Medici Capital > Articles > Is the Glass Half Empty or Half Full?

Article By:

Frank Sirianni BEc(Hon) MEc

Is the Glass Half Empty or Half Full?

Wednesday, 5 July 2006

After the 30th June this year, the new five-year Guild-Government agreement was meant to take effect. With agreements still continuing and a proposed three-month extension, it seems the cloud of confusion, the war of words and the blanket of uncertainty will continue to linger around the industry. While the ensuing agreement had been hailed as a "make or break" moment for the industry, for the average pharmacist, there has never been a time to be so cautious in any pharmacy investment decision. Even if de-regulation regarding the supermarket issue is not approved, it seems minute changes to rules restricting ownership, location, services and pricing could have detrimental effects to a pharmacy's bottom line.

Free-style

Pharmacy, and your, strength has always been its relationship and understanding of the customer!

Some argue that the intervention of the Government in both the regulation of and payment for services results in a "disconnect" in the important relationship between pharmacist and patient. Pharmacy must not lose sight of the importance of the customer relationship.

In a recent visit to Switzerland, one very successful pharmacist passionately encouraged the Pharmacy Study Tour delegates "to take a freestyle approach to pharmacy (like skiing) and take control of health as well as the current 'sickness' market in which we operate". He went on to state that "too much protection leads to no feeling for the market".

Regulation at whose cost?

In the early 90's, pharmacy owners funded micro-economic reform under the first Guild/Government Agreement. A fact often forgotten by both the media and the bureaucrats. Pharmacy paid for the regulation, closure payments, and location rules through reduced mark-up and real dispensing fees.

Pharmacy is now being asked to pay the piper again.

Pharmacy funded the regulation to create an environment for industry development and certainty. Many pharmacists invested heavily in new shop layouts and designs as well as technology. Arguably, wholesalers, manufacturers and other providers also restructured and aligned their business models to suit the economic reform environment created by the Agreements.

For an industry governed and sustained for so long through protection; Is it time for pharmacy to be exposed? Possible deregulation will facilitate competition and foster a need for innovation within community pharmacy. It will allow for specialisation and a stronger customisation of pharmacy offerings. Specialising into sports medicine, wound care, diabetes, or arthritis, are simple ideas to promote the service side of pharmacy and generate customer loyalty. Success will arise through possessing a positive business attitude and a strong business model.

Good business and pharmacy owners will survive!

The supermarket offer

Woolworth's has requested an approval from the Federal Government to operate five in-store pharmacies in an openly transparent eighteen-month trial.

But how transparent? Is it co-incidence that the AMA and ACA have joined forces with Woolworths? Should the Guild-Government agreement allow for such an occurrence; critics suggest that the existence of smaller community pharmacies could be in jeopardy. This extreme view makes the assumption that the eighteen-month trial will be accepted. Woolworths claim Australians pay too much for medicine and the proposal asks for consumers to be the primary judge of achievement. But this ignores the OECD comparisons of pharmacy costs and, most importantly, consumption.

For the pharmacist community, does a slight price difference substitute superior personalised service and interpersonal relationships? For regular consumers, a trip to the pharmacy is not just the attainment of medicine; a pharmacist is a service provider, an educated consultant and a caring professional. First class service, professional advice and a smile all drive sales just as price too is a driver. If Woolworths model their pharmacy with their current retail values in mind; would you return to the disinterested checkout operator for health advice?

Overseas models

The above average returns associated with the pharmacy industry has seen pharmacy industries worldwide subject to corporate interest takeovers. Two markets with significant corporate investment are the United States and United Kingdom. A study in the United Kingdom revels deregulation has lead to supermarket chains Tesco and ASDA (a subsidiary of Wal-Mart) becoming the highly successful retailers of pharmaceuticals. As a result of de-regulation in the UK, the number of independent pharmacies to total outlets dropped 27% to now represent 33% of pharmacy sites.

While these figures are alarming, Australian pharmacy owners need to take action.

Success may have been aided in the past by the supposed "government protection"; many owners have succeeded almost solely due to this. The investment into a business management course or participation in training courses will provide you with the business knowledge to succeed. Invest money into spending time with a pharmacy consultant, develop a business model and act it out. Learn, learn, learn, commit and succeed. The possible deregulation may slow the cash flow but getting through the initial period will be the hardest. A strong business will always succeed.

The Australian government appears to have adopted the US and UK systems as benchmarks for good practice. However, in most parts of the EU, other than the UK, pharmacy is regulated and remains in the hands of pharmacist owners. Let's compare the overall health costs and budgets in the US and UK to Australia and the EU generally?

Woolworths are targeting the pharmacy industry because it is profitable. Whilst the proposal is only in its infancy, planning by Woolworths for such a move would have been extensive. With obvious long-term objectives and strategic goals it is uncommon for a firm to withdraw from a newly entered industry. As mentioned earlier, it may be time for pharmacy to adopt a stronger corporate outlook. In the world of business, the only constant is change and changes in the external environment often have the potential to completely transform an industry and it's profitability.

Obviously, Woolworths is seeking growth markets to achieve better returns for shareholders and satisfy the investment community after the relative debacle of its move into the liquor and petrol markets.

One major issue for current owners is how to compete with the buying power of large multinational organizations. The reality is that if Woolworths pharmacies eventuate; they would compete in pharmacy the same way they do in other industries. Using a low frills cost leadership strategy, Woolworths generate profit by selling large quantities with low margins. However in every industry, there are many opportunities for profit generation; the Woolworths proposal may move sales from existing competition however it leaves gaps for service differentiation. The basic idea of providing a service is to offer superior customer value relative to your competitors; community pharmacies can still enjoy the profitability of the industry by adjusting their business strategy.

European pharmacies have long enjoyed the benefits of a differentiation strategy customising their product and service offerings to areas as diverse as HIV, infant care, nutrition and compounding. Being creative, entrepreneurial and challenging the traditional business model may boost your sales; de-regulation or not. A customer will always pay if they perceive the service offering to be unique and valuable.

What about the impact on manufacturers and suppliers?
A key platform in the supermarket model is the management of the supply chain and operating costs (including logistics). How will this impact pharmaceutical manufacturers and suppliers? While they appear to be willing players in the supermarket foray into health and beauty, they do so at the peril of lower margins and higher negotiation pressures.

Whether the overseas situation is entirely transferable to the Australian market is yet to be known. Market sizes, differing medical systems and cultural values would all have an effect on the consumer uptake of pharmacies in supermarkets. With the UK example illustrating that possibly consumers may have the final power and tend to prefer lower prices and convenience; maybe the financial position of owning a pharmacy in the future may not generate the same returns. With Woolworths taking the first step towards corporate ownership, further corporate investment catering to consumer demand for convenience and low prices is inevitable. Whilst the Australian pharmacy industry is appalled at Woolworths, the new entrant may shake up an industry that could be due for re-generation. Whilst we can all speculate now as to the possibility of future scenarios; we can all be thankful for the chance to re-think current business strategy. Even if you are concerned about the implications of Woolworths, supermarkets and pharmacy; don't panic, take a deep breath because the agreement hasn't been signed and the Guild are using every resource available to ensure the industry remains protected.

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