A hard act to follow

How hard discounters win by more than just lowest prices? Bruce Annabel investigates

Hard discounters dominate a market through offering lowest prices by having the lowest cost structure. That doesn’t come cheaply as it requires a massive investment in systems, data management, processes, procurement and logistics/distribution with super sharp execution.

When the dominant hard discounter, Chemist Warehouse, arrives in a market with lowest prices, a large range and aggressive marketing it attracts large numbers of customers away from any pharmacy. It’s the combination of best prices, range and marketing across the industry that’s the key for their customers. Many of you struggle to understand how they do it.

The table below explains the headline Key Performance Indicators (KPIs) for hard discounters versus traditional community pharmacies.


Hard discounter *

Traditional pharmacy **

Floor space m2



Dispense/retail sales split



Gross profit margin %



Overheads/sales %



Wages + on-costs + rent/sales %



Advertising/sales %

< 1%


Net profit (EBIT)/ sales



There are some interesting learning points from this data:

  1. Hard discounters do well in dispensary, the medicines department and particularly retail. Chemist Warehouse are dominant in fragrance and vitamins and cosmetic markets. And according to IRI Worldwide market research, by the end of February 2017, it held 45% (traditional pharmacy 55%) of the total pharmacy retail market compared with 33% (traditional pharmacy 67%) in June 2014.
  2. It’s an extraordinary story of focus and commitment to the model and delivering what their customers seek.
    By comparison traditional pharmacy, regardless of location, continues to rely on prescription dispensing to attract patients, drive top line sales and deliver 90% or more of overall bottom line net profit.
  3. Traditional pharmacy has become a price taker. The fortunes of most of the industry remains reliant on dispensing profitability and, as a result, these pharmacies are captive of the PBS, government policy and whatever the Guild is able to secure from time to time to prop them up. When combined with price discounting to compete it’s a fragile business model.
  4. Hard discounters’ prices really are lower, 36% GP v 24% GP, than traditional pharmacy.
  5. When combined with range, high quality merchandise and always being in stock, the model drives high customer traffic numbers and sales. Most hard discounters are destination retailers, which is why lowest price is so critical, because they are not located in prime convenience locations. Any pharmacy can discount their prices to that of hard discounters but it’s very difficult to make a net profit which is why the lowest cost structure (27% v 16%) is critical.
  6. Another critical success factor is buying power. With total sales according to Inside Retail June edition of $4.2bn p.a. combined with excellent logistics Chemist Warehouse has the biggest buying power in the industry with suppliers contributing to a lower cost of goods and greater ability to lower prices. This is what we referred to last month as ‘the productivity loop’.
  7. Bottom line net profit (EBIT) / sales % is virtually the same although achieved through radically different strategies and business models.

 Bruce Annabel is a pharmacy business consultant and Adjunct Professor of Pharmacy Management at QUT. 

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  1. Paul Sapardanis

    Great article Bruce and thank you for the clarity it provides. Discounters are seldom in prime retail positions ( that is why CW have kept their My Chemist banner on high tent positions ). It is the relative low wages that they offer thst I would like to discuss further. Until the rest of my colleagues grasp that all that low wages do is gove discounters a competitive advantage then we will continue to flounder. Unfortunately I don’t think some of my fellow owners can grasp this concept.

    • Willy the chemist

      Hence why we need a much higher minimum award wage for pharmacists. Where it now reads ~ $25/hour it should read $30/hr and so forth.

    • Glenda Abbott

      Paul for a minimum wage, if I worked for you, dispensing is all I would do. I would dispense the Pharmacy Board’s recommended hourly prescriptions only not a single one more. No checking webster packs, no counselling patients, no serving customers. I would expect the designated legal breaks. You would not get a second extra of my time other than rostered hours. You obviously have no concept of the current role of a professional pharmacist and the knowledge we possess if you place no value on our skills.

      • David Haworth


      • Paul Sapardanis

        Did you read my blog??? Does it say I think pharmacists are currently underpaid??? Look closer.

      • Jarrod McMaugh

        Gday Glenda

        While your point is very valid, I think you’ll find that Paul’s comment wasn’t endorsing low wages, but pointing out that employers should be pushing for a higher award.

        Not only would this reward employees far more for their work, but it would also directly affect the bottom line of all discounters that rely on low wages to drive their brand of competition.

  2. Tony Pal

    Has anyone noticed that CW discounts apply to high volume products but low volume products have excessively high mark ups. Try buying a Chlorhexidine Surgical Scrub from CWH.
    Also if you have OA and require regular daily Panadol Osteo, how do you take advantage of $4.99 specials, when you have to beg to be allowed to purchase more than one or two packets, One packet is only good for 2 weeks supply. If it was washing powder or bleach you could stock up. I can abuse/misuse bleach just as easy as I can abuse/misuse Panadol Osteo. 3 months supply is 6 packets but I must have a problem or be a junkie to ask for that many in one go. What is the point of a special you can’t take serious advantage of before the price goes back to $6.99? It is like petrol pump discounts that vanish on public holidays when you need to seriously fill up. Is it truly a discount when they get you double the next time around?

    • Andrew

      It’s the Bunnings MO – cheap powertools, expensive wood.

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