Editorial

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Welcome to the May 2012 homepage edition of i2P-Information to Pharmacists. Rollo Manning has been having some time out having staples removed from the site of his open heart surgery.He is now at home recuperating in Darwin, having arrived home last Friday, beating a cold and hasty retreat from Canberra.We all wish him a speedy recovery and hopefully, he will be fit enough to contribute by next month.
This month, Pharmedia discusses the toll that is taken when someone complains about you to an authority without good cause. Well, the good news is that you can now take action to protect yourself if such a complaint is made, and that may even include action for defamation. Read about a recent case involving two doctors, with Mark Coleman drawing on personal experience to illustrate.

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Are the discounters impacting community pharmacy beyond margin erosion?

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Neil Retallick articles by this author...

Neil Retallick is a former General Manager, Merchandising, for National Pharmacies, the successful community pharmacy model owned by the Friendly Societies. Neil holds a Graduate Diploma of Marketing from Monash University, is a CPM and a graduate of the AICD.He began his career with Myer Stores Ltd and worked for FMCG companies including TIA (Sheridan) and Pacific Dunlop. Prior to these roles Neil worked for Cadbury Schweppes Drinks Division - Grocery, and Trimex Pty Ltd in Victoria in State management roles. He is currently Chief Executive Officer at the  Combined Dispensaries in Sydney and is a Member of the Advisory Board at Ehrenberg-Bass Institute for Marketing Science

I’m not sure about this, just as I’m not sure if Chemist Warehouse is Australia’s cheapest pharmacy. However, I have been asked that question in the printed media hundreds of times along with every other literate Australian.
What I’m wondering is if there is a direct causal relationship between the rise of the pharmacy group, Chemist Warehouse being the largest of these, and the reduction in support to all those independent pharmacies that are still trying to operate either individually or in much smaller groups.
My thinking goes like this.

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I’m not sure about this, just as I’m not sure if Chemist Warehouse is Australia’s cheapest pharmacy. However, I have been asked that question in the printed media hundreds of times along with every other literate Australian. What I’m wondering is if there is a direct causal relationship between the rise of the pharmacy group, Chemist Warehouse being the largest of these, and the reduction in support to all those independent pharmacies that are still trying to operate either individually or in much smaller groups. My thinking goes like this.

From a supplier’s perspective, community pharmacy is a relatively expensive distribution network. A supplier can make one appointment with one buyer to get an order with a national grocery chain. That order sees stock delivered to warehouses owned by the grocer, perhaps one in each State. That’s it. The grocer does the rest.

For that same supplier to achieve national distribution of its product in the pharmacy channel takes a lot more effort and cost. This is because the pharmacy sector is so fragmented, as it is intended to be. Government regulation prevents the creation of corporate chains. The Pharmacy Guild works to ensure independent owners, its constituency, are not put at risk. So that supplier has to make presentations to hundreds of customers and then negotiate separately to have its stock put into the warehouses of the pharmacy wholesalers. If it wants display collateral in these stores it has to have merchandisers or other representatives call on every one of them.

There is a significant cost in doing all this. Some might argue that the grocer negotiates such a low buying price that this channel, notwithstanding its other efficiencies, is less profitable than the pharmacy channel. If that was the case I find it hard to understand why these suppliers are so keen to do it.

Enter the pharmacy buying group. By grouping pharmacies together to consolidate purchasing power, a buying group can push the supplier for a lower buying price. If this increase in potential or actual volume can be combined with a promise of improved display compliance in store, then the supplier has the potential for an improved outcome – sell-in and sell-out. The icing on the cake would be if the buying group could negotiate improved terms with one of the pharmacy wholesalers, thereby essentially eliminating the third player in the deal and most likely improving the profit margin for the pharmacy group and the supplier. This is the business model that Chemist Warehouse has pioneered in this country. I tip my hat to them for their innovation and their fortitude.

Imitation is the best form of flattery. Many independent pharmacies have cottoned on to the attraction of the buying group model over the last several years. They have determined it’s the only way to stay competitive in an increasingly discounted market. I don’t know what percentage of the community pharmacy market now operates through buying groups. It would be a high number. No doubt the pharmacists that are involved are achieving lower cost prices and the potential then for either higher profits or sustainability.

The suppliers too are happy. To achieve national distribution of a product no longer requires hundreds or thousands of customer calls. Maybe just 30 or 40 negotiations? And the pharmacy groups help with the wholesale distribution too. As for compliance, this too has improved. This allows the supplier to reduce his field force thereby cutting the costs of operating in the pharmacy channel. Wins all around it seems.

All this sounds fine but my concern is that many hundreds of pharmacies, perhaps still thousands, are not members of large buying groups. If the suppliers reduce their field forces, who calls on these pharmacies and how often? Who does the staff training on the new products? How does the pharmacy get the collateral for an off-location display? How does this small independent pharmacy get a buying price that allows the setting of a competitive retail price? How does this small independent pharmacy survive?

There is an adage that ‘the big get bigger and the small disappear from the face of the earth’. Notwithstanding the existing protection afforded community pharmacies by the current regulatory framework, the writing is on the wall. Small pharmacy cannot survive, not just because of the low prices offered by their larger competitors but because these larger competitors allow the suppliers to reduce their support of the channel and still get market coverage.

I started with a question and the question remains. I would be interested in the views and perspectives of others on this issue.

Are Australia’s small pharmacies doomed?

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