Japan Retail (3): Silver tsunami and cheap groceries - how drugstores became Japan’s other discounter and GMS is falling

Research evidence excerpt

Japan Retail (3): Silver tsunami and cheap groceries - how drugstores became Japan’s other discounter and GMS is falling

Yugo Shima +81 3 6777 6994 yugo.shima@bernsteinsg.com 30 June 2026

EXHIBIT 9: Why the merger wave was inevitable—the EXHIBIT 10: Margin compression among smaller

industry's footprint density shows up at street level pharmacies—the operating economics that force the

M&A wave

2014-2022: Japanese pharmacies operating

profit margin and growth

6%

5%

4%

3%

2%

Source: Bernstein photo.

1%

0%

2014 2016 2018 2020 2022

Source: Company reports, MHLW, Bernstein analysis.

The Survival of the Fittest: The Structural Arbitrage

The receiver of this structural culling is the Drugstore. Why are they the inevitable winners? The reason lies in three structural

advantages that transcend individual company earnings.

First is Economies of scale. While policy changes raise the break-even point and cause cash flow issues for small and medium-

sized pharmacies, Drugstore chains possess massive capital and buying power. They have established their position as the

"Final Receiver," absorbing players forced to exit the market through M&A. In the process of consolidating a fragmented market,

the players with the largest balance sheets are the ones who can expand share most efficiently.

Second is cost asymmetry. This is the core of the unit economics. To open a single independent pharmacy, one must rent a

new location and shoulder the heavy fixed cost of rent. However, when an existing Drugstore adds a dispensing room inside its

store, the additional rent cost is effectively zero. Since the front-end retail business has already covered fixed costs like rent, the

dispensing department can operate at an overwhelmingly lower break-even point than its competitors.