugstore owner is engaged daily in business dealings. Though professionally trained to practice an ancient and highly respected profession, the retail pharmacist thus becomes a vendor of a variety of articles in no way related to the practice of pharmacy. In this retail selling he is in competition with other retailers of whom professional training is not required, and his professional outlook may seem to be of no value or actually may prove to be a handicap. The very aggressiveness of most retail competition may be distasteful to a pharmacist. H e also may be unwilling to create in his establishment the carnival atmosphere that is characteristic of some forms of retailing. I t also should be noted that the formal training of the retail pharmacist in business and the social sciences is necessarily limited. Some of the colleges of pharmacy recognized as long ago as 1900 that with the great majority of their graduates going into retailing, students should receive some formal training in college in the economic and business problems they might be expected to meet. Formal training of college grade in business itself has had a history of scarcely more than sixty years. Nevertheless at present the college course in business has a minimum term of four years, and this can be followed by graduate courses of one or two years, or even longer. Manifestly, therefore, the formal training in business principles and methods that can be given to a student in a four-year pharmacy course is limited and rudimentary. The professional training he is pursuing at the same time is, quite understandably, his major interest. These conditions do not necessarily bar the graduate pharmacist from successful competition in retail trade. Many hundreds of the most outstanding merchants in this country had little or no formal education. Moreover, the training received by a pharmacy student is quite likely to develop the inquiring turn of mind which will lead, in later years, to the

MARKETING DRUG PRODUCTS

7

successful solution of problems presented by retail competition. With other types of retailers, formal education of college grade is a voluntary choice and not a requirement. The retail drugstore is thus a professional island, dealing on the one hand with the laity and generally selling a variety of merchandise very distantly if at all related to pharmacy, and, on the other hand, obtaining the requisite supplies from persons who, so far as law and custom are concerned, need not be professionally trained. I t is an amazing fact that while the states and provinces have been vigilant in protecting the public health in the retail sale of medicines, little concern has been felt by governmental authorities about wholesaling or even manufacturing them. This apparent indifference has existed for many years to a very considerable degree in hospitals and among physicians who dispense their own medicines. In self-protection and in genuine concern for the welfare of the people, the largest and most reliable pharmaceutical manufacturers and drug wholesalers are liberal users of the best talents available in this and related professions. Nonetheless, it is entirely possible for a retail drugstore to have sources of supply employing personnel who are wholly without professional training or knowledge. The U. S. Food, Drug, and Cosmetic Law of 1938 has made more difficult the production and marketing by unqualified persons of harmful preparations intended for medicinal use, and has discouraged the introduction of worthless nostrums. The law also regulates the production and sale of cosmetics that are actually or potentially dangerous to users, but there still is no professional training or license requirement comparable to that required of the retail dispenser of these articles. The retail competitors of the drugstore are many and varied. They include grocery stores, confectioners, country general stores, department stores, variety stores (the familiar five-and-ten's), hardware and household appliance dealers, restaurants and other eating places, jewelers, bookstores,

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MARKETING DRUG PRODUCTS

stationers, tobacconists, florists and seedsmen, g i f t and souvenir shops, newsdealers, photographic supply stores, and sporting goods stores. T h e n in the field for which he is professionally trained, the retail pharmacist encounters the business competition of physicians and other practitioners who dispense their own medicines to their patients instead of writing prescriptions for them. Private and publicly supported hospitals, a f t e r becoming acquainted with the practice of pharmacy t h r o u g h the dispensing of medicines to their patients, extend this activity to out-patients and clinic patrons. F r o m this development it is an easy step for a hospital to offer a general prescription compounding service. I n addition, new discoveries in the healing arts require therapeutic aids and devices suitable only for personal administration by the physician, often exclusively under hospital conditions. County agents and officials of state agriculture d e p a r t ments, in a commendable desire to improve the situation of the f a r m population, have provided them with the necessary serums and other preventive medicines for the protection of f a r m animals and full directions for their administration. T h e onslaught of epidemics has been accompanied, on occasion, by mass innoculations by state and local health officials. Determined social planners have p u t forward schemes which envision government-controlled delivery of necessary medication. Cynics still contend t h a t anyone with sufficient capital and know-how can popularize a medicinal product. T h e y assert t h a t this is possible even if the product is completely useless, if not actually h a r m f u l . Y e t there is the record in very recent years of the complete withdrawal from this field of the products of two large and previously successful manufacturers. Neither of these products was a nostrum or quack remedy. Both producers spent millions of dollars in advertising their preparations to the people of the United States and Canada. T h e y had the guidance of the most skilled practitioners in

MARKETING DRUG PRODUCTS

9

their marketing plans. Y e t each m a n u f a c t u r e r within a few months of one another, publicly announced t h a t they would discontinue manufacture of the product and called upon wholesale and retail distributors to r e t u r n stocks on hand for r e f u n d . T h e y were Stams, a multi-vitamin product of Standa r d Brands, and Vimms, a similar product of Lever Brothers. An examination of the causes of these two costly failures discloses nothing more sinister than the very great difficulty or impossibility of creating demand profitably for preventive medicines for self-diagnosed needs. Advancement of educational frontiers pushes back the areas in which nostrums and quackery thrive. Professional guidance and more rational t h e r a p y take the place of selfdiagnosis by the laity. School and visiting nurses substitute their ways for those of the carnival spieler and the witch doctor. Retail pharmacists then assume their r i g h t f u l places as dispensers of medicine and not as advisers and prescribers for the sick. "Counter prescribing" in retail drugstores is on the way out. Some forecasters see the drugstore of the f u t u r e as a community center confining its activities to the services and merchandise directly related to protection of health. Others envision it as a department in a food store of the super-market type, a sort of one-stop supply depot for local housewives. I n between are the predictors of greatly enlarged and "modernized" establishments f e a t u r i n g lines of merchandise more commonly associated with home-appliance and sporting-goods stores. T h e origin of many of these tendencies and trends goes back to the very beginning of history. Others appeared more recently. A study of them helps to reveal how many of the conditions t h a t exist today came about. I t also provides many useful clues about the f u t u r e . T h e marketing of d r u g products has always had its unknown quantities and its uncertainties. I t is sure to have them in the f u t u r e . T h e risks are great, b u t so are the rewards when success is achieved.

CHAPTER

II

EARLY HISTORY

Records of the practice of pharmacy date back as many as forty centuries before the birth of Christ. T h e first p r a c titioners were priests and other representatives of the forms of religion. T h e y treated the sick and provided the necessary medicines. Of the ancient civilizations which centered about the Mediterranean Sea, the Phoenicians are credited with being the pioneer traders, though there is evidence of even earlier commerce. These traders ranged from the N e a r E a s t to Gibraltar, and probably ventured beyond. T h e unique character, high value, and low bulk of the herbs, spices, and other drugs of the day t h a t were available in different p a r t s of this area make it certain t h a t the Phoenicians carried on an active trade in these medicinal substances. T h u s these traders were the suppliers of the primitive practitioners of pharmacy and the other healing arts. I t is probable t h a t they also were the suppliers of, or a t least traded in, the charms and potions t h a t were used by practitioners to impart an a u r a of mystery and faith to their calling. M a n y of these early practices have come down unchanged to the present day. T h e r e are still voodoo chanters in the A f r i c a n interior and witch doctors in the less accessible p a r t s of Central and South America. Nowadays their sources of supply are likely to be itinerant vendors. T h e y even have been known to indulge in mail-order buying and to make purchases personally from dealers in metropolitan centers. I n ancient times, as at present, the faker and the quack

EARLY HISTORY

II

were always at hand. Worthless nostrums and some positively harmful preparations were offered the ignorant, credulous, and superstitious. I t is also well to remember that some of the preparations of long, long ago were the object of scorn and ridicule by those considered at the time best able to judge their merit. Later, recognition and acceptance were won from the very authorities who first opposed their introduction. The intuitive judgments and the superior reasoning which led to the origin of these preparations have been rewarded many times by the general acceptance they received from the professions and from the laity. In our contempt for the remedies concocted by our forebears from lambs' hoofs, flyspecks, and pony sweat, the humble and ugly mold which the world has come to know as penicillin, the wonder drug, must not be overlooked. Occidentals sneer at the use of tiger bones and stag fetuses as ingredients of medicine in China. Nonetheless it was the practitioners of that country who discovered ephedrine and made it available for all the world. The word "apothecary" appears on occasion in Biblical translations. I t is believed that a more exact translation than "druggist" is "perfumer." Thus the traditional association of the drug trade with perfumery and other cosmetics is of long standing. The basis of this association is the similarity of materials and sources. The traders of Biblical times supplied both the makers of medicine and the perfumers. The separation of the healing arts from religious observances began in Greek and Roman days. Hippocrates, who lived in the fifth century before Christ, is credited with pioneering the rationalization of medical practice. His intellectual curiosity also led to much of the experimentation and discovery that today is called research. At this time many other practices and customs began which have continued right down to the present day. Greek and Roman physicians developed their own favorite medicinal compounds. Sometimes they prepared these themselves, purchasing the ingredients from traders. Others had their

12

MARKETING DRUG PRODUCTS

specialties p u t u p for them by pharmacists. Still other p h y sicians bought ready-made items of which they had none too sure a knowledge of the contents or the use. T h e r e was some prescription writing. This was also the beginning of an interest in polyglot preparations. Only in very recent years has there been a trend away from these multi-ingredient or " s h o t g u n " preparations. T h e evidence is not so clear, but it is probable also t h a t the medicinal value ascribed to a p r e p a ration in the Greek and Roman era was in direct relation to its price. Those days marked the beginning of plans for more eleg a n t and palatable medicines. T h e word "confections" is of pharmaceutical origin and the cliché "sugar-coated" likewise originated among pharmacists. S u g a r is said not to have been brought to E u r o p e until the time of the Crusades in the eleventh century and was so costly then t h a t it was used only in medicines. T h e g a p in human progress between the fall of the Roman E m p i r e in the fifth century and the Renaissance in the eleventh century left its mark on pharmacy. Survivors of the bloody battle of Cassino in W o r l d W a r I I will never forget the Benedictine Monastery which towered over them from the t o p of Mount Cassino. I n this monastery, founded in 529, the monks busied themselves a f t e r the fall of the Roman E m p i r e with copying and preserving manuscripts on pharmacy, the d r u g trade, and other subjects of historic interest which otherwise in the ensuing D a r k Ages would have been lost or destroyed. Such trade as took place in the D a r k Ages in E u r o p e was carried on by venturesome men traveling from one feudal manor to another. T h e i r stocks were necessarily limited to goods they could c a r r y with them. As with the ancient Phoenicians, the unique character, high value, and low bulk of the spices and d r u g s of the Near E a s t again commended themselves as objects of trade. Moreover, the D a r k Ages which engulfed E u r o p e had not spread to the N e a r E a s t .

EARLY HISTORY

13

The Arabian civilization of the day kept alive this area as a source of supply. In the Dark Ages, herbs and other botanical drugs of medicinal value were also cultivated in Europe and used for the treatment of disease. These treatments were usually accompanied by incantations and rites in no way connected with therapeutics or faith healing. This association is understandable because the herbariums of the day were developed mostly at monasteries and other religious institutions. Bandits and rovers were less likely to disturb activities there. In the Renaissance a lot of energy was dissipated in seemingly futile searches. This was called the Age of Alchemy. Leading objectives were the so-called "elixir of life" and the transmutation of base metals into precious metals. The greatest difficulty in scientific studies in the Middle Ages was the arbitrary and unwarranted restrictions on the allowable types of investigations. Hideous penalties were visited upon the student who engaged in anatomical studies or postmortem examinations. The physician whose patients failed to get well was an object of scorn to be dealt with as seemed best to the relatives of the deceased. These blots on human progress should be a warning to military zealots and other holders of authority who would circumscribe the freedom of academic and scientific inquiry and the free interchange of information. Today one speaks patronizingly of the crudity and laughable errors in the work of the alchemists of the Middle Ages. Perhaps they too would have a laugh at the "love potions" and "good luck charms" offered not just in darkest Africa or in remote rural vastnesses of the United States but by itinerant street vendors in Times Square, New York City, and by "lecturers" at demonstrations in nearby stores. The advertising pages of numerous magazines also contain offers of these fakes. Like the wild growth which threatens a garden patch cleared in a tropical jungle, the frontiers of superstition and prejudice are close at hand. Unless constant vigi-

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M A R K E T I N G DRUG PRODUCTS

lance is exercised, they will close in with scarcely a moment's warning. The separation of the practice of medicine from the practice of pharmacy and from the drug trade followed a tortuous course in Europe in the Middle Ages. There were laws and decrees which prohibited pharmacists from treating disease. Some ill-founded theorizing of the day consigned surgery to a lower level of professional esteem than medicine. As a result the barbers (beard cutters) became the bloodletters and surgeons. Then, as now, there crowded into the field a horde of sycophants and sharpers preying upon the ignorance and credulity of the halt and the ailing. Importers and dealers in spices and foodstuffs came into commercial competition with practitioners of pharmacy. J u s t as in Biblical times, many of the ingredients used by perfumers were the same as those used by pharmacists and came from the same places. By the Middle Ages, a considerable number of these spices, herbs, and flavorings had also come into use as foods. The importation of these articles from distant and scattered sources was in the hands of tradesmen. They, in turn, disposed of their imports to perfumers, grocers, pharmacists, and physicians who prepared their own medicines or used for their patients what they bought readymade. It is reasonable to conclude that these importers supplied some pharmaceutical advice with their goods. It is probably also true that pharmacists did not object to trade in these articles in no way concerned with their professional services. The distinction between wholesale and retail trade in the Middle Ages was even less clear than it is today. The guilds which developed at this time in England and other European countries were intended to be a means of mutual protection by tradesmen against the general lawlessness of the day. They were also intended to check unfair trade practices. When a group of competitors join to check unfair practices, it usually proves impossible to distinguish trade restraints from trade practices. Thus the object of the guilds

EARLY HISTORY

15

came more and more to be the preservation of the rights and privileges of those included in their memberships and to make entry by anyone else as difficult as possible. One cannot conceive of anything more diametrically opposed to a rising standard of living and to the development of mass purchasing power. I n pharmacy the guild restraints have continued in continental E u r o p e right down to the present day. T h e y are to be found in the restrictions on the number of d r u g stores and in the price-fixing agreements on the goods and services they supply. T h e object, in blunt terms, is to give as little as possible for as much as possible. I n Great Britain the number of drugstores has not been restricted, but unconscionable price-fixing has created such high profits per unit sold t h a t the store owner scratches out a bare existence from a miniscule volume of sales, while his customers, because of the high prices asked, are denied the health aids they need. Under these circumstances, it is easy to understand t h a t a bitter rivalry could have begun as long as five or six centuries ago in E u r o p e between various types of distributors of d r u g products. Failing in open trade to defeat their competitors they sought to create restrictions and monopolies by legal enactment. T h e Grocers Guild in E n g l a n d in the fifteenth century had exclusive control over imports. I t was a century later before the pharmacists acquired separate guild status by royal decree. T h e m a n u f a c t u r e r in the d r u g trade today who receives sharply worded complaints about the sale of his goods by rival distributors may find some consolation from the fact t h a t such complaints are nothing new. A memorial to the reigning powers by the pharmacists of none other than N u remberg, Bavaria, in the sixteenth century protested the loss of trade in confections, f r u i t juices, and preserves to competing " s u g a r dealers." Spice shops and grocers were charged with g r a b b i n g a large share of business in their lines. Sales of "sundries," then described as sealing wax, fumigants, p a p e r , ink, and pens, were alleged to have been lost

