Pharmacies may have experienced super profits and a significant increase in turnover in the past few years due to the demand of baby formula and other health products in China. Fuelled by domestic safety scandals and an increasingly affluent and rapidly growing middle class, Chinese demand for international brands offering trusted reputations and quality products is growing exponentially. This is particularly the case for products such as vitamins, supplements and baby formula. Due to the restrictions on manufacturers’ ability to sell direct into the Chinese markets, an unsophisticated market has evolved. This has seen opportunistic buyers, Chinese tourists visiting Australia, students studying at the nation’s universities and Chinese migrants, snapping up box-loads of vitamins and baby formula in local pharmacies, discount chemists and supermarkets and shipping them direct to China. As a result of this increase in retail consumption, Pharmacies have experienced a significant increase in turnover in these product categories in the past few years.
Under the previous arrangements, imports of such products into China are largely restricted and limited to unsophisticated traders who can only sell to China’s free trade zones, where goods are shipped to warehouses and subsequently sold through an e-commerce platform to avoid tariffs. However, since the signing of the Free Trade Agreement deal last year, the previous tariffs and duties that add up to 45% to the cost of certain products are reduced to a single import value added tax of 10%, which means this will create opportunities for Australian manufacturers and wholesalers by significantly increasing their competitive position.
The doors are now open for manufactures like Blackmores who will soon be able to ship products directly into China. As a result the share price of Blackmores has more than doubled since the June signing of the FTA. While this has created a super profit situation for backyard traders and indirectly pharmacies in the short term, the removal of import tariffs and trade barriers between the two countries will soon eliminate this opportunity in favour of manufacturers. These changes will inevitably result in a reduction in gross sales for many pharmacies across the country.
For existing or potential pharmacy owners looking to buy, sell or value a pharmacy, there is a need to consider the impact of the historic sales and profit that is attributable to ‘abnormal’ volume in these product categories given that this volume is likely to either plateau or decline over the next 12 to 18 months. Valuations should be adjusted to normalise these income streams in light of the likely decline over time, in this way the impact is somewhat similar to the previous nursing home sales and weight loss sales spike when it first entered the market. While the opportunity should be maximised for as long as it remains available, savvy Pharmacy owners should also factor such declines into forecasting and budgeting and ensure that over performance in these product lines is not masking underperformance in other retail categories.
Felicity Crimston – Manager JR Pharmacy