McKesson Corporation: Medline Med-Surg Distribution Economics

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Is that why it's more profitable, or are there other factors?

In the non-acute world, for a company like Medline, if a hospital theoretically decided to buy every single product possible from Medline, converting from companies like Johnson & Johnson or Stryker to Medline brand, you might achieve about 58% Medline brand penetration within that hospital. Medline doesn't have sutures or surgical implants, so depending on the hospital's acuity and complexity, you can reach the high 50s percentage-wise for Medline brand. That's where the profit lies in vertical integration, with self-manufactured and private label products.

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Is that why it's more profitable, or are there other factors?

An interesting benchmark for you, is that Medline and all the big distributors lose money on just the distribution. Distribution costs, depending on complexity, such as low unit measure distribution and logistics concerns, are around 7%. This includes warehousing and trucking, costing Medline or Cardinal about 7% of revenue. However, the distribution rates charged to hospitals are often below 1%, resulting in a negative 6% on distribution alone. While there is some back-end funding, like Johnson & Johnson paying two points below the line for sutures, you still can't beat the math—you're still underwater.

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Is that why it's more profitable, or are there other factors?

So why would any company do that? Because controlling the channel allows you to profit from your own self-manufactured or private label products. A distribution deal for Medline typically breaks even around a 30% Medline brand ratio. There are factors like margin and what you're selling on exam gloves and surgical packs, but as a rule of thumb, 30% is the breakeven point. At Medline, if it's less than 30% Medline brand, you're not making money on the deal, and it could be a loss. After 30%, it starts to be profitable, and at about 40% Medline brand, you have a really good, mature, profitable account for the long term.

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