16

MARKETING DRUG PRODUCTS

to "common huckster shops." A similar complaint was registered about distilled waters and oils. The barber (who was also a surgeon) and the physician did not fare any better. They were criticized for invading the druggists' prerogatives by dispensing their own medicines. And for those who still complain about the needless variety and duplication of medication kept in drugstores awaiting prescription by physicians, there is also to be noted this sixteenth-century plea that once an item was put in stock at the request of the doctor, he forgot about it. The goods then lay on the shelves of the drugstore so long that they deteriorated or became otherwise unsalable. The sixteenth and seventeenth centuries saw the beginning of a long series of very important discoveries in the physical sciences. These advances had the effect of brushing away the false theories of alchemy. They also profoundly affected the future practice of pharmacy and the marketing of drug products. Pharmacists stopped the production by laborious hand methods of limited quantities of an immense variety of medicinal articles. Instead they specialized in the production of greater quantities of a few related items. Thus large-scale chemical and pharmaceutical manufacturing came into being. The retail druggist, in turn, found it desirable to purchase ready-made some of the articles dispensed in his store instead of preparing them by hand in limited amounts. The pioneer nature of the development from colonial days of the United States and Canada had a strong and special influence on the practice of pharmacy and the marketing of drug products in these countries. The first drugstore in colonial North America is said to have been established in the early part of the seventeenth century. Before that, traders and then the trading posts and general stores had supplied medicines to the hardy pioneers and native Indians. Although the North American Indians are known to have engaged in extensive trading among themselves, nothing of present-day significance in the drug trade has survived from

EARLY HISTORY

17

those beginnings. T h e supplies sold by the traders, t r a d i n g posts, and general stores were imported from E u r o p e . T h e y included the herbs and other drugs in common use and also the ready-made medicinal compounds of secret composition which were then becoming popular in E n g l a n d and on the continent. This was the beginning of the use of the term " p a t e n t medicines" to describe preparations of this character. T h e name is now a misnomer. I n the beginning Royal G r a n t s or "Letters P a t e n t " were allowed inventors of formulas in particular favor with the ruling house. I n modern times, few, if any, such preparations have ever been patented. Their unique and distinctive character has depended upon secret formula and undisclosed methods of compounding. T h e p r o p r i e t a r y rights which result from the use of trademarks have been confused frequently with those accruing from p a t e n t ownership. A trade-mark is a unique and distinctive designation of an article offered for sale. T h e ownership of a trade-mark which is publicly recognized as the designation of a particular medical formula thus confers monopoly rights comparable to those the owner could e n j o y if he had, t h r o u g h p a t e n t rights, the exclusive privilege of making t h a t particular formula. Moreover, trade-mark rights continue as long as the trade-mark is used, whereas p a t e n t rights are a governmental g r a n t for a limited period of years. Qualified pharmacists in colonial N o r t h America turned their thoughts to producing medicinal substances instead of importing them. T h e growing population pointed to special demands for paint. Textile production led to demands for dyestuffs and chemicals. Names t h a t are famous today in each of these three fields became so in drugstores of colonial days. At the same time, some of the physicians were conducting drugstores as a d j u n c t s to their medical practices. Successf u l physicians surrounded themselves with assistants and apprentices. Formal training for p h a r m a c y had scarcely be-

18

MARKETING DRUG PRODUCTS

gun. Frequently a physician's assistant or apprentice was p u t in charge of a drugstore operated by the physician. Drugstores of this t y p e are still to be found in the United States and Canada. A more modern counterpart is the dispensing physician who has his nurse or office assistant supply his patients with the medicine he designates. T r a d e r s followed the growth of the colonies westward. T h e n came the t r a d i n g posts and general stores with their stocks of household remedies and so-called " p a t e n t " medicines. They, too, have their modern successors in northern Canada, Alaska, and remote r u r a l areas of continental United States. Also pioneering in the retail distribution of medicinal and related articles were the itinerant vendors. Some traveled on foot with their packs on their backs. Others rode horseback or, when the condition of the roads permitted, used carts and wagons. T o draw the crowds, there were magical tricks and theatrical performances. This sort of thing goes on right now. I t happens not only at dreary crossroads and villages where anything out of the ordinary draws a crowd, but also in supposedly sophisticated metropolitan centers and resorts. There a "demonstrator" sets himself upon the tailboard of a truck in a p a r k i n g lot or even on a street corner. A f t e r a preliminary and harrowing description of the evils of modern medicine, he enthralls his gap-jawed audience with a "lecture" on his hair "restorer" sold at a special introductory price on an "absolute" money-back g u a r antee. T h e specialized types of retail stores which followed the t r a d i n g posts and country general stores included d r u g stores. T h e particular needs of the pioneer communities caused them to be logical retail outlets for paints, glass, wallp a p e r , chemicals, and dyestuffs. T h e Industrial Revolution of the early nineteenth century resulted in the development of textile mills in this country. T h e home spinning wheel became j u s t a living-room decoration, and drugstore sales of dyestuffs disappeared. T h e chemicals went also, but in r u r a l

EAULY HISTORY

19

areas there still is a substantial sale in some drugstores of paints, glass, and wallpaper. F r o m colonial days until the early nineteenth century, there arose a bitter and growing conflict between the p h y sicians, pharmacists, and other persons interested in the d r u g trade. On the one hand were the physicians who operated drugstores as a d j u n c t s to their medical practices; on the other were the proprietors of the unaffiliated drugstores. T h e proprietors of many of these drugstores were in many instances exceedingly well informed in the practice of p h a r macy. Some of the leading physicians took to writing prescriptions to be filled in these unaffiliated stores instead of depending on the supplies they had in their own offices and stores. I n fact, some physicians decided t h a t prescription writing was superior to dispensing and disposed of their drugstores to former assistants or to outside purchasers. This conflict was settled in dramatic fashion in 1821 in Philadelphia, then the largest city in the United States and the center of pharmaceutical practice and the d r u g trade. A g r o u p of militant Quakers founded at t h a t time the Philadelphia College of P h a r m a c y . T h e y included the proprietors of unaffiliated drugstores. Some were dealers in paints, chemicals, and dyestuffs. Others were wholesale suppliers for the frontier tradesmen and drugstores. Still others had expanded their drugstores into relatively large-scale specialized m a n u f a c t u r i n g establishments. T h e y all s p r a n g into action at a meeting in historic Carpenter's H a l l following the announcement by the University of Pennsylvania t h a t its medical school would institute a system of licenses and sanctions for the persons it deemed competent to practice pharmacy. T h e local pharmacists and members of the d r u g trade refused to have any p a r t in such a scheme. Instead they financed the opening of their own college at which pharmacists could be professionally trained. T h e Philadelphia College of P h a r m a c y was the first such college in N o r t h America. Pharmaceutical education has since

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followed the pattern thus established. T h e result has been a pharmaceutical profession in this country and Canada cooperative with but completely free from the domination of the medical profession and other health professions. Similarly, the drug trade has grown up in a manner completely independent of the medical profession but deserving its cooperation, respect, and gratitude.

CHAPTER

III

R E S A L E P R I C E CONTROL

"Pricing has long been considered as a—perhaps the— central marketing or business problem," says Dr. Charles F . Phillips, President of Bates College and Chairman of the Social Science Research Council in his report, " M a j o r Areas for Marketing Research," in the July, 1946, Journal of Marketing. Dr. Phillips' conclusions apply with special force to the drug trade. Medicinal articles are likely to be the products of professional skill. If they are not the products of professional skill, it is a common practice to represent them as such. The physical ingredients of a medicinal product are therefore a necessarily small part of the cost of the finished product. Most of the price asked for a medicinal product is compensation for this professional skill and not for the products' physical ingredients. A failure to recognize this fact has been the cause of much misunderstanding and hard feeling. An irate patient who is able to determine the names and proportions of the ingredients of a prescription which his physician has ordered for him may complain bitterly to the retail druggist about being asked to pay $1.25 for a mixture of ingredients which could not have cost more than 5 cents. But can he identify each one of them ? Can he be sure that each is of the standard of strength, quality, and purity that is suitable for medicinal use? Can he weigh them with a degree of accuracy which distinguishes differences no greater than the weight of a pencil mark on a piece of paper ? Can he

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put together all these ingredients in a manner which will produce the effects the prescribing physician wanted? Improper compounding may result in incompatibilities which would cause the usefulness of these ingredients to be destroyed. Physicians are as likely as laymen not to recognize the professional skill which retail druggists supply in putting up prescriptions. A physician once made a jocular reference to the "enormous profits" in prescription filling in drugstores. The retail druggist, not to be outdone, thereupon offered to fill the prescriptions of this physician for 10 cents each. The offer was indignantly refused. The physician knew the unfavorable reaction that his patients would have to 10-cent prescriptions after paying him from five to ten dollars for each office visit. In the absence of any other standard, the layman values his prescription somewhat in proportion to the price he pays for it. The usual dose of some important medicines is an exceedingly minute quantity. T o facilitate administration of the medicine in the proper dose it may be incorporated in an inert liquid vehicle. This liquid, instead of being completely inert, may also serve the purpose of a flavoring agent, preservative, or both. Powders are also used to give bulk to medicines in which the individual dose is a very small physical quantity. These practices have the effect of increasing the accuracy of dosages. They also help to give the product an appearance of value corresponding to the price asked for it. At the same time the relationship between the cost of the physical ingredients and the value of the finished product is pushed farther apart. These developments reach their peak in a type of physician's prescription known as the placebo. The placebo is probably the strongest contributing factor to the widespread belief among laymen that a medicine to be really, good must be costly. The placebo is known to have been in use in ancient

RESALE PRICE CONTROL

23

Egyptian times and most likely before that. I t has the appearance of medicine but has no inherent medicinal value. I t is prescribed by the alert and understanding physician for neurasthenic patients who have nothing the matter with them, but who nonetheless will consider the physician incompetent or indifferent unless he prescribes some medicine for them. The placebo also has an incalculable humanitarian value in keeping up the spirit of the incurably ill during their last tortured days. Very understandably, the retail druggist's charge for a placebo bears no relation to the negligible physical value of its ingredients. In some respects, the individual prescription occupies the same position with respect to the proprietary medicine of secret formula that the made-to-measure suit of clothes does to the ready-made garment. The maker of the proprietary medicine is able to obtain many of the advantages of largescale production. By putting up his product in quantity, he saves some of the costs of materials. He is able to buy them in wholesale instead of retail amounts. He also saves on manufacturing costs because he and his help can devote themselves exclusively to his specialty. In addition, it is possible for him to use standardization and methods of test control that would be impracticable in connection with individually prepared prescriptions. Thus the standards for the quantity product can often be maintained on a much more accurate basis than those of the individually prepared prescription. These advantages of large-scale production of medicines were put to use early in the history of colonial America. Proprietary medicines made in this country are said to have been on sale here early in the eighteenth century, and proprietary medicines were imported from Europe even earlier. The pioneer manufacturers were forced to make a choice in the methods they used in creating demand for their products. One choice was to offer them to laymen for treatment of selfdiagnosed ailments. In this case, the medicine-makers made

24

M A R K E T I N G DRUG PRODUCTS

a practice of describing symptoms of disease to prospective purchasers in the confident belief that laymen would think that they exhibited one or more of these symptoms. Such methods of promoting the sales of proprietary medicines are necessarily antagonizing to the physician. Whether or not the proprietary medicine has merit, the physician is opposed to offering it to laymen for the treatment of their self-diagnosed ailments. The physician's opposition is both economic and professional. H e knows that widespread selfdiagnosis of ailments by laymen reduces the frequency with which they consult him for professional advice. He fears, in addition, that this failure to seek his professional advice will result in serious and even fatal delays in the treatment of preventable illness. For these reasons, physicians are extremely unlikely to recommend the use of such a proprietary medicine by their patients, however meritorious the medicine may be. This conflict of interest has led to the development in this country of a large number of manufacturers of proprietary medicines whose marketing plans are directed exclusively to physicians and other professional groups. This development began about the middle of the nineteenth century. Products of these manufacturers are known as "ethical specialties" because physicians consider this the "ethical" way in which to market them. Sales depend entirely upon physicians' prescriptions and recommendations. Products of these manufacturers are not intended to be offered for general sale to laymen. As with the individually prepared prescription, the small p a r t of the price of the finished product represented by the physical ingredients of a proprietary medicine has been reviewed repeatedly from within and without the drug trade. In 1824< the Philadelphia College of Pharmacy published a pamphlet containing the formulas of eight proprietary medicines. Ostensibly, the pamphlet was published to inform physicians that the preparations named were not the unique and

RESALE PRICE CONTROL

2$

all-powerful panaceas their makers declared them to be. Instead, they were asserted to be nothing more than the usual combinations of well-known medicinal substances of the day. Without being unduly cynical, it is likewise a reasonable conclusion that the publication of these formulas led to the manufacture and sale by retail druggists and others of products intended to be identical but marketed as "something cheaper and just as good." The New York College of Pharmacy, now affiliated with Columbia University, issued a similar publication in 1829. This was about the same time as the beginning of an unusual and outstanding example of self-government by a professional and trade group in the United States. The start was the issuance in 1820 of a publication called the United States Pharmacopoeia. This book was sponsored by representatives from the medical profession and was intended to set the standards of strength, quality, and purity of the medicinal substances in general and most widely accepted use. When the 1820 edition of the U. S. Pharmacopoeia appeared exclusively under the sponsorship of physicians, pharmacists pointed out numerous errors in the book. As a result they were consulted in the preparation of the next edition in 1830. Later revisions were made by representatives of the pharmaceutical profession and the d r u g trade as well as by physicians. Now pharmacists and druggists are in the majority on the revision committee. This is logical and proper. The National Formulary sets the standards of strength, quality, and purity of medicinal substances not used widely enough for inclusion in the United States Pharmacopoeia. The first edition was published in 1888 by the American Pharmaceutical Association, a membership corporation composed of persons in the pharmaceutical profession and the drug trade. The standards in the current editions of the United States Pharmacopoeia and National Formulary have the force of law in the United States and in some Latin American and

