Call of the mall


Shopping malls are in decline. Despite high rents, they’re still a prime location for pharmacy, but can they still be profitable? Bruce Annabel and Mal Scrymgeour explain

It was Ralph’s fault. Or could be Victor’s fault. Either way Ralph Erskine and Victor Gruen have a lot to answer for. You might never have heard of these two gentlemen, but they are the fathers of the shopping mall.

It all started in 1955 when, with typically modest Scandinavian fanfare, the world’s first fully enclosed shopping mall opened in Lulea in northern Sweden. The architect of the building was Ralph Erskine and, on that basis, Erskine can rightfully claim to be the Father of the Shopping Mall.

Vying for the same title is Victor Gruen—it’s a name you might recognise from the ABC’s Gruen Transfer.
Victor Gruen designed the world’s first ‘regionally-sized’, fully enclosed shopping complex known as the Southdale Center in Minnesota. It opened in 1956 and became the template for the malls we see today.

Are they good or bad?

Either way you argue it, these two men gave birth to the modern shopping mall. Pharmacy owners can decide if that is a good thing or a bad thing.

Many malls are less appealing than they were for one simple reason: there are fewer customers. In general terms, the shopping mall is in decline around the world. In the USA they have been in decline for well over a decade. And that trend has unequivocally arrived in Australia.

For years, large shopping centres have provided their owners with world class returns, great yields and dividends. Customers loved them. With the arrival of COVID-19, suddenly the idea of being with lots of other people isn’t as appealing as it once was. The call of the mall is waning, and quickly. In the USA, 25% of malls are predicted to close within the next 5 years. For many, the equation of paying the same rent on large, often much of it unproductive footprints simply doesn’t stack up.

Formerly, malls justified their high rents by the high levels of potential customers. Malls must now accept that they are not doing that and therefore pharmacy rents and floor space must reduce. Some of the more inventive and creative landlords are now trying to include online sales into their lease terms. To us, that is a very uncomfortable argument.

It is worth reviewing your own rental situation and how it compares with the pharmacy data we see based on Pitcher Pharmacy Services 2020 client data series presented in Table 1.

Table 1

 

All shopping centre pharmacies

Banner pharmacies*

Traditional strip independent

Floor space m2

331m2

407m2

222m2

Customer numbers growth

(0.5%)

(5.7%)

2.3%

Total sales (ex hcd)

$4,863,342

$5,888,153

$3,525,407

Total sales (ex hcd)/m2

$14,693

$14,467

$15,880

Retail sales/m2

$7,463

$9,265

$4,589

Retail sales/total (ex hcd) %

44%

56%

24%

Retail GP%

34.3%

33.7%

39.2%

Total overheads/sales (ex hcd) %

28.7%

29.3%

25.8%

Rent/sales (ex hcd) %

7.7%

8.3%

4.1%

Rent/m2

$1,135

$1,200

$671

Wages/total income %

39.7%

39.6%

42.1%

M2/no. FTE employees

27m2/FTE

28.8m2/FTE

24.8m2/FTE

EBITDA**/sales (ex hcd) %

7.8%

6%

9.9%

Return on assets ***

11.2%

7.4%

15.3%

 * refers to a banner group mostly located in shopping centres

** net profit before interest, tax and depreciation

*** Return on assets (ROA) is EBITDA/total assets employed (cash, debtors, stock, fit out, systems and purchased goodwill)

Our top 10 take out points:

  1. Sales: Shopping centre pharmacies generate higher sales than the traditional strip pharmacy. The belief that higher sales delivers higher profits is why many still chase shopping centre locations.
  2. High rent: Shopping centre rent represents a far higher rental expense in dollar terms and as a percentage of sales. Good locations cost more and drive profit, but the definition of a ‘good location’ has changed markedly.
  3. Rent/m2: While rent/m2 is a critical factor, the most critical is floor space m2. Small footprint pharmacies in shopping centres are doing reasonably well.
  4. Floor space: This is important because high cost locations must generate higher sales/m2 to overcome the higher expenses. Table 1 demonstrates that traditional strip pharmacies generate higher overall space returns than their shopping centre cousins. It should be the reverse. Shopping centre pharmacies enjoy significantly higher retail sales/m2 and lower total sales/m2 because dispensary returns are lower than those in traditional strips. After rent and other direct outlays are deducted, little if any net profit results from much of a shopping centre pharmacy’s retail space. For shopping centre pharmacies, overall net profit is totally dependent on dispensary and a handful of retail health departments. In contrast traditional strip pharmacies maintain mostly health/medicines departments that deliver good margins, 39% v 34%.
  5. Retail margins: Reasons why shopping centres don’t earn higher margins include:
    a. Excessive floor space is often occupied by low margin, slow turning sundries.
    b. Soft discounting to drive up sales volumes often worsens the problem. Merchandise mix and changed floor space utilisation for income producing activities must be considered.
    c. During the coronavirus pandemic the average consumer ramped up their affinity with technology choosing to buy more online. Health consumers’ behaviour has changed radically meaning pharmacies must also change.
    d. The current shopping centre pharmacy business model is no longer fit for purpose.
  6. Costs: In an attempt to hold the bottom line together, shopping centre pharmacy owners cut wages and hours leading to lesser service and over-worked pharmacists. However, despite those efforts, customer numbers continue falling and wages/income % is largely the same as the traditional strip pharmacies that enjoy higher margins and lower overheads.
  7. High rent: This remains the overarching reason why shopping centre pharmacy total overheads/sales % is higher than traditional strip. As pointed out earlier, higher sales are insufficient to overcome the high occupancy costs.
  8. Poorer returns: Net profit returns are 20%–40% below traditional strips and we find net profit dollars are reasonably similar between the models.
  9. ROA: Independent traditional strip pharmacies enjoy better returns for a lot less effort, less capital investment and lower risk. Table 1 shows a 15.3% return on assets (ROA) compared with shopping centre pharmacies’ 11.2% and 7.4%. The necessary higher capital investment isn’t delivering the returns of yesteryear.
  10. Locations: We know a number of pharmacists who have moved or are about to and those staying have cut the floor space radically.

Our top five suggestions:

  1. New normal: We have a new normal of radical, fast change and uncertainty.
  2. New rules: The old location truisms of bullet proof shopping centre location providing large traffic volumes are over.
  3. Floor Space: Reduce floor space to 200 to 250 m2 and ensure every m2 is productively utilised.
  4. Business model: Move away from soft discounting. Favour large health solution related lines rather than transactional purpose and retail sundries.
  5. Banner group: Choose a group that helps you implement the appropriate business model.

If moving out is the best option, take heart that we have seen those located in neighbourhood centres, suburban strips and provincial locations doing well as per Table 2.

Table 2:  Two non regional shopping centre pharmacy groups KPI results for the six months ended 31 December 2020 compared with same period prior year.

KPI

Group 1

Group 2

Dispensary sales growth ex HCD

9.8%

7.2%

Script growth

6%

9.4%

Professional services growth

25.1%

16%

As a % of all GP$

4.6%

4.5%

Customer numbers growth

4.2%

8.5%

Retail sales growth

16%

16.7%

Nearly 70 years ago, Erskine and Gruen innovated and created the shopping mall. It worked for years. Now however, the results are beyond debate—things have changed. The numbers say that pharmacies outside shopping malls are more profitable, have less risk, less investment and better results.

If you opt to stay in a shopping mall, rent and space must adjust to an appropriate level, if that doesn’t happen, move. After all, the call of the mall is becoming increasingly hollow.

 

 

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