Converging influences arrived in 2011 to create the “Perfect Storm” in the pharmacy industry with dire consequences for a number of pharmacy owners. For the first time in our experience there are a relatively large number of pharmacies currently in the hands of administrators.
Every day it seems another story of a pharmacy in difficultly surfaces. The converging influences have been the economic downturn, the reduction in wholesaler’s margins and a reigning in of trading terms, increased competition and falling margins through discounting, and occupancy costs becoming unsustainable.
Unsustainable deals in high rental locations is the single biggest challenge facing pharmacies particularly in shopping centres. In the past, under pressure to expand their numbers, some marketing groups have negotiated rental deals that have now become untenable in an industry with falling margins. The ‘killer’ has been the effect of the compound growth in rents due to annual 5% increases (and in some cases higher) when the business has been achieving flat or declining sales revenue. It seems in many cases either no long term view was taken when signing up to the lease, or unrealistic growth forecasts were used.
The industry has reached the point where it will need to turn its back on landlords demanding high rents for pharmacy tenants. An interesting anecdote emerged last week which amply demonstrates how pharmacies are being ‘milked’ by landlords. A 400 square metre site was offered to a well-established pharmacy operator at $1,500 per square metre. The landlord would not budge on its negotiations with the pharmacist. So the pharmacist sent in a friend who operates large discount merchandise stores to express interest in the site. The offer made? $500 per square metre!! When the subterfuge was revealed the landlord quickly negotiated a rental deal that was close to that requested by the pharmacist in the first place!
The days of the large footprint pharmacy in a centre is over, unless landlords realize they need to treat such tenancies as mini-majors and provide rental packages that are sustainable for the long term.
The gloomy economic outlook in Europe, depressed retail spending and a federal government that is struggling to provide meaningful leadership and the changes hitting the pharmaceutical industry have created levels of uncertainty and anxiety amongst pharmacists.
Is there any good news? Well yes, pharmacists have proved to be a very resilient group in the past and they will rise to the challenges ahead this time too. Adapting to the altered business conditions quickly is the key to survival. Each pharmacy owner should be carefully examining their business. Cost control in all areas is crucial and none more so than occupancy costs. If your rental costs have risen above 5%, serious consideration should be given to negotiating a rental reduction. If you think you can live with occupancy costs at 7%, don’t make the mistake of thinking you can cut margins as a means of competing. It is better to maintain and concentrate on giving outstanding service to your customers. Also ensure you have implemented every Guild initiative to help you maintain your gross profit.
It is tough for everyone at present but we are all on the same ‘football ground’. I suggest you don’t wait for someone to get you the ball, get your own head over it and get it for yourself!
Peter Marshall
Managing Director
Pharmacy Solutions Australia
peterm@pharmacysolutions.com.au
0417 721 203