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other countries in matters concerning the strength, quality, and purity of the medicinal substances listed in them. For this reason, these substances are usually called "official" preparations. Since 1938 the Homeopathic Pharmacopoeia has had equivalent standing in the United States for the preparations listed in it. From the very beginning of the United States Pharmacopoeia in 1820 the price competition characteristic of the drug trade has been in evidence between the "official" preparations and the proprietary medicines. A considerable p a r t of this price competition has resulted from a misunderstanding of the evolutionary nature of medical and pharmaceutical progress. The "official" preparation of any period was often the original discovery, the proprietary preparation, of an earlier period. The first appearance of some now "official" preparations was in Roman, Greek, and even Egyptian times. Despite these facts, it has been a common practice for some medical and pharmaceutical practitioners to advocate the use of the "official" preparations in preference to the proprietary articles. In effect, they urge the selection of the "widely used" to the exclusion of the "newly discovered." Any great acceptance of such a procedure would mean a delay if not a complete stoppage in medical and pharmaceutical progress. The contention usually advanced is that the "official" preparations are cheaper but this is scant comfort to the pneumonia patient who fails to recover from treatment with an "official" preparation. There is no doubt that he would have preferred to be treated with a newer but "non-official" proprietary medicine which would have cured him. Promotion of the use of "official" preparations on a money-saving basis is foredoomed to failure. Most medical and pharmaceutical practitioners recognize that recovery with a $3 proprietary medicine is infinitely to be preferred to lingering illness and death with a $1 "official" preparation. Some manufacturers of proprietary preparations have

RESALE PRICE CONTROL

27

been subjected to justifiable criticism for the prices at which their products are offered. An unreasonably high price prevents the use of such products in all b u t the most u r g e n t cases. F o r t u n a t e l y , it is becoming increasingly a p p a r e n t t h a t the manufacturer who charges more than is warranted for a unique product he has created is only making trouble for himself. H e is encouraging the development of preparations which have the same uses as his original discovery. On the other hand, the determination of a reasonable price for a newly discovered p r o p r i e t a r y medicine does not depend entirely on the physical value of the ingredients in the p r e p a ration. If the producer is able to recover in his price only this physical value, he has no reserve funds with which to search for improvements and still newer discoveries. Moreover, he has no money with which to p a y for the inevitable and costly failures which are an unavoidable p a r t of any successful research. T h e prospect of great rewards is the spur which leads to the risk of large amounts of money in the search for still unsolved medical enigmas. I t is absurd to advocate any plan which would encourage the use only of the tried and proved medicines. T h e success of such a plan would d r y u p private research and leave such discoveries as might be made to employees in state-controlled laboratories. T h e United States and Canada can count themselves f o r t u n a t e t h a t governmental bureaucracy has not laid its clammy hand on pharmaceutical and medical progress; there is trouble enough here with the anti-vivisectionists, the faith healers, and other cultists. T h e development of "official" preparations from proprietaries has caused difficulty in distinguishing between the two in professional and trade circles. Aspirin tablets are considered in the d r u g trade to be p r o p r i e t a r y medicines. H u n d r e d s of trade-marked brands of aspirin are on sale. Yet an aspirin tablet is an article for which the standards of strength, quality, and p u r i t y are listed in the United States P h a r m a copoeia. T h u s it also has the standing of an "official" p r e p a -

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MARKETING DRUG PRODUCTS

ration. T h i s is a condition which leads to exceedingly active price competition. T h e maker of one trade-marked brand of aspirin tablets contends t h a t his product is the same as all the others because the standards are officially established. This contention is only partially true. T h e "official" standards of strength, quality, and p u r i t y are minimums. I n addition, the subjective values are j u s t about impossible to measure. T h e physical characteristics of a lunch-wagon hamburger may be indistinguishable from those of a chopped steak at a luxury hotel. Nonetheless, a ten-year old child knows which is which and does not hold himself back in expressing his convictions. T h e end of the Civil W a r in 1865 in the United States brought about widespread and fundamental changes in professional methods and trade practices. T h e population of the United States grew from 31 million in 1860 to almost 40 million in 1870 and then gained another 25 per cent in 1880 to reach over 50 million. T h e severe economic depression in the early 1870's caused many other profound changes. New forms of wholesale and retail distribution appeared. T h e first of the five-and-ten-cent stores were started in t h a t decade. D e p a r t m e n t stores began about the same time. Both based their appeals for trade on the representation of giving more goods for less money. Mail-order selling t h r o u g h catalogs and by advertisements in magazines and other periodicals also started in the 1880's. Here, too, opportunities to "save money" were emphasized. All of these new types of retail distributors saw t h a t the manufacturer's trade-mark represented a standard of quality t h a t customers quickly recognized. T h u s the offer at less than the customary price of a medicinal article bearing a well-known m a n u f a c t u r e r ' s trade-mark represented an appeal to consumers t h a t was j u s t about irresistible. T h e price competition of those days was largely in medicinal articles. Cosmetics did not s t a r t to attain their present popularity until a f t e r the first World W a r . Anyone beyond middle age

RESALE PRICE CONTROL

29

can recall that the phrase "painted woman" connoted "prostitute." The reaction of the drug trade and the pharmaceutical profession to this new form of price competition was quick and fierce. Some retail druggists decided to reduce their own prices. This started in the early 1880's. They became known as "cut-rate" druggists because they were selling their goods for less than the customary margin or "rate." Other retail druggists tried to maintain their profits by reducing purchase costs. If this price competition cut down their sales they hoped to keep up their profits by the co-operative purchase of merchandise directly from manufacturers instead of buying from wholesale druggists. The resulting businesses are now known as retailer-owned or "mutual" wholesale drug houses. The appearance of all this price competition also resulted in a great number of attempts to control it by voluntary agreements and by legal restrictions. The most ambitious of these voluntary agreements ended with a consent decree in the U. S. District Court in Indianapolis in 1907. Under the terms of this court decree, the National Association of Retail Druggists, the National Wholesale Druggists' Association, and various manufacturers, wholesalers, and retailers agreed to refrain forever from joining in any price-fixing activities. Violation of this consent decree could place them in contempt of court and subject to fine and imprisonment. The practices that led to the consent decree were held to be violations of the Sherman Anti-trust Act, a law that had been enacted by the U. S. Congress in 1890. The Sherman Act prohibits contracts, combinations, and conspiracies in restraint of interstate and foreign trade. In the litigation which ended with the Indianapolis decree, it was charged that if a wholesaler or a retailer was discovered to be selling a packaged article at less than the established margin, he found that not only could he obtain no further supplies of that article but also that he would be unable to buy many

30

MARKETING DRUG PRODUCTS

hundreds of other articles necessary to the successful conduct of his business. A f t e r this joint effort to control resale prices had been barred by the Indianapolis decree in 1907, individual manufacturers tried to force the resale of their products a t no less than the full margin. I n 1911 these methods received a crushing setback from the U . S. Supreme Court's decision in the D r . Miles Medical Company case. I n a five-to-four decision the court held t h a t resale price agreements between an individual m a n u f a c t u r e r and the wholesale and retail distributors of his product were violations of the Sheridan Anti-trust Act. Beginning in 1913, various proposals were introduced in the U . S. Congress to amend the Sherman Act so as to authorize voluntary agreements between a m a n u f a c t u r e r of trade-marked merchandise and his wholesale and retail distributors to specify the prices at which this merchandise could be resold. I n these proposed bills special provisions were made for the disposal of damaged goods and of goods in which style or seasonable elements were a factor. T h e r e was also a provision in these bills excepting from resale price agreements merchandise in the stocks of b a n k r u p t and liquidating wholesalers and retailers. T h e r e were eighteen years of continuous but unsuccessful effort to amend the Sherman Anti-trust Act to allow resale price agreements. T h e C a p p e r Kelly bill containing these provisions actually did pass the U . S. House of Representatives in 1931, but in such emasculated form t h a t , even if the Senate had approved it, the results accomplished would have been only a small p a r t of the aim of its supporters. Resale price agreements have since become a reality in the United States, but by an entirely different method. While this eighteen-year effort proceeded in Congress, various individual manufacturers were developing other plans for the control of the resale prices of their trademarked products. T h e General Electric Company's consign-

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31

ment selling plan for electric light bulbs was considered by the U. S. Supreme Court in 1926. Assortments of electric light bulbs were distributed directly to the retailers who resold them to consumers, but the ownership of the merchandise remained with the manufacturer until it was sold by the retailer. Since the merchandise remained the property of the manufacturer, the U. S. Supreme Court upheld the right of the General Electric Company to specify the price at which the merchandise was to be sold to consumers and declared it not to be a violation of the Sherman Anti-trust Law. The legal approval, in 1926, of consignment selling as a means of resale price control led to its increased use in the wholesale drug trade. This control of prices by wholesalers is called del credere selling. The manufacturer enters into a written contract with a wholesale druggist of his selection to act as his sales agent for products of his manufacture. The manufacturer agrees to furnish and maintain a stock of his products at the place of business of his sales agent, the wholesale druggist. This stock remains the property of the manufacturer until it is sold by the sales agent. The practical effect of this provision in the contract is to require the sales agent to make regular reports to the manufacturer of sales and of stocks of his products on hand. The contract between the manufacturer and the wholesaler who acts as his sales agent specifies the terms of sales by the wholesaler, and names the retailers and other persons to whom the wholesaler is to limit his sales. Less than a dozen manufacturers in the drug trade have used this method of resale price control, but they have included some of the largest and best known. It has been feared that if any large number of manufacturers in the drug trade were to adopt del credere selling, the result would be exceedingly cumbersome and costly to the wholesale druggists. Consignment selling was not unknown to the drug trade when this sales agency or del credere plan came into prominence in the middle 1920's. Goods with unproved sales pos-

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sibilities and those with exceedingly limited demand are often bought from manufacturers by wholesale druggists on a pay-on-sale basis. Frequently the terms of sale are modified to a basis of payment on reorder. Consignment selling of this kind has enabled manufacturers in the drug trade to have their merchandise stocked by wholesale druggists who otherwise would not have assumed the risks of taking it in, and has also been used in the retail drug trade by manufacturers anxious to obtain retail distribution for their products. In both wholesale and retail sales on consignment the manufacturer is likely to tie up large amounts of his money because retailers and wholesalers are characteristically slow in reporting to manufacturers their sales of consigned goods. Exclusive agency agreements have come into use as a means of resale price control in the wholesale and retail trade. If an exclusive agency agreement has value to the wholesaler and retailer, they are both likely to be willing to follow the manufacturer's suggestions about resale prices. Exclusive agency agreements have proved to be most effective for goods on which it is desirable and practical to limit the number of wholesalers and retailers stocking the item. They are ineffective for goods in demand in all types of outlet. Customer selection has also had extensive trial in the drug trade as a means of resale price control. The right of a manufacturer to refuse to sell a wholesaler or a retailer for any reason, or for no reason, was approved by the U. S. Supreme Court in 1919 in a case involving Colgate and Company. In its efforts to force the sale of its products by wholesalers and retailers at what were called "suggested resale prices," Colgate and Company had been refusing to sell its products to wholesalers and retailers who failed to observe these "suggested resale prices." In this refusal Colgate and Company was upheld, but the Supreme Court warned there must be no collusion between the company and anyone else in obtaining information about the observance of the "suggested resale prires" by whole-

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33

salers and retailers. Colgate and Company was expressly forbidden to receive information from any but its own employees about the prices at which its goods were sold by wholesalers and retailers. Colgate and Company was also forbidden to act in collusion with other manufacturers in refusing to sell to a wholesaler or a retailer. In the exercise of this right of refusal to sell, Colgate and Company was allowed to do no more than warn wholesalers and retailers that if they did not sell its products at "suggested resale prices," Colgate and Company would not sell them any more of its products. The U. S. Supreme Court repeated these cautions in a decision in 1922 involving Beechnut Packing Company. Contracts and advance agreements about resale prices were held to be illegal. This viewpoint was again affirmed by the Court in 1935 when the Armand Company was forbidden to obtain any advance promises, agreements, or understandings about the prices at which its products were to be resold. Moreover, the company was forbidden to obtain any such advance promises, agreements, or understandings from wholesalers that its products would not be sold to retailers who failed to observe "suggested resale prices." The legal control of resale prices was given an entirely different direction by a law called the Fair T r a d e Act which was passed by the state legislature in California in 1931. This law permits resale price agreements between the owner of trade-marked merchandise and his wholesale and retail distributors. Since it is a state law, these resale price agreements apply only to sales within the state. The California Fair T r a d e Act did not become a powerful force in controlling resale prices in that state until it was amended in 1933 to require every wholesaler and retailer of an article on which a resale price agreement existed to observe these resale prices even if the wholesaler or retailer had not himself signed such a resale price agreement. The enactment by the U. S. Congress of the National Industrial Recovery Act in 1933 temporarily obscured the full

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force and significance of the California Fair Trade Act. The Recovery Act provided for the establishment of "trade practice codes" for virtually every trade and industry on a nation-wide basis. These codes contained provisions for minimum resale prices. The code for the retail drug trade established the minimum resale price for retailers' sales as the wholesale list price. In general the wholesale list price was about one-third less than the price established for sales to consumers. This wholesale list price was ordinarily subject to discounts, not only on purchases by wholesalers, but also on purchases in quantity by retailers. The effect of this minimum resale price provision in the retail drug trade code was thus to prevent sales to consumers by any retailer at prices below the purchase cost paid by the smallest retail store. The U. S. Supreme Court invalidated the National Industrial Recovery Act in 1935, thus abruptly ending the "trade practice codes." Connecticut still has a law which requires in that state the maintenance of minimum retail prices for drug and cosmetic products on the same basis as was in effect in the retail drug trade code. Louisiana has a similar law, but the State Board of Pharmacy has the authority to determine a minimum mark-up and to force the addition of this minimum mark-up to these base prices. This authority has never been used. In 1935 the legislatures of eight additional states enacted laws similar to the California Fair Trade Act. In 1936 the U. S. Supreme Court upheld the California Fair T r a d e Act, including the provision requiring a wholesaler or a retailer to observe the prices specified in resale price agreements even though he did not sign such an agreement. This is called the "non-signers' clause" of the Fair Trade Act. The passage by the U. S. Congress in 1937 of the only amendment so far enacted to the Sherman Anti-trust Act of 1890 made possible the use of resale price agreements on virtually a nation-wide basis. This amendment is called the Tydings-Miller Act. I t allows the owner of trade-marked

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35

articles, wherever he may be located, to issue resale price agreements in any state with a Fair Trade Act. Previously the use of a resale price agreement under a state Fair Trade Act was limited to those instances in which the owner of the trade-marked article and the wholesalers and retailers were all located in the same state. Manufacturers selling trademarked articles on a nation-wide basis thus were put in the position of establishing a branch office or appointing an agent in each state with a Fair T r a d e Act to be able to have resale price agreements with all their wholesale and retail distributors. The number of states with Fair Trade Acts increased rapidly following the passage of the Tydings-Miller Act in 1937. In the following four years, the total was raised to 45 states. Hawaii also has such a law, enacted by its territorial legislature. The three states which do not now have laws permitting resale price agreements are Missouri, Texas, and Vermont. Resale price agreements are also illegal within the District of Columbia. An act of Congress is required to make them effective there. State Fair Trade Acts permit but do not require a producer of trade-marked merchandise to make resale price agreements with wholesalers, retailers, and other resellers. Prices named in resale price agreements may be minimum, maximum, or both. Most commonly they are minimum prices. Different prices for different classes of resellers may be named in a resale price agreement. Wholesalers, retailers, and other resellers who have not themselves signed resale price agreements must maintain the prices specified in these agreements if notice of these resale prices has been sent to them. The single exception is the Rhode Island Fair Trade Act. I t simply provides that persons damaged by a reseller's knowingly and willfully failing to observe prices provided in a resale price agreement may sue the reseller for damages. In all state Fair Trade Acts, knowingly and willfully advertising or selling an article on which a resale price agreement

