Amplified change: how to avoid disaster


What steps can pharmacy owners take to help prevent their business from succumbing to the external forces that threaten disaster? Bruce Annabel & Mal Scrymgeour investigate

We recently watched a TV show called Seconds from Disaster. As the title suggests, people are aware that they face impending doom. In some episodes good management, good fortune or outstanding skill of an individual saved the day. In other episodes the outcome is catastrophic.

The series covered incidents such as British Airways flight 9 in 1982. A 747 flew through a cloud of volcanic ash. All on board experienced an anxious 25 minutes when volcanic ash stopped all four engines working and the plane glided as the crew worked furiously to restore power.

Captain Eric Moody told the passengers “We have a small problem. All four engines have stopped. We are doing our damnedest to get them going again. I trust you are not in too much distress.”

With a combination of good fortune and immense skill, the aircraft landed safely. It was like a Hollywood action movie, but it was real.

Disaster or disruption?

While pharmacy isn’t quite facing its own ‘Seconds from Disaster’ situation, it is facing what we’ve termed ‘amplified change’.

The SARS-CoV-2 virus is the cause of huge disruption and rapid change to the economic landscape. We know many businesses, including a number of pharmacies, are being supported by government. They are only avoiding disaster because of external help.

Other pharmacies are struggling, regardless of any external help, because of a huge reduction in patient traffic.

We have fundamental change. Many customers have reduced their buying of discretionary items (retail sundries in our vocabulary) and for many businesses, this amplified change means everything else changes too. And we expect the change to be permanent.

The virus-induced restrictions and state border closures have hammered the economy, lengthening the recession and increasing government deficits and debt. Last month the federal government fired its big fiscal guns at driving up demand, business investment and employment.

The private sector is the key to recovery and how the sector responds to the stimulus will be critical to how we recover from the recession.

The bulk of the demand stimulus is aimed squarely at incentivising consumption by lower and middle-income earners, typically the traditional customers of community pharmacy. In theory this is good.

Restarting the engines

An attempt to restart the economic engines with bold policies, combined with historically low official interest rates, will hopefully shorten the recession and reduce its depth compared with the one we experienced 30 years ago.

Westpac chief economist Bill Evans thinks the RBA may even reduce official rates from 0.25% currently to 0.1% in the near future.

For this strategy to restart the economic engines to work, much has to go so right, including:

  • business responding by investing and re-employing;
  • people deciding to return to work;
  • wary consumers deciding to spend rather than save;
  • vaccination of the population by the end of 2021;
  • avoidance of another ‘Victorianesque’ second wave;
  • state borders re-opening; and
  • state governments implementing their own stimulus measures.

Clearly the federal government is aiming at business using the ‘here and now stimulus’ to quickly recover the economy and employment thus allowing them to curtail welfare support. This is critical because the government and the Reserve Bank have nothing left to fire if this doesn’t work.

Fortunately, consumer confidence rebounded 11.9% in response to the federal budget and by 32% during the past two months, according to the Westpac-Melbourne Institute Index of Consumer Sentiment.¹

Pharmacy owners can play their part in the recovery too, by employing and investing in their businesses.

Just last week, a client called to say he and his partner will now embark on two major pharmacy refits, including a more service-oriented dispensary design they had been putting off for two years.

Taking care of your business

Pharmacy owners can ameliorate the risk that uncertainty brings by acting on what we term the internal controllables: “the chances of loss from various factors that can be reduced or avoided altogether”.²

In other words, restart your own economic engines. Now is the time to look at what you can influence within the pharmacy, because the externalities, good and bad, will happen whether you like it or not. Your foil against the bad is implementing the many internal controllable opportunities now.

One thing we know is that discretionary expenditure is at risk while purchase of essentials will, by comparison, dominate.

This fits well with the core health activities of community pharmacy. Obviously maintain and increase the essentials that patients need, while carrying less of the discretionary items they don’t. Simple.

For often historical reasons, many pharmacies invest in excessive volumes of stock that fails to generate a return because they are slow moving. People purchase these products elsewhere and margins are poor.

