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Australian Journal of Pharmacy : April 2005
retailing retail management Johnston Rorke partner in charge of pharmacy services, Bruce Annabel, email@example.com Can you win the price race? H AVING recently attended my 15th consecutive APP Conference it has become even more apparent to me that the typical community pharmacy busi- ness model has got to change fast! The current model is based on the wobbly strategy of regulation, location (conve- nience), maximising script volume throughput and cost minimisation. It’s wobbly because even with the exist- ing regulations most of these pharmacies are losing market share to smart retailers internal and external to the industry. Com- munity pharmacy is retail, like it or not, and it’s no longer good enough just being there and applying clinical competence. The smart competitors are lifting large chunks of healthcare category business by offering a strong customer value proposi- tion—one that is customer relevant for the market segment they are targeting. In the meantime most traditional commu- nity pharmacies are sitting ducks and sim- ply watch the business float out the door to these other retailers. And don’t forget Messrs Costello and Abbott. Both aim to increase competition within the pharmacy sector, with Health Minister Abbott most recently affirming his plan at APP to have pharmacies com- pete on patient copayments. Such a pol- icy will surely lead to the commoditisation of PBS drugs. As I said last month, many pharmacy owners, in an attempt to retain market share, are responding by reducing prices, thinking that’s the only thing that enhances customer relevance. But it’s risky stuff because few can do so prof- itably, let alone sustain it! There are too many pharmacies—and the number is growing—which mistak- enly use price as a strategy (discounting core category profit-making lines to ‘com- pete’) but don’t offer the widest range nor employ a low cost business model (prod- uct purchases, supply chain, fit-out, staffing and rent). Let’s face it, the cost structure of the great majority of community pharmacies is high in all these areas. These stores have got to find an alternative to price as their strategy to drive customer value and, above all, customer relevance. The price reaction we’re seeing is largely in response to a radical realloca- tion of the pharmacy prescription and retail market. Add to that the fact that retail sales and pharmacy total sales growth (seasonally adjusted compared with same month previous year) have fallen significantly in recent months (see Table One). Table One: Retail sales and pharmacy sales growth, June 2004-January 2005 Month June July August September October November December January Aust. Retail Ph’cy and Cosmetic Sales Growth %% 8.9 6.2 5.5 5.6 3.0 1.9 2.4 1.4 Source: ACRS Retail Trends Choose your strategy wisely Traditional pharmacy is competing in a tougher retail environment against very sophisticated retailers taking market share via aggressive strategies including price. Some of these have emerged within phar- macy in the form of the low-cost/low-price warehouses, Internet online sales, mail order and the growing number of conve- niently located, lower (note not lowest!) price pharmacy franchises based on a well- marketed, customer-relevant retail offer. Most traditional community pharma- cies are losing market share and doing lit- tle or nothing about it except, in many cases, pushing the price button. That’s fine when used as a tactic but definitely not if applied across the board to core cat- egory lines that generate most of the store’s profits. 272 ? THE AUSTRALIAN JOURNAL OF PHARMACY VOL.86 APRIL 2005 Sales Growth 15.5 8.2 9.7 11.8 0.6 3.4 3.8 (6.0) Also, discounting (low price today and high tomorrow), while generating short- term gains, will simply encourage con- sumers to buy when the price is low and stay away when they are high. In the short term such strategies can be successful. However, the survival proba- bility falls dramatically if this strategy is not combined with the delivery of a coherent, long-term retail strategy that focuses on sustainability. McKinsey’s found that between 1984 and 2004 only 57 per cent of companies that adopted purely a short-term approach survived (5 January 2005, Pre- mium Edition, ‘Balancing short and long term performance’). However, 73 per cent of those that concentrated on both short-term and long-term performance survived and, importantly, earned double the profit return. The message is clear! You either join the low-cost/low-price retailers (and imple- ment best practice management to deliver it) or do something different that cus- tomers are interested in and that will gen- erate a profit—that is, profitable health- care where the emphasis is not on price. In my view the price end of the retail pharmacy spectrum will become clut- tered and ultimately lead to a downward spiral in margin and profits to the detri- ment of many owners. Those with high overheads simply can’t go there—they must concentrate on aspects of the value equation not involving price because the lowest cost retailer will always win. They will sell it cheaper in the long term. Either way, be sure of the race you choose to enter. Execute with excellence while keeping one eye firmly fixed on delivering customer outcomes and the other eye on your competitors. ¦