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exists at a price not permitted by the agreement is declared to be unfair competition, and may be stopped by court injunction. Violation of an injunction is contempt of court and makes the offender liable to fine and imprisonment. Persons affected by violations of resale price agreements also may sue offenders for damages. A person cannot be held to be a violator of a resale price agreement if he can prove that the agreement is not being generally observed or that the person issuing the agreement has failed to take action against violators. Also, a resale price agreement cannot be enforced which requires resellers to observe prices which are different from those observed by the trade-mark owner himself. I t is unfair competition for the trade-mark owner to undersell the wholesalers and retailers of his products when the quantities and conditions of sale are the same. Resale price agreements are prohibited between groups of manufacturers, groups of wholesalers, or groups of retailers. A resale price agreement to be legal and enforceable must be a contract between an individual producer, manufacturer, or owner of a trade-marked article and the resellers of that article. Collusion with competitors is prohibited. The state Fair Trade Acts generally allow the prices specified in resale price agreements to be disregarded in the case of genuine clearance and close-out sales. In some states the law requires the producer to be given advance notice of clearance and close-out sales of his products and an opportunity to buy them back at the original purchase price. In all states with Fair Trade Acts there is likewise a general exception from resale price agreements for sales under court order and for sales of damaged goods when clearly so specified. Second-hand goods are also excluded. The Virginia law prohibits resale price agreements on wearing apparel and staple foods. The Wisconsin Department of Agriculture and Markets has the power to set aside the prices in any resale price agreement which it decides after

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a public hearing are " u n f a i r and unreasonable." T h e use by wholesalers and retailers of gifts, premiums, combination sales coupons, and t r a d i n g stamps has been successfully prohibited as a means of evading resale price agreements. This restriction has been held to apply even to the prices charged by a wholesaler or a retailer on accommodation sales to his own employees of an article subject to a resale price agreement. Other possible evasions of minimum resale prices are forbidden by the requirement t h a t any Federal, state, or local sales or excise t a x levied on resales of an article on which a resale price agreement exists are additions to the prices provided in the agreement. When a resale price agreement is issued specifying minimum prices, the result usually is a reduction in prevailing selling prices of most wholesalers and retailers, and increases in the prices of the comparatively small number of resellers who have taken the lead in price competition. T h e net social gain from the introduction of resale price agreements therefore depends on the extent to which the price reductions of most resellers offset in the a g g r e g a t e the price increases of the resellers whose prices are raised. This net social gain from the operation of resale price agreements can continue only as long as the minimum prices established by resale price agreements merely prevent sales a t a loss to resellers and do not operate to guarantee profits to them. T h e maintenance of this ideal is not easy. Resale prices t h a t are considered too low by wholesalers and retailers invite continuous and bitter complaints. Resale prices t h a t are too high bring the same kind of criticism from individual customers and organized consumer groups. Much of the present opposition to resale price agreements comes from persons who oppose these agreements as buyers, but vigorously s u p p o r t them when they become sellers. Newspaper publishers have been for the most p a r t loud and persistent critics of resale price agreements. This is understandable. T h e retailers who use price reductions as a t r a d e stimulant

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are usually liberal users of newspaper advertising space. Yet if a retail druggist resells these newspapers in his store for less than the resell price established by the publisher he immediately finds himself cut off from further supplies of these newspapers and, in addition, is probably also denounced publicly for engaging in "trickery" and "cheap publicity." Similar inconsistencies in attitude are to be found in the Federal government. Government officials have officially expressed opposition to resale price agreements. When the expressions of these pubilc servants on this and other subjects are published by the U. S. Government Printing Office, bookstores and other resellers are required by the government to resell such publications at the prices specified by the Government Printing Office. Legal control of resale prices has also been sought in recent years in the United States by a prohibition of sales below cost. Thirty states have such laws generally applicable to wholesale and retail sales. They are variously designated as Unfair Practices Acts and Unfair Sales Acts. They may be referred to also as Anti-loss-leader laws because an article sold for less than purchase cost to attract trade is called a loss-leader. In addition, Michigan has such a law limited to bakery products and petroleum products, and Ohio has one covering only cigarettes. These state laws were all passed in the decade immediately preceding World W a r I I . There is no Federal law prohibiting sales below cost. The justification for such enactments is that, under ordinary circumstances, a sale below cost is necessarily deceptive. No wholesaler or retailer can continue indefinitely in business if he sells below cost. If he regularly sells some items for less than cost, the selling prices of the other articles in his establishment must be high enough not only to cover costs on them but also to pay the losses on the articles sold below cost. Items of known quality are chosen for sale below cost as loss-leaders. The customer usually has no way of knowing the extent to which unknown and non-

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standard articles are overpriced. This is held to be a competitive practice which is unfair to the wholesaler or the retailer who prices each article on sale in his establishment in accordance with its individual cost. The restrictions in these state laws against sales below cost do not apply to perishable and seasonal goods. As is the case with the state Fair Trade Acts, there is an exception for genuine clearance and final liquidation sales and for sales under court order. Imperfect and damaged merchandise is also excepted. There is, in addition, a special exception for sales of goods at prices equal to the legal prices of a competitor for comparable articles. Casual and isolated sales not in the regular course of trade are also excluded in most of these state laws. Unlike the state Fair Trade Acts, these Unfair Practices and Unfair Sales Acts usually include criminal penalties in addition to the right of competitors and others affected to sue for damages and obtain injunctions against further violations. In the enforcement of these laws great difficulty has been experienced in proving a violation. Cost is generally defined by law as purchase cost plus the cost of doing business. Sometimes the original cost of purchase or the replacement cost is designated, depending on which is lower. Minimum percentages figures for cost of doing business for wholesalers and retailers are stated in some laws. Sales below purchase cost plus this percentage cost of doing business named in the law are presumed to be "sales below cost" unless the alleged violator can prove he has a lower cost of doing business. In other states the authorities are empowered to determine the cost of doing business for individual wholesale and retail trades and to use the figures thus established in prosecuting violators. Even the definition of purchase cost presents practical difficulties. Some laws have been amended so as to exclude for the purpose of determining purchase or replacement cost,

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purchases at prices which cannot be justified by current market conditions, and purchases outside the usual course of trade. In other cases, purchase cost has been defined as no less than the price for quantities ordinarily bought only by the smallest dealers. Even greater difficulties have been met in establishing the percentages based on the cost of doing business. Some of these laws now contain a requirement that a retailer not making use of the services of a wholesaler in his purchases must nonetheless include the wholesaler's cost of doing business as p a r t of his "cost." Other amendments have sought to require retailers in calculating their cost of doing business in impute rent for space also occupied by the store owner's family as living quarters. H e has also been told to include in his cost of doing business the value of his own services and that of members of his family who work in the store, and to make these values the established rates for hired help in the same line of business. No one can quarrel with an effort to prohibit by law the deceptive use of loss-leaders. Efforts to use these laws to guarantee profits for wholesalers and retailers are sure to have far-reaching and undesired effects. Retailers will avoid such high-priced wholesalers by doing their own wholesaling through co-operative group buying. If retail prices get too high, consumers will be encouraged to form consumer cooperative stores to do their retailing. The Emergency Price Control Law enacted in the United States in 1941 was unlike these other legal controls on prices in that it was intended to establish maximum rather than minimum prices. The drug trade has been concerned almost entirely with minimum prices. This was well demonstrated during the five-year life allotted to the Emergency Price Control Act and its administrative and enforcement agency, the Office of Price Administration. In all of its activities the least harried section of this government agency was the group assigned to watch over maximum prices in the d r u g trade. At

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41

one time during World War I I some earnest planners in the Office of Price Administration sought a reduction in the prices for multi-vitamin preparations to figures far below those that were in effect in the base period to which other trades and industries were held. They were opposed by the trade and defeated in the courts, and nothing ever came of their efforts. Instead, voluntary reductions by manufacturers, wholesalers, and retailers later brought selling levels down to figures less than those the government had tried to force on the drug trade.

CHAPTER

IV

R E G U L A T I O N OF T R A D E PRACTICES

Competition in discounts and allowances to wholesalers and retailers has been another result of the great difference in the cost of the ingredients of a medicinal product and the value of the finished article. Manufacturers have tried to obtain favorable consideration for their products from wholesalers and retailers by offering them on more favorable terms than those of manufacturers of competing products. These favorable terms have not been necessarily the same for all the customers of a manufacturer. Some wholesalers have been found to be paying higher prices than were paid for the identical merchandise by competing wholesalers. There have been similar happenings in the retail trade. Whenever discovered, these discriminations are the subject of bitter complaints. I t is recognized that a manufacturer may be able to obtain and fill orders for a large quantity of his product at a lower cost per unit than orders for a small quantity. I t is also recognized that some wholesalers and retailers may be able to supply a manufacturer with special help in selling which other wholesalers and retailers are unable or unwilling to supply. The complaint has not been directed against these practices, but against secret discounts for- quantity purchases which competing wholesalers and retailers would be glad to take advantage of if they knew about them. Likewise, the complaint is directed against making allowances and other payments available to some wholesalers and retailers and not to equally qualified competitors.

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OF T R A D E P R A C T I C E S

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In 1914 the U. S. Congress enacted the Clayton Act and the Federal Trade Commission Act in an effort to control these practices. The Clayton Act prohibited discriminations in price unless they resulted from differences in "grade, quality, or quantity," or made only "due allowance" for differences in selling costs and shipping costs. There is also a safeguard for price differences made in good faith to meet competition. Penalties for violations of the Clayton Act include fine and imprisonment and the right by persons affected to sue for damages. The Clayton Act was also intended to prohibit specific forms of restraints of trade and monopolistic practices which experience since enactment of the Sherman Anti-trust Act in 1890 had shown could not be controlled by that law. The Clayton Act prohibits exclusive-dealing contracts such as those which require a purchaser of machinery and equipment to use in that machinery and equipment none but supplies bought from a designated supplier. It also prohibits exclusive-agency agreements in the purchase of goods for resale if the result is "to substantially lessen competition or tend to create a monopoly." Another provision prohibits the purchase of the capital stock of one corporation by another if the effect would be to "substantially lessen competition" between the two corporations or to "create a monopoly." An exception is made for such purchases if they are only an investment and if the ownership of this stock is not used to bring about " a substantial lessening of competition." The enactment of the Clayton Act on October 15, 1914, followed by less than three weeks the approval on September 26, 1914, of the Federal Trade Commission Act. This law prohibits "unfair methods of competition in commerce and unfair or deceptive acts in commerce." The law also created an enforcement agency called the Federal Trade Commission. Five commissioners are appointed by the President for seven-year terms in such order that their terms expire in five

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successive years. Not over three commissioners are to be of the same political party. The Federal Trade Commission issues complaints against persons it accuses of "unfair methods of competition and unfair and deceptive acts." These complaints may be the result of representations made to the Federal Trade Commission by persons who assert they have been wronged, or they may result from investigations undertaken by the Commission. The person complained against, who is called the respondent, has 30 days to make his answer to the complaint at a time and place named by the Commission. An official of the Federal T r a d e Commission who is called an "examiner" usually presides at the hearing but a Commissioner himself may preside. The Federal Trade Commission is also represented at the hearing by attorneys in its employ on a fulltime basis. These attorneys try to convince the examiner that the Federal Trade Commission should issue an order that the respondent shall "cease and desist" from the violations charged. If the attorneys for the respondent succeed in convincing the examiner of the merit of his defense, the examiner may recommend to the Commission that its complaint should be dismissed. In dealing with these complaints of unfair competition it will be seen that the Commission acts as both prosecutor and judge. The McCarran-Summers Act which was approved J u n e 11, 1946, is intended to prevent the Commission or other federal administrative agencies from abusing this dual role as prosecutor and judge. This law requires them to make public their rules of procedure and practice, and gives to any citizen the right to petition for changes in these rules. Appeals to set aside or modify cease-and-desist orders of the Federal Trade Commission may be made to the U. S. Circuit Court of Appeals. Under amendments known as the Wheeler-Lea Act, made in 1938 to the Federal T r a d e Commission Act, this appeal must be made within 60 days. If no

REGULATION OF TRADE PRACTICES

45

appeal is made by the respondent within this time, the ceaseand-desist order becomes "final." The Circuit Court of Appeals has the power to approve, modify, or set aside a Federal Trade Commission cease-and-desist order. Additional evidence may be submitted to the Court by either the respondent or the Commission if it is shown that there were good reasons why this evidence was not presented at the Commission's hearing. The U. S. Supreme Court also has the power to modify or set aside Federal Trade Commission orders, but the conditions under which appeals may be made to this Court are severely restricted and rarely used. The Federal Trade Commission itself has the power on its own initiative to reopen, alter, modify, and set aside partly or entirely any of its cease-and-desist orders. If such steps are taken after a cease-and-desist order becomes "final," the respondent has the same rights of hearing and appeal as in an original complaint. In the 60-day period before a ceaseand-desist order becomes "final," the Commission may modify it and set it aside partly or entirely unless an appeal has been made by the respondent to the U. S. Circuit Court of Appeals and the record of the Commission hearing has been filed with the Court. The complete settlement of Federal Trade Commission cease-and-desist orders takes a long time. Some complaints have been before the Commission and the Courts for ten years or more. Failure to observe cease-anddesist orders of the Federal Trade Commission constitutes contempt of court, and thus exposes the offender to fine and imprisonment. These penalties are also provided for refusal to testify at hearings or to produce records requested, for false reports, and for failure to supply reports required by the Commission. The Federal Trade Commission settles some cases of unfair competition and deceptive practices without the issuance of complaints. Instead it obtains a written agreement under which the respondent admits he has engaged in the practices complained of and "stipulates" that he will stop them. Ac-

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cordingly, these agreements are called "stipulations." The Federal Trade Commission also has the power to undertake investigations of trade practices and to require reports to it from corporations on their activities. It also may investigate compliance with the Sherman Anti-trust Act and other laws prohibiting monopolies and restraint of trade. The Federal Trade Commission, in addition, sponsors trade practice conferences for the purpose of defining for a particular trade or industry the "unfair methods of competition" and the "unfair and deceptive acts or practices" which are unlawful. Advice and suggestions are invited from members of the trade or industry but they are not necessarily accepted or even considered. Such advice and suggestions may be offered personally at the conference itself or by letter to the Commission. The resulting rules are intended to discourage unfair practices by a description of these practices in terms fitted to a particular trade or industry. The first of these rules was issued in 1919. Now there are rules of trade practice in force for over two hundred industries. The rules are of two types. Violations of rules in Group I are considered by the Commission to be offenses against the Federal Trade Commission Act and other regulatory laws which it administers. Rules in Group II are concerned with practices which are considered desirable, but failure to observe them is not necessarily regarded as a violation of the law. Moreover coercion by the members of a trade or industry to force compliance with Group II trade practice rules may itself be against the law. As an example of a regulation affecting the drug trade, rules of the Razor and Razor Blade Industry put in force by the Federal Trade Commission June 19, 1945, say, "It is an unfair trade practice for any person, partnership, corporation, or other concern, by trade or corporate name, or otherwise, to hold himself or itself out as being a manufacturer or producer of razors, razor blades, or allied products when

