Delusions of grandeur


Take it from the top: treating scalp conditions in the pharmacy

Sometimes the perceptions that owners have about how their pharmacy is performing may be nothing more than an illusion, say Bruce Annabel and Mal Scrymgeour

Some years ago, we both considered ourselves to be good at dancing. It was only an occasional thought and not one supported by evidence of any kind. The qualifying criteria to get us dancing, or to even step on the dance floor, involved alcoholic beverages.

One of us recalls dancing in what felt like an appealing manner, but was actually an unsuccessful attempt to impress a female admirer. The entire thing came unravelled when a Michael Jackson song came on. That song was ‘the man in the mirror’. Deciding to accept Mr Jackson’s suggestion and check his appearance in a mirror provided an unpleasant reality check.

The gap between the mental image of ourselves and the truth can be vast. It can also be very valuable. The truth can hurt sometimes. A lot.

The same is true of pharmacy performance. There is a horrible truth that most avoid.

To illustrate our point, one of us was at a conference recently where just this situation arose.

However it wasn’t in relation to dancing, it was in relation to pharmacy financial performance. There were three different pharmacists, two ran pharmacies and were members of different banner groups, while the third operated an independent pharmacy doing his own thing but with a strong patient professional service purpose at the core. All three, particularly the one with the biggest turnover, believed themselves to be at various stages of brilliance.

The numbers tell a different story as shown in Table 1.

Interestingly, our three pharmacist friends had three different stories.

The independent with a purpose (the third pharmacy in the table below), knows the truth, but pleasingly, also knows how to make money in pharmacy. This pharmacist continues to do so and continues to have an increasingly good business. We like this pharmacist, if for no other reason than the mirror and the mental image match. This individual has a good grasp on reality.

The pharmacists that follow the instructions of their respective banner group 1 and 2 management offices pleasingly delivered both owners above average turnover. Often the instructions are followed to the letter and they are therefore highly compliant and well-liked banner members. But as Table 2 shows, their businesses have experienced a continuing decline in performance, particularly net profitability, the money line, to the point where in cash flow terms they are now marginal. All the data to date clarifies that they are on a steady decline, it is a delusion to think that the banner will save them, or even know how to.

 Figure 1: KPIs and results year ended 30 June 2018 (source BA client base)

 

Banner 1 pharmacy

Banner 2 pharmacy

Independent with purpose pharmacy

Total sales (ex HCD)

$5.6m

$3.8m

$3.2m

Gross profit margin %

33.6%

34.7%

43.2%

GP$ / script

$12.01

$12.36

$16.12

Professional services

$26,000

$29,000

$131,000

Prof services $/customer

$0.19

$0.33

$1.88

Retail sale/customer

$18.23

$12.62

$19.38

Net profit/sales % (ex HCD)

7.1%

7.1%

14%

Return on investment

8.9%

9.7%

21%

Commonwealth Bank yield (f)

8.4%

8.4%

 

Explaining away poor performance

Poor performance is explained away as being the result of macro issues, such as Chemist Warehouse, or they point to relative performance measures against those in the rest of the industry which allow a decline in performance. The reality is much closer to home. If that home had a mirror, it would show that this business is heading south at a deeply concerning rate. The owners’ attitudes will mean drastic changes at the last minute to avoid a terminal outcome. They are not facing reality.

Both pharmacists say they are doing everything we have suggested over the years. They believe that their teams are outstanding to the point of no one being able to compare with their individual and combined brilliance. These individuals are deluded and their numbers confirm this, reflected in marginal profitability and a return on investment barely above that offered to Commonwealth Bank shareholders.

However, the second pharmacist has had an epiphany and discovered a reality—she realised things aren’t going that well and she has to change how she and the team operate and/or get out of the banner.

We know of banners and banner leaders who live in a similar world. These people often mask poor performance of the collective banner group by adding new offers and programs. They hide poor underlying performance with these activities and forget the old marketing adage ‘a sick mother gives birth to an ill baby’. The point being that if the core business is unhealthy, covering this up with other customer offers doesn’t address the problem. If anything, it combines to make things worse.

Figure 2: Net profit/sales % previous five years

Financial year

Banner 1 pharmacy

Banner 2

Pharmacy

2017/18

7.1%

7.1%

2016/17

6.5%

5.7%

2015/16

9.5%

8.1%

2014/15

11.4%

8%

2013/14

11.6%

9.2%

One would struggle to assert that these three are representative of all pharmacists, but they are very familiar stories to us.

Finding a solution

So, what to do:

  1. Compare your annual GP$ performance from 2014 onwards—the peak GP$/script.
  2. Compare your costs as a percentage of running your business since 2014.
  3. Compare your NP% and NP$ performance since 2014.

If your NP% and NP$ are up and your cost of doing business has reduced, congratulations and well done. You are not deluded and you are in a small minority. Carry on looking forward and making the changes required to keep delivering these type of results.

If your NP% and NP$ are flat or down, welcome to the real world where most of pharmacy is living. Your actions are different.

  1. Consider your market position
  2. Address costs
  3. Consider your margins, product mix, category mix
  4. Seek advice on what to do. And act. Doing nothing isn’t an option.

Many owners are members of banner groups, like the two we have discussed, and blame them when the results aren’t what they would like. However, we know some owners who regard the banner programs as a base only.

They have placed their own imprint on the business in the form of treating people as patients to be helped, instead of customers who you sell to, and built a motivated pharmacist professional service team to deliver it. These pharmacies do much better than the two featured here although still not up to the returns enjoyed by the ‘independent with a purpose’ owner.

Dealing with a changed market

The point is, the market has changed so much and risks have significantly increased, including political risk regardless of who wins the election in just a few weeks from now. We know Labor has issues with certain segments of the industry, yet we understand maintains a healthy respect for the profession and the potential. Hopefully that means a reasonable 7CPA outcome.

But Labor’s tax changes are targeting business owners and investors, including you, through various tax initiatives that will add even more challenges to being a business owner.

Both sides of government want to keep a lid on PBS expenditure. Check out the April federal Department of Health budget papers showing forecast PBS net cost in 2022/23 of $9.7bn. Last financial year 2017/18 it was $9.3bn. So if all the listings and pharmacy remuneration increases are to materialise, what initiatives will they force on the broader industry to achieve it?

With all that in mind, look in the mirror. You’ll discover that your success or failure is staring right back at you. Rely on your own decision making and create your own future.

Make decisions that grow your business. From that point on when you check your reflection in the mirror, you should always look good.

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