The 2012/13 financial year has provided many challenges for pharmacy. It has also seemingly laid the road map for pharmacy moving forward. Challenges bring out the best in people and there has been many pharmacists working extremely hard to overcome the issues presented and continue to thrive in pharmacy as it remains a strong industry.
In a review of FY13 there have been many issues for pharmacy to deal with and an increased number of issues specifically for community pharmacy owners to contend with;
- the impact of the WADP cuts,
- continuation of poor economic conditions,
- increasing impact of rents – especially in shopping centres,
- greater volume of sales being directed on-line,
- the increasing sophistication of supermarket “pharmacy aisles”,
- the increased proliferation of discount pharmacies, and without a doubt the single largest issue;
- the tightening of lending practices at all of the financial institutions.
Of course there are other important issues such as the continued wages pressures which are being felt by all small businesses – hopefully spring will bring some renewed hope for changes to this area.
Since the WADP cuts came into effect in April 2012 we have seen an increase in the dispensary gross profit but a lowering in the dispensary turnover resulting in an increase in dispensary gross profit dollars. Across the thirty four businesses that I have seen figures presented (I am using the 34 pharmacies for the commentary below), the increase in the dispensary gross profit dollars, on average, is approximately 2%.
Moving forward it has been predicted that the WADP cuts will decrease the net profit per script by up to $2/script. Now that there has been an early patent expiry of Crestor, this will see a buffer of approximately $0.60 per script for the next 14 months. So if pharmacists are going to make up the lost $1.40 net profit they are going to need to respond to the challenge by adjusting their businesses to ensure they either specialise in pharmaceutical care or they specialise in the retail theatre.
Retail is proving difficult at the present time mainly due to poor economic conditions which are not predicted to get better until the second half of the 2014FY. I am seeing that front of shop sales have declined by roughly 4% between FY12 and FY13, even though the most recent data shows that pharmaceuticals had the highest price rises (7.6%). Greater competition in some categories has led to price creep in the other less competitive categories. When in a pharmacy I use a selected basket of products test (not overly unscientific but a guide) and I have noted a continual ratcheting of the prices.
Of course there is plenty of commentary in regard to the wider economic conditions but I note that the latest bureau of statistics figures showed that there were some weaker than expected results and that the likelihood of further rate cuts has increased if economic activity weakens this year in line with the anticipated peak in mining investment. Whether further rate cuts will provide much impetus to retail sales we’ll have to wait and see.
Not so long ago I was of the opinion that there was a buyer for every pharmacy that came onto the market. The year gone has certainly tested this theory to the limit and I would have to now revise the statement to “there is a buyer for every pharmacy on the market but some need a lot of work first”. The majority of this work is being spent negotiating with landlords for more favourable lease terms, specifically rent. Whether this comes in the form of a straight reduction, or a decrease in the store size in line with the reduction, it is time consuming and difficult work explaining to a landlord that unless they make trading conditions more profitable they will be the ones that are left in a worse position.
The increasing volume of delinquent pharmacies throughout 2012 and 2013 has brought some gloom to the pharmacy landscape. There is anecdotal evidence that there will be a continuation of this trend for a while longer. Wholesalers and banks report that the level of stressed assets is worrying and there is now far less tolerance when a pharmacy gets into difficulty. This may be a small part of the reason we are seeing the volume of insolvencies. I know we will see more pharmacies in trouble but I also believe that in the back half of this financial year there will be a more stable environment.
The continuing trend toward ecommerce is creating additional strain on traditional retailing. Online sales in Australia reached a record high of $12.6bn in the year to Nov 2012 (NAB, January 2013) but this is expected to reach more than $31bn during 2013 (Experian, Nov 2012). On-line sales are rising at extremely fast rates, fuelled by the strong dollar but also because of the increasing connectivity among consumers. This growth is being further enhanced by an increase in mobile commerce, according to PayPal, 22% of Australians used mobile devices to make a purchase during Christmas 2012 – resulting in $5bn worth of sales. Despite this, 63% of retailers don’t plan to create mobile-optimised websites as part of their on-line strategy (Experian, 2012). It is of note that Coles, Woolworths, Myer and David Jones are all investing significant resources to enhancing the shopping experience of their consumers – having a multichannel presence is moving higher on their agenda, (Econsultancy, Feb 2013).