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47

such is not true in fact." This is a Group I rule. A Group I I rule says, "Lawful contracts are business obligations which should be performed in letter and in spirit. The repudiation of contracts by sellers in a rising market or by buyers in a declining market is condemned by the Industry." Other branches of the drug trade and related businesses for which Trade Practice Rules have been issued include the beauty- and barber-shop suppliers ; manufacturers of insecticides, disinfectants, and medical gas ; and makers of sanitary napkins. Trade practice rules for the wholesale drug trade have been in force since December 13, 1934. The provisions of the Clayton Act of 1914 regulating price discrimination were extensively overhauled by Congress in 1936. The resulting amendments are known as the Robinson—Patman Act. They followed extensive investigations by the Federal Trade Commission and by a special Congressional committee. The Federal Trade Commission acting in response to a U. S. Senate Resolution in 1928, made an investigation of chain stores. The last of the reports of this investigation was published in 1935. Among the facts revealed was that of 670 manufacturers in the drug trade who were studied, 256 manufacturers, or less than 40 per cent, gave special discounts and allowances to their wholesale and retail distributors in the period covered, 1929 and 1930. Manufacturers were not asked to report the usual discounts and allowances that appear on a manufacturer's invoice. They were asked only to report on such special discounts and allowances as increases in the volume of a customer's purchases would secure for him. Sometimes these quantity discounts and allowances were fixed in relation to a sales quota assigned in advance, or to sales by the customer in some previous period. Other allowances on which the Commission sought information were those offered for special services performed for the manufacturer by his customers. The manufacturer might give allowances to retailers who mentioned his products in advertise-

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ments and included them in displays in windows and stores. T h e allowances received by various retailers showed no relationship whatever between the amount of their purchases and the amount of allowances received. This revelation was a source of embarrassment and chagrin both to manufacturers and to competing wholesalers and retailers receiving these allowances. L i g g e t t and Owl, which then were chain d r u g store companies under the same ownership but separately managed, received allowances averaging, respectively, 13.69 per cent and 10.57 per cent. Walgreen drugstores, at t h a t time second only to L i g g e t t drugstores in the number of stores being operated and the volume of sales, had special discounts and allowances averaging 10.06 per cent. Bartell D r u g Company, with all its stores in Seattle, Washington, and with its total purchases less than one-twentieth of those of either L i g g e t t or Walgreen and no more t h a n one-sixth those of Owl, had special discounts and allowances averaging 11.57 per cent of its purchases from the manufacturers. F o r all drugstore companies these special discounts and allowances averaged 10.05 per cent. About 40 per cent of these discounts were determined by the quantity bought, and 60 per cent were given for special services. This average of 10.05 per cent was much larger than the average of only 4.45 per cent received by wholesale druggists in special discounts and allowances and t h a t of 7.35 per cent received by d e p a r t ment stores. F o r purchases of tobacco products by drugstore companies, the average of special discount was 7.82 per cent, and more than 95 per cent of this was for special services. A special committee of the House of Representatives carried on a similar investigation in 1935 and 1936. This special committee was formed to investigate the American Retail Federation, a trade association inaugurated in 1935, b u t the committee soon turned its attention to the buying practices of chain stores. T h e committee published lists of the special allowances received by the L i g g e t t stores, the Walgreen stores, and other retailers in 1935. These provided infor-

REGULATION OF TRADE PRACTICES

49

mation on both the character and the amount of the special discounts received from manufacturers. In some cases the amount paid was a definite sum but in most instances it was proportional to the purchases made of the manufacturer's product. Special services for which drugstore companies and other retailers were found to have been compensated included: 1. Listing or featuring the manufacturer's product in newspaper advertisements of the store. Displaying signs in store windows advertising the manufacturer's product. 3. Using the manufacturer's special display cabinet in the store. Displaying the manufacturer's product at the wrapping counter in the store. 5. Selling drives by store salespeople for the product. 6. Window and store displays featuring the product. 7. Displays and signs behind soda fountains. 8. Demonstrators and sales bulletins supplied to the store by the manufacturer to promote his product and train store salespeople. 9. Announcements about the product in store radio broadcasts. 10. Commissions paid to salespeople on sales of the manufacturer's product. After the Federal Trade Commission and a special committee of the House of Representatives published the amount and character of special discounts and allowances which manufacturers had been giving to retailers and wholesalers, Congress enacted the Robinson—Patman Act in 1936. This Act is an amendment to the Clayton Act of 1914 for the specific purpose of outlawing unfair discriminations. Quantity discounts are not prohibited. However, if a seller grants a lower price to one purchaser than to another by reason of the larger quantity bought by one of them, and if both purchasers are competitors, the seller must be able to prove

50

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that the difference in price was not greater than the savings that seller made because of the greater quantity bought by the favored purchaser. The seller is not required to pass on to purchasers any of the savings that he makes in filling quantity orders, but if he does pass on any of this saving in the form of a quantity discount, the discount must not be greater than the amount he can prove he saved in filling the order. If a purchaser knowingly receives a quantity discount greater than the saving resulting from filling a large order, the purchaser is equally guilty with the seller. In addition, the Federal Trade Commission is authorized to establish quantity discount limits when it can be demonstrated that maximum discounts offered can be taken advantage of by so few purchasers as to create the possibility of monopoly. No use has yet been made of this provision. The regulations governing quantity discounts in the Robinson—Patman Act also require a seller who gives a discount to a purchaser to make the same discount available to his other customers who are in competition with the first purchaser. These other customers, to obtain the quantity discount, must buy in the same quantities as the first purchaser. In the period of more than ten years that the Robinson—Patman Act has been in effect, considerable uncertainty and misunderstanding has developed about the meaning of the phrase to "make available" a quantity discount. Suggestions have been made and legislation has been proposed to require manufacturers offering quantity discounts to publish them in such a manner that they will be known to all customers and prospective customers. So far none of these proposals has become law. Unless the seller volunteers information about quantity discounts, legal requirements seem to be met by supplying such information only on request. In addition to regulating quantity discounts, the Robinson—Patman Act also contains provisions regulating other discounts and allowances. As in the case of quantity dis-

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51

counts, there is no compulsion for the seller to give these allowances to purchasers of his merchandise, but if the seller does give them, he must make them available on a "proportionately equal" basis to all customers in competition with one another. Three difficult problems arise in meeting these requirements. First arises the question of how a special discount and allowance may be considered to have been "made available" to the competitors of a customer who has received one. Second is the definition of "proportionately equal," and third is the decision as to what distributors are in competition with the customer of a seller. The intent of the special discount and allowance provision of the Robinson-Patman Act is to require the seller, who gives an advertising allowance of $50 to a purchaser of $1,000 worth of his products, to give to a competitor of that purchaser a 50-cent advertising allowance with the purchase of $10 of the seller's products. The most specific official interpretation of these three points that has been made up to the present time is to be found in the decision given J u n e 5,1946, by the Second U. S. Circuit Court of Appeals in New York. Elizabeth Arden, Inc., a cosmetic manufacturer, had appealed to this court from a cease-and-desist order of the Federal Trade Commission. The original complaint by the Commission was made May 15, 1937. I t issued a cease-anddesist order more than five years afterward, on J u n e 5,1942. Four years later to the day came the decision on the appeal by the U. S. Circuit Court of Appeals in which the ceaseand-desist order was upheld. The U. S. Supreme Court on April 14, 1947, refused to hear an appeal from this decision and thus upheld it. In this case it was shown that the manufacturer has furnished to some of its retail customers specially trained representatives called "demonstrators" to work as salespeople in the retailers' stores. A demonstrator in a store was assigned to a special section at which only Elizabeth Arden products were on sale. If a customer of the store asked a demonstrator

52

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for something other than Elizabeth Arden products, the demonstrator was supposed to direct the customer to the proper department. If the request was for a brand of cosmetics and toiletries other than Elizabeth Arden, it is conceivable than the demonstrator would try to persuade the customer to change her selection to Elizabeth Arden products. Demonstrators were supplied to only about 265 of the 3,000 retailers who were customers of Elizabeth Arden. These 265 retailers accounted for 40 per cent of the company's total sales, according to the record, and the demonstrators they received cost the company about $250,000 a year. The remaining 90 per cent of the company's customers, who bought 60 per cent of its entire output, received no demonstrator service. I t was charged that the terms on which demonstrators were made available to retailers were framed in such a manner that only this small proportion of its customers could qualify to obtain the services of demonstrators. I t has been contended that a seller is not compelled to grant an allowance unless the buyer, for that allowance, can and will render a service of an amount and character satisfactory to the seller. The effect of the Circuit Court of Appeals decision in the Elizabeth Arden case is to make it unlawful for a seller to impose such qualifications for allowances to his customers that they prevent most of his customers from obtaining them. I t was held that the 90 per cent of Elizabeth Arden customers who did not meet the company's qualifications to receive the services of demonstrators included retail stores of the same general type as those which had been given this service. The evidence collected by the Federal Trade Commission showed that stores with and without demonstrators were in competition with each other. Another section of the Robinson-Patman Act is intended to prohibit sellers from granting and buyers from receiving brokerage allowances. This section has its principal applications in the marketing of food products and in the operations

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53

of resident buying offices. An amendment enacted in 1938 excludes from the restrictions of the Robinson—Patman Act purchases for their own use by nonprofit institutions such as hospitals, schools, churches, and charitable institutions. In 1938 amendments known as the Wheeler-Lea Act were made to the Federal Trade Commission Act of 1914. At this time the provision was introduced which specifies that ceaseand-desist orders issued by the Federal Trade Commission become final if the persons against whom the orders have been issued fail to petition for a review by the U. S. Circuit Court of Appeals within 60 days after the orders have been issued. A penalty section was also added which permits a fine up to $5,000 for each violation of a cease-and-desist order after the order has become final. The 1938 amendments broadened the control by the Federal Trade Commission over unfair methods of competition by extending the Commission's jurisdiction to include "unfair or deceptive acts or practices." The original jurisdiction in 1914 applied to "unfair methods of competition." Thus until enactment of the 1938 amendments, the Commission had had to show that an unfair method against which complaint had been lodged had injured competitors. Under the previous law the manufacturer of "Raladam," a reducing preparation, was believed to be advertising deceptively and was prosecuted by the Federal Trade Commission for "unfair methods of competition." The U. S. Supreme Court decided in 1931 that for a practice to be an unfair method of competition it must be shown to have a tendency to affect injuriously the business of competitors. Under the 1938 amendments it is no longer necessary for the Federal Trade Commission in a prosecution to prove that unfair methods complained against have any effect upon competition. Under the 1938 amendments the publication of a false advertisement to induce the purchase of foods, drugs, cosmetics, and therapeutic devices was made unlawful. The Federal Trade Commission was authorized to stop the distribution of

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false advertisements in the same type of proceedings as are used in prosecutions of other types of unfair and deceptive practices under the Federal Trade Commission Act. The term "false advertisement" was defined as an advertisement which is "misleading in any material respect." The law says that in determining whether or not an advertisement is misleading "there shall be taken into account (among other things) not only the representations made or suggested by statement, word, design, device, sound or any combination thereof, but also the extent to which the advertisement fails to reveal facts material in the light of such representations or material with respect to consequences which may result from the use of the commodity to which the advertisement relates under the conditions prescribed in said advertisement, or under such conditions as are customary or usual. " N o advertisement of a drug shall be deemed to be false if it is disseminated only to members of the medical profession, contains no false representation of a material fact, and includes, or is accompanied in each instance by truthful disclosure of, the formula showing quantitatively each ingredient of such drug." (This exception for the medical profession also includes the other public health professions such as pharmacy, dentistry, and veterinary medicine.) If before issuance of a complaint by the Federal Trade Commission, or before the date on which a cease-and-desist order becomes final, a person is about to distribute a false advertisement, the Federal Trade Commission is allowed to secure a restraining order in the U. S. District Court. This Court may exclude a newspaper, magazine, or periodical from the operation of such a restraining order if the order would result in a delay of the issue after its regular time and if it appears that the delay is not the result of an attempt to evade the law. If an article falsely advertised may be injurious to health or if the advertisement is published with the intent to defraud or mislead, the person who is responsible for the false

REGULATION OF TRADE PRACTICES

$5

advertisement is subject to a fine of $5,000 and imprisonment up to six months for the first offense, and a $10,000 fine and one year's prison sentence if he has been guilty before of the same offense. Publishers, radio broadcasting stations, and advertising agencies are not liable for the fine and imprisonment provided in the law unless they refuse to tell the Federal Trade Commission the name and address of the person who ordered the advertisement. The labeling of products sold in the drug trade has been the subject of legal control in the United States since 1890. Since 1848 imports of drugs have been subject to inspection and approval of the U. S. Bureau of the Customs under the D r u g Import Act. The application of the 1890 law was limited to imported foods, drugs, and liquor. Their entry into this country was prohibited if they were "adulterated or unwholesome," but truthful labeling of the contents of imported foods, drugs, and liquor was required merely by implication. The 1890 law did provide, in addition, for seizure and destruction of articles found unfit for use. I t soon became evident that regulation of foods, drugs, and liquor of domestic manufacture was equally desirable. Numerous articles in magazines and newspapers of the day gave startling and disturbing facts about the widespread distribution of worthless, harmful, and misleadingly labeled preparations. The late Dr. Harvey W . Wiley who was head of the Bureau of Chemistry in the U. S. Department of Agriculture at the time, became the outstanding leader in the movement to expose and correct these conditions. The result was the enactment by Congress, to be effective J a n u ary 1, 1907, of the Federal Food and D r u g Act of 1906. The law was to be administered by Dr. Wiley as head of the Bureau of Chemistry in the U. S. Department of Agriculture. The Food and D r u g Act of 1906 was intended to protect the people of this country from misbranded and adulterated commodities by prohibiting their introduction into interstate commerce. Labeling of a container which does

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not indicate the actual nature of its contents is held to be untruthful, and such a practice is called misbranding. The Food and Drug Act of 1906 was amended in 1 9 1 2 to prohibit false statements of the curative or therapeutic effects of medicines. The joker was that the Government had to prove that these false claims were made "with willful intent to deceive." Other Federal laws were put into effect during this period in an effort to deal more effectively with practices not subject to regulation under the Food and Drug Act of 1906. The Federal Insecticide Act was passed in 1 9 1 0 and is in effect until replaced by the Federal Insecticide, Fungicide, and Rodenticide Act approved June 25, 1947. The Act of 1 9 1 0 prohibited the interstate shipment of misbranded or adulterated insecticides and such related products as fungicides, Paris green, and lead arsenate. The new law which becomes fully effective June 25, 1948, extends this coverage to rodenticides, herbicides, and economic poisons designed to control pests. Articles subject to the law must be registered with the U. S. Department of Agriculture. Proof of claims for uses and formula disclosure may be required. Labels must include directions for use and warnings against misuse. Economic poisons likely to be mistaken for food ingredients must be distinctively colored. The Harrison Narcotic Act of 1914, which also is still in force, provides for the Federal licensing of importers, manufacturers, wholesalers, and retailers of opium, coca, their salts and derivatives, and preparations made from them. Other preparations have been added to this list when they have been found to have narcotic properties. Detailed records must be maintained of purchases, inventories, and sales, all for the purpose of limiting the distribution of narcotics to approved medicinal uses. The Federal Caustic Poison Act of 1927 prohibits the interstate shipment of dangerous caustic and corrosive substances in misbranded packages of a size suitable for house-

