The Profitability Crisis in China’s Pharmacy Sector
China’s retail pharmacy market, once a beacon of growth and profitability, is facing an unprecedented challenge. Major chains like Laobaixing (老百姓) are reporting declining revenues and shrinking net profits even as they continue to expand their store networks. This paradox of 越开店越亏 (losing money the more stores open) has become a central concern for investors and industry analysts alike.
According to recent financial disclosures, Laobaixing reported a 1.51% year-on-year decrease in revenue to 10.774 billion yuan and a significant 20.86% drop in net profit attributable to shareholders to 398 million yuan for the first half of 2025. This trend isn’t isolated to Laobaixing—other major players including Guoyao Yizhi, Shuyu Pingmin, Dashenlin, and Jianzhijia have all reported substantial profit declines throughout 2024 and into 2025.
The Expansion Paradox: More Stores, Less Profit
The pharmacy sector’s aggressive expansion strategy has created a difficult operational environment where new stores cannibalize existing store revenues while adding operational costs. During the first half of 2025, Laobaixing added a net 108 new stores, consisting of 305 new franchise locations offset by 197 closed directly-operated stores.
Declining Single-Store Performance
The core of the profitability problem lies in deteriorating single-store economics. Laobaixing’s pharmaceutical retail revenue decreased by 2.30% year-on-year, with gross margin falling by 1.07 percentage points. This decline reflects intense competition that has forced chains to engage in frequent promotions and price wars, further compressing already thin margins.
Industry data from Zhong Kang reveals that China’s retail pharmacy market actually shrank in the first quarter of 2025, with a net reduction of approximately 3,000 stores nationwide, bringing the total below 700,000 locations. This market contraction suggests that the era of easy growth through expansion has ended.
Financial Pressures and Goodwill Risks
The expansion strategy has not only pressured operational metrics but also created significant financial vulnerabilities. Laobaixing’s debt burden has increased substantially, with 1.093 billion yuan in current portion of non-current liabilities and 1.321 billion yuan in long-term borrowings as of mid-2025.
The Goodwill Time Bomb
Perhaps most concerning is the massive goodwill accumulation resulting from frequent acquisitions. Laobaixing’s goodwill reached 5.763 billion yuan by mid-2025, representing a staggering 85.6% of the company’s 6.733 billion yuan in net assets. This creates substantial risk of future impairment charges if acquired businesses underperform.
Company Secretary Feng Shini (冯诗倪) acknowledged these challenges during an earnings conference, attributing the 2024 profit decline to three main factors: increased new store numbers, the performance growth period for new stores, and goodwill impairment losses. For Q1 2025, the company cited losses from new stores in their growth phase, store closure costs, and increased depreciation and amortization.
Shareholder Actions Amid Financial Strain
Despite the challenging financial performance, controlling shareholders have been actively managing their positions through strategic divestments and complex financing arrangements.
The Pledge-Release-Pledge Cycle
In June 2025, the controlling shareholder, Pharmaceutical Group, engaged in what market observers call “release-pledge-repledge” transactions. The group first released a pledge of 51.11 million shares to China Construction Bank’s Xiangjiang Branch, then immediately pledged 32.11 million shares to the same institution for a three-year term through June 2028, citing “own production and operation needs” for the funds.
This type of financing activity has become increasingly common among pharmaceutical retail company shareholders. As of June 30, 2025, Pharmaceutical Group had pledged 62.04% of its shareholding in Laobaixing, representing 15.65% of the company’s total shares.
Historical Divestment Patterns
The current financial maneuvers follow a pattern established by founders Xie Zilong and Chen Xiulan (谢子龙、陈秀兰), who control Pharmaceutical Group. Between 2020 and 2022, the group realized over 1 billion yuan through share reductions. The recent announcement of plans to sell up to 22.8029 million shares (3% of total equity) through block or auction trades continues this trend, potentially generating approximately 451 million yuan based on current valuations.
Strategic Implications for the Pharmacy Sector
The challenges facing Laobaixing reflect broader industry dynamics that require strategic reassessment by all market participants.
Market Consolidation and Rationalization
The pharmacy sector appears to be entering a consolidation phase after years of rapid expansion. With store numbers declining nationally and average customers per store potentially increasing, surviving chains may eventually benefit from reduced competition. However, the transition period presents significant financial strain for even the largest players.
Operational Efficiency Imperative
In this new environment, operational efficiency becomes critical to survival. Chains must focus on:
– Optimizing product mix toward higher-margin categories
– Implementing sophisticated inventory management systems
– Developing proprietary product lines
– Enhancing customer loyalty programs
– Leveraging digital channels for customer acquisition and retention
The Path Forward for Pharmacy Chains
The current profitability crisis represents both a challenge and an opportunity for China’s pharmacy sector. Companies that navigate this period successfully will likely emerge stronger and more sustainable.
Successful chains will need to balance several competing priorities: maintaining adequate scale while avoiding destructive competition, investing in digital capabilities without overspending, and managing financial structures to avoid excessive leverage or goodwill risk.
The phenomenon of 越开店越亏 may eventually subside as market rationalization takes hold and surviving operators achieve better economies of scale. However, the transition will likely claim more casualties before the industry reaches a new equilibrium.
For investors and industry observers, the key metrics to watch will include same-store sales growth, gross margin trends, goodwill-to-equity ratios, and cash flow generation. Companies that demonstrate improvement in these areas despite the challenging environment will likely be the long-term winners in China’s pharmacy sector.