Excerpt from Brian Keen's "Guide To Buying A Pharmacy"
Group Member or Independent?
There are acknowledged to be around 2,500 pharmacies belonging to groups in Australia in 2005 – up by over 20% in five years: This is large growth from any perspective and warrants some investigation.
As some parts of the wholesale industry have evolved from strong co-operatives of pharmacy owners, it is not surprising to see the very comfortable relationship between retailers and wholesalers that has emerged. On the whole, this model has served the industry pretty well…but in the words of Bob Dylan, “Times They Are A-Changing.” Take a look overseas at the United States and Great Britain for an idea of what can happen; in these countries they have seen partial deregulation and the appearance of pharmacy departments in supermarkets – and in the process seen up to 30% of independents disappear! In New Zealand major changes and part-deregulation effected in 2004 has been wreaking havoc…In Australia we've seen successive state and federal governments determined to open up competition in many fields, and as a result a scaling down of protection in areas such as: dairy farming and distribution; liquor; newsagency; taxis, etc….and with some scary results: a milk wholesale business that 10-15 years ago would have sold for an ROI of around 12% would sell for one of 100%; and look what the impact of wider distribution of newspapers and magazines has done to the newsagency retailer.
Quoting Bruce Annabel, partner in charge of pharmacy services, Johnstone Rorke Associates, in an article headed ‘Last chance, your move’ (AJP September 2006), he has written that every pharmacist owner needs to embrace change and innovate because the current retail model isn’t working any more…he quotes poor retail sales, falling GP, increased overheads, lower return on investment, all pointing squarely to the growing irrelevance of the model. He prescribes two moves you could make: First, a short-term fix that involves increasing generic substitution rates; joining one of the three pharmacy brands gaining prominence; relocate to a superior location, and merge or sell out. And second, addressing your long-term viability by a range of steps including getting your systems right; understanding what drives you customers; taking ownership of regulatory changes; understanding your financial results and position; developing a vision and goal – and then delivering them! A huge challenge for any owner, impossible for many I believe…
Retail pharmacy as a whole is under pressure to change as new challenges that are facing the industry evolve; there is a growing acknowledgement of the need for new strategies and models, which mean a different view of how the individual pharmacist runs their business.
There is a groundswell of informed debate among forward-thinking people in the industry; as readers of the business sections of The Australian Journal of Pharmacy, Pharmacy News and Retail Pharmacy will know, contributors such Kos Sclavos, president of the Pharmacy Guild of Australia, talk about a past where banner groups didn’t care what happened inside the pharmacy, versus the current understanding that it is essential that for a group to be successful it has to promote the same message across all its outlets; And that embraces ambience and the same professional tone… continuity which can only be achieved if there is compliance. Whilst the benefits of compliance through the application of business systems has been accepted as the major reason franchising as a sector has been seen to help its practitioners dominate all manner of industries, pharmacy has, generally speaking, been in denial about this method of business operation. Nevertheless, some time soon, there will be a paradigm shift in retail pharmacy and the forces are mounting to provide suitable models to enable the pharmacy retailer to face this change and succeed...
Quoting Bruce Annabel again, he highlights the need for evolution and explains: “Banner groups started life primarily to gain price advantages through centralized product purchasing. However, over the years, having been acquired and developed by the three wholesalers, they have evolved into providing both product procurement and marketing activities, plus some ancillary benefits such as promotions, signage/ colour identity, fit out/ design support, merchandising, training and HR.”
He continues, referring to a number of issues including: lack of customer relevance; sub-optimal net profit return; rapidly growing overheads; reducing dispensing margins; and the need for banner groups to offer a value proposition that is relevant to the customers or their members; and this is all without deregulation! He believes pharmacy must move beyond the two strategies of regulation and location, and that banner groups need to offer real value in providing a satisfactory financial return for both themselves and the pharmacy owner. He says that banner groups and owner members have a lot at stake and change is essential to the future viability of both.
We are seeing the evolution of high merchandise-intense formats, some based on lower prices and others enhanced customer relevance.
In AJP Jeff Sher, API’s group leader was quoted as saying, “The market can expect greater competition…the future of pharmacy will ultimately not be determined by government regulation or industry bodies, but by the consumer and those who understand the retail value proposition.”
Mr Annabel says pharmacists should scrutinize a banner group to ensure it provides services that augment their customer value proposition and finance viability. “Simply judging the [membership] cost without considering the benefits received doesn’t wash any more,” he said. “Pharmacists will first need to consider the group that matches their own core values and business/professional goals, then take into account the specific market customer demographic. For example, does the owner want to go down the discounts route (lower prices supported by high merchandise intensity) or the route of a niche healthcare retailer?”
He nominates Health Information Pharmacy (HIP) and Fullife as good examples of specialty retail healthcare. “HIP goes down the route of medicines and prescriptions, whereas Fullife drives a limited number of ‘signature’ retail categories.”
The HIP model provides a proven business system and a permanent business coach to help members implement the programs and achieve all their goals; they also run the Accelerated Ownership Program, which helps pharmacists find and buy their own pharmacy where they mentor pharmacists through the whole process of evaluation of the pharmacy, negotiations with the vendor, finance, due diligence, referring to appropriate accounting and legal needs and, finally, taking over and growing the business.
In the same AJP article Lisl Baker, general manager, Fullife, attributes their success to the extra effort required to keep hold of their clients. “Because we aren’t wholesaler-aligned, we can’t keep our stores unless they are doing well. We live and die by how well we’re doing today, so we have got to inspire our stores and paint the vision for them so that they’re motivated to do it and grow it.”
In relation to ‘brand’ you’ll find many definitions offered – in my view any business with a recognised name is a ‘brand’ …it may be a single store or a group of 200 stores… When describing pharmacies that are members of groups I find the term ‘banner group’ misleading due to the varying types of business styles and methods lumped under the heading; additionally, with the attention being paid to franchising and the challenges facing many pharmacists, some existing wholesaler groups, such as Soul Pattision and Amcal, that have in the past been more of a buying group model, are busily restructuring them into what is approaching a fully-fledged business-system franchise such as one sees in the franchise industry at large; accordingly I shall identify pharmacy business types a little differently for my purposes:
Wholesaler Buying Groups; examples include Chemworld, Pharmacist Advice and Synergy; these may or may not trade under the same name, but do have buying programs and a moderate level of marketing programs and support; they will have some form of agreement but not a full business system franchise.
Wholesaler Franchise Groups; previously only included a few examples such as Terry White, Medicine Shoppe and Priceline that operated with a full business-system franchise (described more fully below) but which, as we have seen, are growing to include the likes of Amcal Max and Soul Pattison.
Independent Buying Groups; represented by organizations such as PBS Services; National Pharmacies; Capital Chemists and Pharmacy Alliance, these are less likely to be branded in-store and their members are independents or chains that will receive a varying range of purchaser deals, marketing, training and accounting support options.
Independent Franchise Groups; an emerging field that only include a few examples such as Friendlies in WA and Health Information Pharmacy nationally. These are pharmacist-developed and owned and they operate with a full business-system franchise.
Next time - so what is franchising?12.06.08