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57

hold use. This law is still in force. I t applies to the caustic and poisonous acids and to such corrosives as potassium and sodium hydroxide, silver nitrate, and ammonia water. There are two Federal laws in force regulating the interstate shipment of serums, antitoxins, and other biological products. The Virus, Serum, and Toxin Act of 1902 has been continued with only minor changes in the Public Health Service Act of 1944. I t prohibits misbranding and adulteration and provides for government licenses and inspection of manufacturers. Its application is limited to biological products for human use. The Virus, Serum, and Toxin Act of 1913 contains the same kind of provisions for these products for veterinary use. Nation-wide prohibition of the sale of alcoholic beverages was in effect in the United States between 1919 and 1934. Their sale for medicinal use was restricted to wholesale and retail druggists. Under the Volstead Act of 1919 it was necessary for these distributors to obtain special licenses and to maintain detailed records of purchases, inventories, and sales. Control of the manufacture and sale of alcoholic beverages is now largely centered in the Federal Alcohol Administration Act of 1935. This law is administered by the U. S. Bureau of Internal Revenue. Agitation for a complete revision of the Federal Food and D r u g Law of 1906 became very active in 1933, and a bill to accomplish this purpose was introduced that year. I t was debated in Congress for over five years and not all of its provisions went into effect until J u l y 1, 1940. This law is officially known as the Food, Drug, and Cosmetic Act of 1938. I t is administered by the Food and D r u g Administration, originally a p a r t of the U. S. Department of Agriculture but now in the Federal Security Agency. Changes which were brought about by this law include a greatly widened coverage and much more stringent and detailed control of misbranding and adulteration. As its name indicates, the law brought cosmetics under its control. Cos-

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metics are broadly defined as any substances intended to enhance personal beauty except toilet soap. Cosmetics had been subject to the Food and D r u g Act of 1906 only if medicinal claims were made for them. T h e sale in interstate commerce of cosmetics which may be injurious to users is now prohibited, b u t poisonous coal-tar hair dyes may continue to be sold if they have warning labels. Coverage of the law was also extended to therapeutic devices and a p p a r a t u s , and the same kind of controls of misbranding and fraudulent representations were established as for drugs. Diagnostic agents were also added. T h e y are articles which in themselves have no therapeutic value but which, in the language of the law, are "intended to affect the structure or any function of the body." T h e y include, for example, a dye taken internally to facilitate X - r a y photog r a p h s or fluoroscopic examination. T h e restrictions on the marketing of new d r u g s are probably the most important extension of coverage to be found in the 1938 law. "New d r u g s " are broadly defined as d r u g s which may be new by reason o f : " ( Í ) the newness for drug use of any substance which composes the drug, in whole or in p a r t , whether it be an active substance or a menstruum, excipient, carrier, coating, or other component; " ( # ) the newness for drug use of a combination of two or more substances, none of which is a new d r u g ; " ( 3 ) the newness for drug use of the proportions of the substances in a combination, even though the substances in certain other proportions do not constitute a new d r u g ; or "(•I) the newness of the dosage, or methods or duration of administration or application, or other conditions of use of the drug prescribed, recommended or suggested in the labeling thereof, even though the drug is not a new drug when used in certain different dosages, or in different methods or duration of administration or application, or in conditions that are otherwise different."

REGULATION OF TRADE PRACTICES

S9

The law prohibits the interstate shipment of new drugs, defined in this manner, unless they have been adequately tested to show that they are safe to use under the conditions prescribed on their labels. Manufacturers of new drugs are required to apply to the Food and D r u g Administration in a form specified by it for permission to market their output. If the Food and D r u g Administration does not act on the application within the time specified in the law, the applicant may proceed with the shipment and sale of his product. I t is also permissible to ship new drugs for clinical and other experimental use but these shipments must be limited to qualified experts and the product labeled "for investigational use only." Biological products subject to the two Federal Virus, Serum, and Toxin Acts also are exempt from these restrictions upon new drugs. A number of provisions about the labeling of drugs listed in the United States Pharmacopoeia, the National Formulary, and the Homeopathic Pharmacopoeia, were introduced in the Food, D r u g and Cosmetic Act of 1938. These are the so-called "official" drugs. Their labels must now reveal any differences of strength, quality, and purity from official standards. The 1906 law merely required a statement on the label of the strength, quality, and purity with no indication of any difference there might be from the official standard. "Official" drugs are now to be labeled and packaged as prescribed in the Pharmacopoeias and Formulary. Thus if the U. S. Pharmacopoeia specifies amber bottles for an "official" preparation, it is against the law to ship it in interstate commerce in clear glass bottles. Both "official" and other drugs intended for human use are required to be labeled with warnings against the possibility of habit formation if they contain any narcotic or other habit-forming substances. There must be warning of probable misuse on the labels of drugs and therapeutic devices, and cautions on the labels of drugs liable to deteriorate. Labeling of drugs and therapeutic devices must include ade-

6o

MARKETING DRUG PRODUCTS

quate directions for use unless the uses of the article are so well known that these directions are unnecessary. Partial disclosure of the contents of proprietary medicines is required on their labels. The law and the regulations of the Food and D r u g Administration refer to "non-official" drugs but they mean proprietary medicines. The active ingredients must be listed on the label and the quantity or proportion of some particularly active substances such as chloroform, alcohol, and various narcotics and sedatives. Labels of proprietary medicines are also required to state the strength of ingredients. Under the 1906 Act the law was violated only if the strength was less than that stated on the label. The use of containers for foods, drugs, therapeutic devices, and cosmetics that are likely to make the contents injurious to health is prohibited. Shipments of these articles in interstate commerce are forbidden if they have been manufactured under unsanitary conditions. Factory inspection by the Food and D r u g Administration is authorized. Interstate shipments of drugs, therapeutic devices, and cosmetics which are dangerous to health under the conditions of use prescribed on the labeling are also forbidden. The Food, D r u g and Cosmetic Act of 1938 corrects seizure and limitation provisions in the Act of 1906 which were the subject of much bitter and justifiable complaint by manufacturers in the food and drug trades. The 1906 law placed no limit on the number of seizures of shipments that might be made by the Food and D r u g Administration on the charge that these shipments were against the law. The 1906 law allowed the Food and D r u g Administration to start prosecutions wherever the goods were seized. Thus a food or drug manufacturer often found himself called upon to defend not one but several suits by the Federal Food and D r u g Administration, usually in widely separated sections of the country. The manufacturer without the money to fight these multiple seizures might have to let them go by default, even though convinced of the merit of his defense.

REGULATION OF TBADE PRACTICES

61

The 1938 law generally limits seizures for misbranding by the Food and Drug Administration to a single interstate shipment unless the manufacturer has been convicted before for the same violation for the same product. Multiple seizures are also authorized if the Food and Drug Administration believes that the labeling of the article is fraudulent and that the product might be dangerous in use. Even under these circumstances, consolidation of multiple seizures in single prosecution is now permitted, and this prosecution may be transferred to the Federal district court nearest the place of business of the manufacturer. In its regulation of fraudulent practices, the Food, Drug, and Cosmetic Act of 1938 prohibits slack-filled and "deceptive" containers. Acting under these provisions the Food and Drug Administration has moved against metal and other opaque containers only partly filled, oversized cartons, unnecessarily bulky wrappings, jars with false bottoms, and containers with overthick bases and side walls. An amendment adopted December 22, 1941, to the Food, Drug and Cosmetic Act of 1938 requires the assay and standardization both by the manufacturer and by the Food and Drug Administration of all insulin. While the patents were in effect on this product, the owner of the patent, the University of Toronto, had required this double assay and standardization by the manufacturer and by itself. These patents expired December 24, 1941, and with their expiration the authority ended for the University of Toronto to require insulin makers to submit their product for assay. The law requiring this double examination by the manufacturer and a government laboratory was the first departure from the procedure in effect since 1906 whereby standards had been set by the U. S. Pharmacopoeia or the National Formulary. The amendment nonetheless had the support of the Board of Trustees of the U. S. Pharmacopoeia. Another departure from the long established procedure occurred July 6, 1945, when the Food, Drug and Cosmetic Act of 1938 was again amended to require the Food and

62

MARKETING DRUG PRODUCTS

D r u g Administration to test the strength, quality, purity, characteristics, and identity of each lot of penicillin, and of products containing penicillin, before they could be placed on the market. These requirements were extended to streptomycin by another amendment to the law. This newest amendment was added March 10, 1947. After the enactment of the Food and D r u g Act of 1906, virtually every state enacted laws within a few years to control in a similar manner the labeling and adulteration of foods and drugs on shipments within the state. Twenty of these state laws were approved within the first year after enactment of the Federal law, and within eight years all but four states had adopted such measures. Similarly state laws regulating the sale of narcotics followed speedily the enactment of the Harrison Narcotic Act in 1914. No such acceptance has occurred among the states for the provisions of the Federal Food, Drug, and Cosmetic Act of 1938. During the five years the Federal Act of 1938 was under discussion in Congress, some state legislatures approved laws containing similar provisions or amended existing state food and drug laws to bring them into conformity with the new Federal law. Additional state acts have become law in more recent years. The usual practice is to include in them also the provisions found in the Federal Wheeler—Lea Act for regulation of advertising. I t probably will be some time before all the states have such laws. Only about onethird of the states have enacted them thus far. Less than one-fourth of the states have adopted the provisions of the Robinson—Patman Act. In addition to the requirements in the federal and state Food, D r u g and Cosmetic Acts, the weights and measures laws in a number of states specify that packaged articles are to be labeled with their weight, measure, or numerical count. There is usually an exception for the smallest packages and sometimes for packages put up by the retailer at the time of the sale.

REGULATION OF TRADE PRACTICES

63

About one-third of the states have laws either prohibiting or restricting the distribution of samples of drugs and medicines on public streets and highways and from house to house. In some laws cosmetics are also included. In others the restriction applies only to medicines containing poisons and other substances injurious to health. Delivering samples of medicine directly to children, or even leaving the samples accessible to them, is forbidden in several state laws. Premiums and other gifts in connection with the sale of merchandise are regulated by both Federal and state laws. The Federal Anti-lottery Act, which is administered by the U. S. Post Office Department, prohibits the use of the mails for announcement of lotteries and other devices in which awards of prizes or gifts to participants are governed wholly or partly by chance. Prize contests are permitted in which awards are based on the contestant's skill. Under the anti-lottery laws, the offering of a premium or prize to a customer who succeeds in collecting all the letters in a word or name, where one of the letters is issued at a time, either with or in a package of a product, is illegal. This plan is generally called the "controlled letter" plan. Lucky number drawings are also prohibited by the antilottery laws. Nearly all states have similar laws. Advertising and sales promotion plans involving a lottery or chance, as well as premium plans considered to be fraudulent or deceptive, are subject under the Federal Trade Commission Act to action by the Commission whether the mails are used or not. Among the contests and premium plans which have been banned by the Federal Trade Commission are those in which prizes or premiums of varying value are packed with products. A sales promotion plan under which customers are asked to pay a small amount for what is represented as packing and shipping charges has been prohibited in instances in which it was shown that the payment asked was sufficient to cover the entire cost of the merchandise supplied.

64

MARKETING DRUG PRODUCTS

Under the Robinson—Patman Act, the Federal Trade Commission also may prohibit premiums and gifts if their effect is an illegal price discrimination. The state antidiscrimination laws have similar provisions. Premiums and prizes may not be used to evade the minimum prices set in resale price agreements authorized by State Fair Trade Acts. In the distribution of alcoholic beverages the U. S. Bureau of Internal Revenue has issued special regulations under the Federal Alcohol Administration Act under which advertising specialties such as ash trays, bottle openers, matches, recipes, blotters, and other articles of nominal value may be distributed either directly or through retailers, but these retailers may not be paid for this distribution service. Premium coupons and trading stamps are used when the articles offered as premiums have a greater value than can be given profitably as a gift with a single purchase. Other variants are certificates, sales slips, labels, and punched cards. They are to be saved by the customer until he has accumulated a sufficient quantity to be redeemable for a premium. Severe restrictions are imposed by law in a number of states on the use of these premium coupons and similar tokens. These restrictions cannot be made to apply to coupons used exclusively in interstate commerce, nor to their use under some other circumstances. T o make a premium coupon subject to interstate commerce, the sale of the merchandise with which the coupon is given and the redemption of the coupons likewise must be an interstate transaction. These state laws do not apply to premium coupons and tokens redeemable only for cash. The likelihood of these coupons being redeemed for cash is reduced by making merchandise offers much more liberal than cash redemption values. An ingenious variation of the same idea is illustrated by a chocolate set which is advertised as a combination sale of a chocolate set and a pound of cocoa for $9.90. The regular selling price for the cocoa is 30 cents a pound. In each pound

REGULATION OF TRADE PRACTICES

6$

of cocoa a coupon is packed, redeemable only by those who purchased the chocolate set. When 30 coupons have been collected they are redeemable for 90 cents, thus making the chocolate set a premium supplied without extra cost to purchasers of 30 pounds of cocoa. Combination sales also escape the restrictions in state laws on the use of premiums and coupons. Two or more articles are sold together for a unit price which is usually less than the combined retail value of the products and premiums included. In this manner it is possible, as with the use of coupons, to offer a premium of greater value than could be given profitably as a gift with a single purchase. A premium or gift offered with the sale of the product at its regular price is not restricted by the state laws. Premiums offered under these conditions are called "direct" premiums. Laws are in effect in more than 40 states prohibiting untrue, deceptive, and misleading statements in advertisements. These are called "Truth-in-Advertising" laws. In a few states the law contains a weakening qualification that these untrue, deceptive, and misleading statements must be made "knowingly." Special laws in the different states provide more detailed control of outdoor advertising, distribution of handbills, and other mediums. The retail sale of poisonous substances and articles having medicinal use is subject to restrictions in the state pharmacy laws. Each state and the District of Columbia has such a law, and each law is different in some particular from all the others. These laws are intended to limit the retailing of medicines, poisons, and other potentially dangerous articles to drugstores in charge of pharmacists in the belief that they are familiar with the use of these articles and with the harm that could come from their misuse. Certain exceptions are necessary. A physician is allowed to prescribe and dispense his own medicines, but in some states he may dispense only to his own patients. This is to head off the possibility of his operating a drugstore, unless