After discounting and including expenses such as rent and advertising, they lose money at the net profit line.

What has worked in the past, won’t necessarily work in the future. Rethink it and ask yourself the hard question—will this activity grow the net profit line or not?

Excessive floor space m2 is an issue that can’t be fixed quickly, but merchandise mix is something that can.

Table 1 shows the performance of Pharmacy A, a traditional banner community pharmacy, essentials and retail sundries performance:

 

Note 1

Sales

GP$

GP%

Shelf space lm

Stock $

Stock turns

Net profit

Sleep management

$81,206

$36,410

45%

14

$12,604

3.6

$23,630

Signature health

$522,344

$245,564

47%

128

$60,319

4.6

$130,274

Priority health

$210,087

$82,216

39%

86

$34,131

3.7

$4,456

 

$813,637

$364,190

41%

229

$107,054

4.2

$158,360

   % of total retail

66%

72%

 

45%

42%

 

 

 

 

 

 

 

 

 

 

Retail sundries

$422,484

$140,235

33%

274

$146,473

1.9

($106,806)

% of total retail

34%

28%

 

55%

58%

 

 

 

 

 

 

 

 

 

 

Total retail section

$1,236,121

$504,425

41%

503

$253,527

2.9

$51,554

  • Signature health: s2/3, wellness/vitamins, wound care etc.
  • Priority health: digestion, eye, ear, medicated skin & hair, sun, footcare, quit smoking etc
  • Retail sundries: cosmetics, gifts, general skin & hair, hand/nail, fragrance, oral, jewellery, confectionery, baby basic offer etc.

The total retail section generated, after expenses, a net profit of $51,554 comprising the ‘essentials’ earning $158,360 compared with sundries section losing $106,806. Importantly the essentials delivered 72% of the income from 45% of the shelf space and 42% of the stock investment.

But retail sundries earned only 29% of income from 55% of and 58% of the investment in space and stock respectively, yielding a net loss of more than $100,000.

So, there’s not enough of the essentials, meaning Pharmacy A is exposed to losing income through falling retail sundries sales.

Table 2 summarises Pharmacy B, an innovator community pharmacy, essentials and retail sundries performance:

Note 1

Sales

GP$

GP%

Shelf space lm

Stock $

Stock turns

Net profit

Sleep management

$154,982

$76,837

49%

24

$23,008

3.4

$57,653

Signature health

$576,103

$245,564

46%

173

$76,326

4.0

$128,820

Priority health

$269,344

$104,862

39%

101

$33,089

5.0

$23,942

 

$1,000,429

$449,071

45%

298

$132,423

4.2

$210,415

   % of total retail

89%

91%

 

77%

85%

 

 

 

 

 

 

 

 

 

 

Retail sundries

$122,606

$46,608

38%

91

$23,698

3.2

($26,288)

% of total retail

11%

9%

 

23%

15%

 

 

 

 

 

 

 

 

 

 

Total retail section

$1,123,035

$495,680

44%

389

$156,120

4.0

$184,127

Pharmacy B generated far higher returns by investing 85% of stock and 77% of space in the essentials sections while minimising retail sundries, resulting in strong net profitability and setting it up to help meet the challenges of uncertain times ahead.

Furthermore, the pharmacy presents a strong health image instead of looking like a mixed business.

The steps to take

Our recommendations:

  • Assume ‘amplified change’
  • Consider what your area’s patients need.
  • Review your most recent results and ask if your finances can handle any further hits Analyse from POS reports your stock mix, margins and space allocation.
  • Make changes within your control to emulate Pharmacy B.

In times of rapid change, standing still is your enemy. The pilots of Flight 9 experienced ‘amplified change’, but they stayed calm and acted to solve the problems they faced.

The recommendations above outline actions for you to undertake. Doing nothing isn’t an option. Act now and guide your business safely through the economic turbulence.

References

1. David Rogers, ‘Confidence soars on federal budget boost’, The Australian, 14 October 2020
2. Businessdictionary.com

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