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How to assess a ‘retail opportunity’ 1. Pharmacy

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Last year I asked my local pharmacist if the senior gent cleaning the shelves was bored at home. ‘No,’ he replied, ‘that’s my father-in-law. Five years ago we had two full-time shop assistants, now I have one. Dad comes in one day a week to do the things I’d have to do on a Sunday when we are closed.’

I worked in a pharmacy in school holidays and our Thursday to Saturday average was one script per minute (crucial stat - see below). We were so busy. It was exciting with lots of medical conditions to learn about. Lots of people to talk to in this bustling community hub.

In those good ol’ days trainee pharmacists mixed medicines and one day we had an explosion. Wrong concentration of something; tablets and coloured liquids everywhere. Awesome. We cheered. The Pharmacist, who made me work long hours to turn me off pharmacy as a career, then reminded us of the implications of what had just happened if the customer had taken that medicine. ‘Oh yes, that’.  


What retail or career opportunity does a pharmacy business offer?

Today, pharmacy - with pre-packaged medicines - is less exciting and the numbers (1) look much less exciting.

Not Exciting Number 1. A pharmacist - Australia has 5,456 community pharmacists - works an average of 55 hours per week (~5 days*9 hours and one day* 10 hours).

Not Exciting Number 2. Net Profit (profit after tax) figures show that community pharmacists are working hard for their money. The average community pharmacy is making 3.0%. That’s a mere three cents in the dollar.

                                                                                          

Why has community pharmacy become a ‘hot topic’ in Australia? Money, of course: Revenue from the Federal Government through the $15 billion Community Pharmacy Agreement (2), part of which is the Pharmaceutical Benefits Scheme (PBS) subsidy of $148 per script - or an annual average of $600,000 per pharmacy. The driver is the rise in consumer choice for the cheaper generic drugs over higher-margin branded drugs.

Not Exciting Number 3. If revenue is about to drop by $600,000 per annum, what happens to a Net Profit of ~3.0%?

This sector is another example of structural change which has been masked for some time but is now at a critical pointthe proposal to end the PBS subsidy is only part of the changes facing community pharmacy. We have to understand the numbers and the business context to make the right decisions. 

The pharmacy story in numbers:

Income Statement

  • Average revenue $3.8m (regional shopping centre), $1.8m (strip retail)
  • Average Net Profit 3.0%
  • Prescriptions (PBS) 48% of revenue
  • Revenue from Sales of other products - 52%
  • Gross Profit Margin 22 -24%

Balance Sheet

  • Value of prescription inventory - $240,000 or 38% of Assets
  • Accounts receivable - 23% of Assets
  • Inventory turnover 10.4 (non-prescription), 12.5 prescription
  • Number of prescriptions per day 22 [WOW, we were powering at 1 script per minute and 6 shop assistants at Christmas]

Conclusion? A sluggish business facing increasing competition from supermarkets, discount pharmacies, complementary health stores and online, and ‘downward’ pressure (analyst language for significant drop in revenue) because of the dependence on taxpayer-funded subsidies to hold the revenue line. 


Is there a performance-enhancing tonic for pharmacies?

To improve business performance, you look to increase, rationalise and diversify sources of revenue, and contain, reduce or offset costs. What have pharmacies done?

Supplying nursing homes and being part of membership groups, such as lodges, has been used since the 1960’s as a way of generating reliable sales. To diversify the sources of ‘Other – non-prescription’ revenue, cosmetics and health products were introduced.

Over the last decade, the community pharmacy sector has been consolidating into a group of ‘brands’ which are owned by the major pharmaceutical companies. This creates economies of scale and lower product costs but makes the shopfront just a distribution channel for the franchisor.

Not Exciting Number 4: The Gross Profit Margin in the low 20’s. In the 1970’s my pharmacist worked off a pricing schedule of 40% GPM or 30% GPM (for products to maintain competitiveness). A ‘viable’ retail business aims for 50%.

New revenue ideas

In order to maintain profile (in the customer’s mind) and the ability to upsell, pharmacies have introduced a range of ‘structured professional services’ – such as screening for a range of conditions, health education seminars, new mothers clubs and alternative health services to generate a target 20% ‘Other Revenue’ income with a higher margin.

Are customers paying for these services? If they are being offered as a loss leader, are they generating other sales?

The potential role of pharmacies in the treatment of chronic disease is being promoted but a new model of GP/Pharmacy/Community allied health providers, such as under the ‘Medicare Local’ concept, is not yet established. 

Costs

The location of a business is a key success factor. Pharmacies have been protected to a degree by the Guild/Government Agreement which limits the number of pharmacies in a geographic area. Sometimes that doesn’t help.

When older suburbs become trendy, the rent tends to rise prompting the demise of many traditional shopfront businesses. My local pharmacist has a rent of $50,000 pa with two years to go on his 10 year lease. He told me that the new cafe next door is paying $4,000 per week. Then there are the outgoings…

So is a retail centre location the best solution? Again, look at the numbers:

                                                      

The benefit of location in a shopping centre/retail precinct is that the management company has a vested interest in a pharmacy’s success because of its ability to attract customers into the centre. In this example, the attractively low ‘Rent % (of Sales Revenue)’ number suggests that the community pharmacy is wanted in the centre.

The retail property owner - often a listed company which requires reliable returns for investors such as superannuation fund - want pharmacy services to remain strong as part of the retail mix to help generate traffic. Sometimes pharmacies are located with an external, street side entry to allow late night trading when the centre is closed.

But the business costs must be paid, unlike a strip retail location where the pharmacist can reduce business expenses by not advertising, cutting staff or not opening on a Sunday.


FOR YOUR PROJECT OR BUSINESS

Two issues to consider:

The sources of revenue as a percentage of total revenue

If a source of revenue is dominant, a business could be at risk. This is particularly important where that source of revenue is government funding. One day it may just stop.

The risk of working in the business, not on it in terms of planning for the future. 

Pharmacy seems to be an example of this – where the pharmacist is working hard to keep the business going but it is increasingly at risk of going out of business.

A question to ask:

Is there a way of changing a business model when the key business and operating environment is regulated? There are a number of sectors in a similar situation.


I went back to check on my alma mater strip retail pharmacy. Though it is still a member of a lodge chain, it is now one third of the size, no longer on the corner as this saved 70% of its rent.

On a Saturday morning it had one pharmacist and one shop assistant who was cleaning the shelves of the cosmetics stand. ‘Our busy days are Tuesday and Wednesday,’ she said.


References for reports for the UK and US sectors.

(1) The figures are drawn from the following sources:

i. US National Association of Community Pharmacy 2012 report which shows ‘per store’ results. These figures are used because the structure of the pharmacy sector in Australia (large chains) show a franchisor, not franchisee (individual business), result.

ii. The Productivity Report 2014 and media articles in response to those reports. iii. A review of indicative P&L by retail property managers and local pharmacists who have said they were ‘about right’.

(2) The Pharmacy Guild argues that the subsidy was only 7.1 billion in the 2012-2013 year and has been declining each year.

(3) UK Data: ww.atkearney.com.au/health/ideas-insights/article/-/asset_publisher/LCcgOeS4t85g/content/the-future-of-community-pharmacy-in-england/10192

(4) USA http://www.ncpanet.org/pdf/digest/2013/2013digest_financials.pdf (note: US ratios use per square foot, Aust - per square metre)

This blog is for an education purpose only. 

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