66

MAKKETING DRUG PRODUCTS

he is also licensed as a pharmacist. Dentists and veterinarians customarily have the same freedom. A second necessary group of exceptions from the general requirement in state pharmacy laws restricting the retailing of medicinal articles to drugstores in charge of pharmacists results from the fact that a number of articles in common use have both medicinal and non-medicinal uses. Familiar examples are bay rum, bicarbonate of soda, epsom salts, glycerine, gum camphor, peroxide of hydrogen, petroleum jelly, sugar, distilled water, and witch hazel. The usual practice is to regard these articles as subject to the state pharmacy laws if they are labeled to indicate medicinal uses. An exception is generally made for medicinal articles in common household use with which laymen are supposed to be generally familiar. A variant of this exception permits the general retailing of these articles only in rural areas in which drugstores are not readily accessible. The courts in some instances have denounced this exception and have held that if protection of the public health laws is needed for purchasers who reside in built-up areas accessible to drugstores, this protection is just as necessary for citizens in the sparsely settled sections. Accordingly, they have required the state authorities to except all retailers or none. A fourth type of necessary exception results from the fact that some medicinal articles and poisons also have uses in the arts, industry, and agriculture. Manifest inconsistencies thus appear. Although a state pharmacy law may ban the retail sale of a harmless household drug in all but drugstores in charge of pharmacists, retailing of poisonous and highly dangerous substances is permitted in unlimited quantities in feed stores and farm supply stores for agricultural uses. A fifth general exception in state pharmacy laws concerns proprietary medicines. In defense of the exception for proprietary medicines, it was contended at one time that the pharmacist in charge of a drugstore was in no better position than anyone else to warn his customers about possible

REGULATION OF TRADE PRACTICES

67

dangers of the misuse of a proprietary medicine because he did know what was in it. These articles were once of secret composition, but under the provisions requiring disclosure of formulae made by the Federal and state food, drug, and cosmetic laws, this is no longer true. This exception has been hedged with numerous qualifications. In some states the proprietary medicines may be sold by unlicensed persons only if they are non-poisonous and non-narcotic. If the proprietary medicine includes in its name an "official" title listed in the Pharmacopoeias or the Formulary, then it is held to be an "official" preparation and not a proprietary medicine. Thus a brand of aspirin is not considered to be a proprietary medicine because aspirin is an "official" title listed in the U. S. Pharmacopoeia. In some states this restriction has even been extended to proprietary medicines when the label shows them to contain "official" preparations as one or more of its ingredients. The proprietary medicines which are most likely to stay under this exception are those which are designated exclusively by a unique and fanciful name and which are non-narcotic and non-poisonous. I t has been found generally undesirable to specify in the state pharmacy law the names of the poisonous substances and medicinal preparations which may be sold generally at retail. Scientific advances and increased public knowledge make some preparations no longer potentially dangerous. New discoveries reveal other substances which should be strictly controlled. If the state authorities who administer the pharmacy laws have the power to add to and delete from the list of medicinal and poisonous preparations subject to restriction in retail sale, it is then possible to keep their regulation up to date. Competent and conscientious state officials thus can provide needed protection of the public health without giving undeserved economic advantage to retail druggists or to any other group of retailers.

CHAPTER

V

COST A N A L Y S I S

The large difference which ordinarily exists between the cost of the physical ingredients in a drug product and the value of the finished product is a leading inducement to price competition in the drug trade. The most recent U. S. Census of Manufacturers, which covered the year 1939, included 1,094 manufacturers of "drugs and medicines." They reported for that year costs for materials, fuel, contract work, and direct labor which were 38 per cent of the price they received for their products. For 539 manufacturers of perfumes, cosmetics, and other toilet preparations the corresponding figure was 46 per cent. The average for all manufacturers in 1939 was nearly 73 per cent. The contrast is even more noticeable when the customary discounts in the drug trade to wholesalers and retailers are taken into account. For a packaged medicinal product these discounts are commonly as shown in table 1. The prospect of high profits per unit sold invites price concessions by manufacturers in the drug trade in an effort to increase the number of units sold. The attractiveness of price concessions of this kind is readily recognized and understood by wholesalers and retailers. An item with a discount of 20 per cent, instead of the customary 16% per cent, offers a definite and easily measurable increase in the margin available to the wholesaler. Similarly, the opportunity for a retailer to obtain a margin of 40 per cent in place of the usual 33 Ys per cent presents an opportunity to obtain an increased profit.

COST ANALYSIS

69

A manufacturer in the drug trade can afford to make these concessions ever more liberal by offering them in merchandise rather than in the form of a direct reduction of price. For many decades in the drug trade, offers of this kind were known as "free goods deals." In 1946 the Federal Trade Commission decided that the use of the word "free" in such a manner is a misrepresentation. In the opinion of the Federal Trade Commission, the designation of merchanTABLE 1 Usual Wholesale and Retail Margins for Articles in the Drug Trade

Packaged

Consumer pays retailer Retailer pays wholesaler

$1.00 .66/4

Retailer's gross margin

$0.33J^

Wholesaler pays manufacturer 16% per cent less than retailer pays wholesaler

$0.55^

Manufacturer's average cost for materials, fuel, contract work, and direct labor of 38 per cent of price he received for his products $0,213^ Manufacturer's margin for selling and administrative costs and profits $0.34^} dise as "free" may be applied truthfully only to goods which are given away unconditionally. There must be no requirement of the purchase of something else to obtain them. Consequently, the practice in the drug trade is now, in deference to the Federal Trade Commission, to refer to these offers as "deals" which include "extra" goods or "bonus" goods. If a manufacturer offers a quantity discount of 20 per cent to wholesalers or retailers who buy at one time 12 dozen of his product, there is an outright and definite reduction in the manufacturer's income of 20 per cent. I f , instead, the

70

M A R K E T I N G DRUG

PRODUCTS

manufacturer offers to buyers of 12 dozen of his product an additional 3 dozen, as " e x t r a " goods or "bonus" goods, the quantity discount is also 20 per cent, because the 3 dozen " e x t r a " or "bonus" goods are 20 per cent of the total 15 dozen included in the manufacturer's offer. In the instance of an outright quantity discount of 20 per cent on an item ordinarily selling to retailers for 66% cents each, or $8.00 a dozen, the cost to the manufacturer on a 12-dozen purchase is 20 per cent of $96.00 or $19.20. When the manufacturer gives the 20 per cent quantity discount in the form of 3 dozen "extra" or "bonus" goods, the cost to him of these 3 dozen is less than $19.20. If he can afford to sell his goods at the rate of $8.00 a dozen less 20 per cent, or $6.40, the cost to him of producing this merchandise must be less than $6.40 a dozen. Any amount by which the cost of production is less than the price for which he sells the goods thus represents to the manufacturer a cash saving over granting an outright reduction in price. If it is assumed that the manufacturer's direct costs of production are equal to the nation-wide average for manufacturers in the drug trade in 1939, they are 21% cents a package. Thus, the out-of-pocket costs to the manufacturer of 3 dozen " e x t r a " or "bonus" goods are $7.60 in contrast to a cost to him of $19.20 if an outright quantity discount of 20 per cent is given. It is sometimes contended that the 3 dozen " e x t r a " or "bonus" goods should bear their proportionate share of the manufacturer's administrative and selling costs. These administrative and selling costs exist whether or not an offer of " e x t r a " or "bonus" goods is made. In reality, therefore, the manufacturer's only cash outlay for the "extra" or "bonus" goods is for direct costs of production. When a wholesaler or a retailer receives a quantity discount in the form of additional merchandise, he must sell this merchandise in order to obtain the purchase cost saving offered. This is an advantage to manufacturers which helps

COST A N A L Y S I S

71

to account for the popularity of these offers. Even during the periods of greatest merchandise scarcity during and following World W a r I I , hundreds of these offers were available to wholesalers and retailers in the drug trade. Wholesalers and retailers have experienced difficulty in determining readily and accurately the savings in purchase cost that are represented by these "extra" and "bonus" goods offers and deals. This also may be another reason for their popularity among manufacturers in the drug trade. Deals and offers are likely to seem more liberal than actually is the case, with little possibility that misrepresentations about them will be questioned. The most common type of these "extra" and "bonus" goods offers is the opportunity to obtain without extra charge an additional quantity of an item when a specified quantity of the item is purchased. Table 2 shows the quantity discounts represented by the more usual propositions of this type. TABLE 2

Quantity Discount Equivalents of "Extra" and "Bonus" Goods Offers Quantity Purchased (dozens)

"Extra" or "Bonus" Goods (dozens)

Vi

Va

%

Ye

% 1 1 1

K2 Vi2 Ve

M

Amount of Quantity Discount Represented by "Extra" or "Bonus" Goods (per cent)

25 16^ 8K 1%

14M 20

In determining the percentage amount of the quantity discount represented by the "extra" or "bonus" goods in any such offers as those illustrated above, it is necessary to determine first the total quantity required to be purchased

72

MARKETING DRUG PRODUCTS

under the terms of the offer. If the offer is one dozen, with a quarter dozen additional " e x t r a " or "bonus" units the total quantity required to be purchased is dozen of which % dozen are the " e x t r a " or "bonus" goods. This % dozen is 20 per cent of dozen. T h e amount of the discount repsented by this % dozen is thus 20 per cent. A second t y p e of offer is t h a t in which a purchase of a specified quantity of one item brings " e x t r a " or "bonus" goods in the form of some other of the m a n u f a c t u r e r ' s products. A purchaser of 1 dozen of the 50-cent size of an item is offered a "bonus" of % dozen of the 10-cent size. T h e amount of the extra discount represented by the "bonus" goods is determined by comparing the usual cost of the items included in the deal with their cost under the terms of the special offer. F o r example: Usual cost of 1 dozen of the 50-cent size . Usual cost of % dozen of 10-cent size

.

.

.

$4.00 .20

Total usual cost Cost of special offer

$4.20 4.00

Difference

$0.20

T h u s , merchandise for which $4.20 would normally be paid is offered for $4.00, a saving of 20 cents on a $4.20 purchase. This 20 cents amounts to a discount of about 4 % per cent on a purchase t h a t normally would cost $4.20. A third t y p e of bonus commonly employed in the d r u g trade is t h a t in which a wholly unrelated article is offered in connection with the purchase of a specified quantity of an item. An electric clock said to have a retail value of $3.00 is offered as a "bonus" with the purchase by a retailer of 2 dozen of an item to be sold to consumers for 50 cents each. T o determine the amount of the quantity discount represented by the electric clock, the retailer must decide how much he would p a y for an electric clock which he expects to

COST ANALYSIS

73

sell in his store for $3.00. Suppose a $1.75 value is set. T h e n the following figures can be used: Usual cost to the retailer of 2 dozen of the 50-cent item Usual purchase cost to the retailer for a $3.00 clock .

$8.00 1.75

Total usual cost Cost of special offer

$9.75 8.00

Difference

$1.75

On merchandise for which $9.75 ordinarily would be paid, a saving of $1.75 amounts to about 18 per cent. As in the other offers of " e x t r a " goods here illustrated, this saving of about 18 per cent is obtained only if and when all the goods included in the deal have been sold and sold at the prices anticipated. Good j u d g m e n t is required on the p a r t of wholesalers and retailers in deciding whether or not the values placed on the " e x t r a " goods and "bonus" goods in these special deals are as represented. I t is also well for them to be alert as to the correctness of the prices t h a t are represented to be the usual purchase costs for the manufacturer's goods. Wholesalers and retailers in the d r u g t r a d e have obtained increased margins by accepting marketing responsibilities t h a t for other products are assumed and paid for by manufacturers. When a m a n u f a c t u r e r undertakes to create and maintain consumer demand for his products, he is likely to find t h a t he must spend a very substantial p a r t of his receipts for this purpose. T h e m a n u f a c t u r e r of an original discovery for which he has created a large demand among users may find it necessary to spend as much as 25 per cent of his entire gross receipts for advertising to these users and prospective users, and another 15 per cent for other selling costs. T h e a p p o r tionment of each dollar spent by users for such a p r o d u c t may be as follows:

74

MARKETING DRUG PRODUCTS

User pays retailer Retailer pays wholesaler

$1.00 .66%

Wholesaler pays manufacturer

$0.55%

Manufacturer's cost for materials, fuel, contract work and direct labor Manufacturer's expenditure for advertising to users and prospective users Manufacturer's expenditure for other selling costs . Manufacturer's administrative costs and profit

.

-21% -13% .08% $0.12%

Another manufacturer observes the acceptance that the pioneer producer has obtained for this article among users and prospective users. The second manufacturer believes there will be ready acceptance now for such an article from another maker. To provide an inducement to users to buy his product, the second manufacturer offers it to them at a lower price. To provide an inducement for wholesalers and retailers to buy it, he offers them larger margins than are allowed by the manufacturer of the established and wellknown article. The lower price and the increased margins are possible because the second manufacturer spends little or nothing for advertising and other devices to increase consumer demand for the article. Moreover, he has assumed none of the costs and risks involved in the creation and popularization of a new product. The second manufacturer depends upon the lower price of his product to create consumer demand for it. He depends on the larger margins to wholesalers and retailers to bring preferred attention to his product by these distributors. Following is the distribution that might occur of money paid for the product of the manufacturer who spends little or nothing for advertising and development costs: User pays retailer 25 per cent less, or Retailer pays wholesaler a reduced price sufficient to

75^

COST ANALYSIS

give the retailer a margin of 40 per cent instead of 3 3 % per cent on the selling price

75

45^

Wholesaler pays manufacturer a lower price and receives a margin of 20 per cent instead of 16% per cent

3

Manufacturer's cost for materials, fuel, contract work and direct labor

21 YQ^

Manufacturer makes no expenditure for advertising to users and prospective users and spends only a nominal amount for other selling costs. He thus has available for administrative costs and profit . . . .

