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.

KPI

Hard discounter *

Traditional pharmacy **

Floor space m2

500m2

245m2

Dispense/retail sales split

55/45

67/23

Gross profit margin %

24%

36%

Overheads/sales %

16%

27%

Wages + on-costs + rent/sales %

12%

21%

Advertising/sales %

< 1%

1.4%

Net profit (EBIT)/ sales

8%

9%

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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