The large supermarkets have, for sometime, had a “pharmacy aisle” in their store mix but it has been rolled out at an increasing rate. IGA Supermarkets also have a similar styled aisles in their new stores and I am sure these will be part of any refurbishment of older stores. Coles announced plans to expand its presence in the weight loss and sports nutrition categories and are currently reviewing new products by suppliers to be used in this expansion.
Coles is currently trialling the use of tablet computers to provide product information at their Southland store in Melbourne. This increased sophistication and the continued enhancement of their “health presence” means more competition to pharmacy. There is certainly downward pressure being placed on prices of traditional pharmacy lines by the supermarkets which makes it essential for pharmacists to be smarter about their business and to become experts on consumer behaviour.
During the financial year just completed there was a slowing in the growth of discount pharmacies. There have certainly been less pharmacies on the market which has contributed to this slowing but the propensity for not spending too much on any one asset has been foremost in the discounters mind. Creating a successful model in this space requires that all parameters are strictly adhered to, especially the purchase price and the rent for each store.
There are still many opportunities for expansion by all the discount models but I believe that the stronger ones are positioned for long term survival – numbers are the key to success in this space. Especially as margins continue to shrink and volume becomes even more critical.
The largest issue in terms of business sales during this year has been the continued tightening of lending practices by all financial institutions (it will be sometime before these are eased). According to each of the banks (minor and major) they wish to be in the pharmacy space, however the reality is that each have a selective approach to which businesses they will support. This selection is often times solely based on the pharmacist that they are prepared to support – the appetite for any level of risk has gone. LVR’s for first time buyers can be significantly lower than for a pharmacist who has a track record in the industry.
A number of the banks remain exposed to pharmacies that are either in receivership or are operating “very close to the wind”. There is a constant wrestle between retail bankers and their credit counterparts to get deals done. Credit place pressure on valuers to work within a range that they believe is acceptable hence having a direct influence on the price of pharmacy.
Prices for pharmacies in the financial year have become more directly driven by these valuations and the signs are that this will continue as pressure remains for valuers to ease the ROI’s. This said, a premium can still be extracted from the market for a pharmacy that has an obvious upside and in particular those that are in a low rental situation. Rentals below 3% of turnover are in the golden range and are highly sought after while pharmacies that have a rental above 7% are being marked much harder by the buyer market.
The challenges currently facing the industry has resulted in a general lack of confidence. Business failures, often caused by excessive borrowings (brought on by an over exuberant banking sector and excessive wholesaler terms of trade), then being caught by a downturn in the Australian economy, have made everyone uncertain.
No longer can pharmacy rely on wholesaler margins and generic discounts to sustain net profits. The ability to sustain pharmacy profits sits squarely in the guise of your business relevance to your consumer. Finding ways to engage with your consumers will become more relevant throughout 2014 and beyond. It will also be essential to have a strategy to play a more dominant role in either the professional arena or the retail arena. This will involve improving efficiencies (and ideally costs) in the dispensary, maximising the government incentives from the 5CPA and introducing new services that generate an income (eg HMR’s, methadone).
Strategies to grow retail profitably are essential. Grow your customers and improve sales of products per customer, introducing new profitable merchandise and improving margins wherever possible across the store will be essential to ensuring each pharmacy’s long term survival and growth.
The pharmacy industry is a great industry and has a solid future with the ageing population and the general strength of the health care sector. The uncertainty of FY13 needs to be replaced with strong business principles and increased consumer understanding in FY14.
by Peter Marshall, Managing Director Pharmacy Solutions Australia