14%^

I t is a common practice under these circumstances for such a m a n u f a c t u r e r to cut out the wholesaler and deal directly with the retailer on even a more liberal basis. A typical distribution of costs and margins would be as follows: User pays retailer 25 per cent less, or

75^

Retailer pays manufacturer a reduced price sufficient to give the retailer a margin of 50 per cent instead of 3 3 % per cent on the selling price

37%^

Manufacturer's cost for materials, fuel, contract work and direct labor

21%^

Manufacturer makes no expenditure for advertising to users and prospective users. He thus has available for the extra costs of selling direct to retailers and for administrative costs and profit

1

T h e appearance of products " j u s t as good" is sure to happen wherever competitive enterprise is allowed to exist. This competition and the prospect of such competition help to prevent exploitation and unreasonably high profits by discoverers and developers of unique products. T h e record of the d r u g trade in this connection is excellent. Insulin was selling within 20 years a f t e r its discovery and commercial

76

MARKETING DRUG PRODUCTS

development for less than one-fifth of the price at which it was first offered. Within five years after they were first available, sulfa preparations were priced at a fraction of the figure asked at the beginning. If a manufacturer persists in holding his prices to unreasonably high figures for products he controls, his action stimulates research which causes other products serving the same purpose to be developed. Wholesalers and retailers in the d r u g trade readily buy products the chief distinction of which is lower prices and higher percentage margins to distributors. Some are sold by manufacturers as frankly imitative of established and widely sold items. Some are supplied to retailers on an exclusive agency plan. The United-Rexall D r u g Company is said to have designated about 10,000 individually owned drugstores as exclusive agencies for its products. These products are sold under such trade-marks as "Rexall," "Puretest," and "Caranome." The Liggett, Owl, Sontag, and Lane drugstores which are owned and operated by the United-Rexall D r u g Company, also promote these exclusive agency brands aggressively. The company's own drugstores and those of its exclusive agencies are usually so located that no one competes closely with any of the others. About onefourth of the total of approximately 4,000 drugstores in Canada are said to have exclusive agencies for Nyal products. Other products bearing above-average margins for wholesalers and retailers are offered to them imprinted with the name of the wholesaler or retailer as distributor. Frederick Stearns and Company, which is now a subsidiary of Sterling D r u g Company, makes various household remedies under formulas which it owns and controls. These products are labeled to order with the wholesaler or retailer buying them designated on the package as the distributor. Wholesale druggists frequently operate laboratories and p u t out specialties under their own names. This is a common

COST ANALYSIS

77

practice also for both chain and individually owned drug stores. The liberal margins offered in connection with any of these goods are not obtained unless and until the goods are sold. The length of time that elapses between the purchase of an article by a wholesaler or a retailer and its sale by him to his customers is called the rate of turnover of the article. A slow rate of turnover means that a long time has elapsed between the purchase of merchandise and its ultimate sale. The rate of turnover is necessarily also a measure of the speed with which profits are obtained in a wholesale or a retail establishment. T o be sure, not all articles sold by wholesalers and retailers in the drug trade are disposed of at a profit, but it is equally true that no profits are obtained until the goods are sold. The quantity of goods sold is fully as important as the rate of turnover. Consider one simple example. In a drugstore, adjoining the principal cash register, there are two display spaces of the same size and equal prominence. In one space the store owner puts 3 dozen packages of one item. The manufacturer of this item is carrying on a continuous, extensive, and very skillful campaign to maintain and increase consumer demand for his product. The retailer sells this article for 29 cents a package and obtains a gross margin on each package sold of 7 cents, as the cost to him is 22 cents a package. This gross margin is less than 25 per cent of the price the retailer receives for the article from his customers. Three dozen a week are sold of the item. Thus in a year's time the retailer has obtained a total gross margin of $131.04 from the sale of the article. In the adjoining and equally prominent space at the cash register, the retail druggist puts another brand of the same kind of product. The manufacturer of the competing brand does not spend any of his income for advertising to users and prospective users. As a substitute, he offers the retailer a larger margin per package sold. Although the selling price

78

MARKETING DRUG PRODUCTS

to consumers is only 19 cents instead of 29 cents, the retail druggist's margin is 9 cents because the cost to him per package is only 10 cents. I t is very unlikely that this retailer will sell as much of the second item as the first. His customers never heard of the second item. A p a r t from displaying it in this manner, the retailer is unable or unwilling to do anything to acquaint people with it with enough enthusiasm, persuasiveness, and persistence to make them want to buy it. Consequently the retailer sells only 3 dozen a month instead of 3 dozen a week of the second item. His gross margin in a year's time is $38.88 instead of $131.04. If he is buying both items in the same quantities he is getting his profits out of purchases of the first item at over four times the rate for the second item. The bigger profit to the retailer of the first item seems obvious. Nonetheless the shelves, storerooms, and warehouses of wholesalers and retailers in the drug trade are cluttered with huge quantities of items, the principal attraction of which is the large gross margins that will be obtained if they can be sold. The explanation probably is that differences in margins are easy to understand. A long and involved discussion is needed to show that these margins are not obtained unless and until the goods are sold, and that even then they may be offset by a more rapid rate of turnover and a larger volume of sales for an item with a smaller margin per unit. The rate of turnover has a very important influence on net profits. H . J . Ostlund in Bulletin No. 6 of the Statistical Division of the National Wholesale Druggists' Association says, "the faster the rate of turnover the less the inventory that will be carried per dollar of sales. The less the inventory carried the less the space that will be needed for its storage and the lower will be the costs of financing and protecting the inventory." T o measure the effects of the rate of turnover upon net profits, it is necessary first to examine total costs and profits. Such an analysis for a retail drugstore appeared in the

COST ANALYSIS

79

Druggists Circular for October, 1937. The figures correspond closely to costs and profits in more recent years. They also illustrate the kinds of costs which are experienced in the operation of other kinds of retail stores. TABLE 3 Statement of a Year's Operations in a Typical Sales

Drugstore

$15,070.85-100%

Inventory (at cost price of merchandise stock on hand at beginning of year) $3,301.02 Merchandise bought during the year 9,724.87 Total merchandise to be accounted for (at cost price) . .13,025.89 Inventory on hand at end of year . 3,229.74 Cost of merchandise sold during year therefore must have been

$ 9,796.15—65.0%

Gross Margin (difference between sales and cost of goods sold)

$ 5,274.70-35.0%

Store operating costs: Salaries (proprietor or manager) 2,190.00-14.5% All store expenses (rent, light and power, heat, taxes and licenses, insurance, interest paid, repairs, miscellaneous maintenance costs) . . 1,657.79 — 11.0% Total expenses Net Profit

$ 3,847.79-25.5% $ 1,426.91- 9.5%

The rate of turnover most commonly measured in drugstores and in other retail and wholesale establishments is the average for the entire merchandise stock. The first step is to determine the amount of stock that was kept on hand during the period being studied. In the case of the drugstore

8o

MARKETING DRUG PRODUCTS

for which the annual operating statement is reproduced above, this amount is assumed to be the average of the amount on hand at the beginning and the amount on hand at the end of the year : Inventory beginning of year Inventory end of year Total of both inventories Average inventory (one-half of total) .

.

.

$3,301.02 3,229.74 $6,530.76 $3,265.38

T h e rate of turnover for the year is the ratio of the average inventory in the year to the cost of goods sold d u r i n g the year : Cost of goods sold $9,796.15 = 3.0 (average annual rate of Average inventory 3,265.38 turnover of the merchandise stock) A rate of turnover of 3.0 times in a year means t h a t the average time which elapses between purchase and sale of merchandise is 4 months. T h e cost of keeping merchandise in this drugstore ready to sell is represented by expenditures for rent, light, heat, taxes, insurance, interest on borrowed money, depreciation and repairs of store fixtures and equipment, and miscellaneous store maintenance costs. I t is shown in the operating statement above t h a t the average cost of keeping merchandise in this drugstore ready for sale is 11 per cent of sales. I t is also shown t h a t the average time this merchandise is kept is 4 months. If 11 per cent of sales covers the cost of keeping merchandise in this drugstore for 4 months, the cost of keeping merchandise which remains in the store only 2 months before it is sold is one-half of 11 per cent, or per cent. Using these figures as a basis, table 4 shows as a percentage of sales for various rates of turnover the costs of keeping merchandise in this drugstore. Table 4 shows t h a t doubling the rate of turnover on mer-

8l

COST ANALYSIS

chandise which has had a turnover of once a year results in a reduction in, the turnover costs incurred in the sale of that merchandise from 33 per cent of its selling price to 16.5 per cent of its selling price. If the net profits at the rate of turnover of once a year amounted to 5 per cent of sales, the TABLE 4 Cost of Keeping 1

Merchandise

in a Typical

2

Drugstore 3

Elapsed Time Between Purchase and Sale of Merchandise (months)

Rate of Turnover (times a year)

Turnover Cost (per cent of selling price of merchandise)

24 12 8 6 4 3 2.4 2 1.5 1.2 1

0.5 1.0 1.5 2.0 3.0 4.0 5.0 6.0 8.0 10.0 12.0

66.0 33.0 22.0 16.5 11.0 8.2 6.6 5.5 4.1 3.3 2.8

K (15 days) % ( 7 - 8 days)

24.0 48.0

1.4 . 0.7

result of doubling the rate of turnover is to raise these net profits to 21.5 per cent of sales. No such increase in profits occurs when the rate of turnover is doubled on an article on which the rate of turnover has been 12 times a year. Turnover costs drop from 2.8 per cent of its selling price to 1.4 per cent. This is certainly a negligible gain in comparison with the cost reductions and profit increases possible from raising the rate of turnover of slow-selling articles. With the extensive and varied stocks that are characteristic of wholesalers and retailers in the drug trade, it is under-

82

MARKETING DRUG PRODUCTS

standable that efforts to increase turnover have been directed at those items on which it could be increased most easily instead of on those on which it was most desirable to increase the rate of turnover. Many items of proved salability and large and steady demand have been bought once, twice, or three times a week in small quantities at highest prices, even when the merchandise was readily available in quantity. Purchases of such frequency in these small quantities are unnecessarily costly both for the manufacturer and for his distributors. There are excessive costs in buying, handling, and delivery along with risks of being out of wanted merchandise. The only compensating advantage is a negligible reduction in turnover costs. If orders for this merchandise were to be given in quantities sufficient to last two months instead of two days, it frequently would be possible for wholesale and retail distributors in the drug trade to obtain quantity discounts they are not now receiving. Profits from the sale of merchandise in drugstores and other retail establishments are also affected by the amount and cost of services required in the store in connection with its sale. For packaged articles in drugstores, this is largely if not entirely the cost of the store salesperson's time in making individual sales. In the operating statement above of a typical drugstore, all sales are made by the proprietor or manager. This is customary in a large proportion of the drugstores throughout the world. In some stores the cost of selling merchandise may also include expenditures for advertising, delivery, expenses, and loss from bad debts on merchandise sold on credit. Of all sales in drugstores in the United States, sales on open account and other forms of credit selling amount to an average of less than 10 per cent of total sales. The operating statement above for a typical drugstore shows salaries to average 14.5 per cent of sales. In this store the salary cost of 14.5 per cent is the total cost of selling merchandise. It is incorrect to assume, however, that the

COST ANALYSIS

83

cost of selling merchandise in this store amounts to 14.5 per cent of each sale. Such an assumption would mean that on the sale of a 10-cent size of an item the selling cost would be 1.45 cents while on a 25-cent size of the same item the selling cost would be times as much or 3.62 cents. There is certainly not 2 ^ times as much selling cost involved in the sale of a 25-cent item as in the 10-cent size of the same item, nor is the selling cost necessarily twice as much on a 50-cent item as it is on a 25-cent item. Considerable evidence supports this conclusion. Selling costs generally are highest in proportion to sales in drugstores and other retail establishments in which the average amount of each sale is low. Time studies conducted by the U. S. Department of Commerce in its National Drugstore Survey in St. Louis in 1931 and 1932 also showed that selling costs for packaged articles in a drugstore are proportional to the number of sales made and not to the amount of these sales. Except for the relatively few classes of packaged articles with average selling times less than 20 seconds, and for the correspondingly small number with selling time of 150 seconds or more, there was found in the National Drugstore Survey no relationship between the unit amount of a sale and the salesperson's time in making it. The results of this study are reported in a publication of the U. S. Department of Commerce called "Costs, Sales, and Profits in the Retail Drug Store," Domestic Commerce Series No. 90, published in 1934. It is possible to determine from the National Drugstore Survey the amount of time spent by a salesperson in a drugstore in selling packaged articles and in other necessary activities in the store. For each of the 165 classes of packaged articles studied in this survey figures are supplied on the selling time required, the volume of sales, and the rate of turnover. Thus it is possible to determine the proportion of the total sales made in each of these 165 articles and the time spent in making them.

84

MARKETING DRUG PRODUCTS

An inverse relationship was found between the rate of turnover of a packaged article and the average amount of the sale. Interestingly, the cost of the selling time does not vary much when this cost is expressed as a percentage of the amount of the sale. The results are shown in table 5. TABLE 5 Cost of Time for Selling, Wrapping, and Receiving Packaged Articles in Drugstores 1

2

Average Time to Sell, Wrap, and Rate of Turnover Receive of Article Payment (times a year) (seconds) 0.9 1.0 2.0 3.0 4.0 5.0 6.0 7.0 13.0

or less to 1.9 to 2.9 to 3.9 to 4.9 to 5.9 to 6.9 to 12.9 up

90 70 55 55 50 40 35 25 15

3

Average Amount of Sale (cents) 50 40 35 35 30 25 15 15 10

4

Payment

far

5

Cost of Time (at 50 cents per hour) Percentage Used in Selling, Cost of Wrapping, and Time Receiving (per cent of selling Payment (cents) price) 1.251 0.973 0.764 0.764 0.695 0.556 0.486 0.348 0.208

2.5 2.4 2.2 2.2 2.3 2.2 3.2 2.3 2.1

The proportion of these sales at each of these rates of turnover appears in table 6. Thus from 100 typical sales of packaged articles in a drugstore a total of $23.85 was received. The total time required to make these sales, according to the time studies of the National Drugstore Survey was 3,940 seconds, or a little less than 66 minutes. This total of $23.85 also happens to be a close approximation of the average daily receipts from the sale of packaged articles in the drugstore for which

COST ANALYSIS

85

TABLE 6

Classification of Sales by Rate of Turnover 1

2

Average Time to Sell, Wrap, and Rate of Receive Turnover of Article Payment (times a year) (seconds) 0.9 or less 1.0 to 1.9 2.0 to 2.9 3.0 to 3.9 4.0 to 4.9 5.0 to 5.9 6.0 to 6.9 7.0 to 12 9 13.0 up Totals

90 70 55 55 50 40 35 25 15

3

Average Amount of Sale (cents) 50 40 35 35 30 25 15 15 10

4

5

6

Relative Relative Relative Amount of Selling Number Sales at Time Each of Sales at each at Each Turnover Turnover Rate of (3x4) (2x4) Turnover (dollars) (seconds) 4 12 11 10 5 5 1 32 20

2.00 4.80 3.85 3.50 1.50 1.25 .15 4.80 2.00

360 840 605 550 250 200 35 800 300

100

23.85

3940

the a n n u a l o p e r a t i n g statement is shown in table 3. I t s t o t a l sales average of $41.29 daily was divided as follows: Prescription department . . . Soda fountain Packaged articles T o t a l daily sales

$ 7.65 9.08 24.56 $41.29

Indeed, a reclassification of some such sales as bottled s o f t drinks f r o m the p a c k a g e d articles d e p a r t m e n t to the soda f o u n t a i n m i g h t conceivably b r i n g the $24.56 figure down to exactly $23.85. T h e really significant f a c t is t h a t the p r o p r i e t o r or m a n a g e r working alone in a d r u g s t o r e f o r p r o b a b l y 12 hours a d a y spends less t h a n 66 minutes of t h a t d a y in selling p a c k a g e d articles. A n estimate of the daily selling time in all three d e p a r t m e n t s in this d r u g s t o r e is provided in table 7.

86

MARKETING DRUG PRODUCTS TABLE 7

Daily Selling Time in Three Departments of a Typical One-Man Drugstore 1

Department

2

3

4

5

Average Average Average Time Total Daily Number per Sale Time Sale of Sales (seconds) (seconds)

Prescription $ 7.65 Fountain 9.79 Other (packaged articles). . . 23.85

9 89 100

360 60 39

3240 5340 3940

$41.29

198

63

12520

Totals

The 12,520 seconds consumed daily by the proprietor or manager in making sales in all three of these departments of his drugstore amount to less than 3 % hours a day. Over 8 y 2 hours, or 30,680 seconds in a 12-hour day of 43,200 seconds are spent in buying, receiving, care of merchandise stock, planning and installation of displays, record keeping, and other necessary work of operating the store. Part of this 8y