Bruce Annabel and Mal Scrymgeour explore whether pharmacy is trying to have its cake (or calamari) and eat it as well
We both like hot and spicy Calamari. On those relatively few evenings when we have a meal together, we continue on our challenge of trying to find Australia’s best Calamari.
Oddly and somewhat confusingly, the best Calamari was in a Melbourne restaurant that didn’t offer Calamari. Happily they offered squid instead.
After a very pleasant meal we had what has become the standard debate about dessert. Do we indulge or not? Looking for a suitable excuse to enjoy dessert, somewhat lacking creatively we settled on the fact that as we hadn’t dined together in some time, dessert was justified on that basis alone.
Our conversation turned to when we had had dessert last. Embarrassingly for us, it was the evening prior.
Dessert should be special. Having dessert every night means it’s not special. And you get fat. Too much of something special, by definition, means it is no longer special. It becomes the norm.
In the case of our industry, we have specials and promotions with increasing frequency. The volume of specials, sales and promotions continues to grow and means that specials aren’t special any longer. They are losing effectiveness.
Throwing away money
In the news recently there was an article that stated Australian grocery retailers spent an incredible $51bn on promoted sales, but it also pointed out that 48% of these sales would have occurred anyway.
In other words, half the items that grocers sold on promotion would have sold at the normal shelf price anyway. As a result, there is huge waste on promotions and lost profit for Australian grocers.
There is no robust data that we are aware of for the pharmacy industry covering the same topic. If there was data, the numbers would be different of course, but we speculate that the pharmacy industry also unnecessarily exits a huge amount of profit from discounting for no benefit.
We have even seen some pharmacies discard price catalogue promotions completely or partially and not experience a decrease in units sold. Instead they marketed professional service and patient health solutions that generated real and more profitable growth.
So with some basic analysis and a bit of conjecture, we suspect the percentage of waste may be less in our industry but not much. You can tell.
Look at a pharmacy catalogue, do you really think a reduced price on many of the items actually encourages increased consumption? Check the volumes sold on and off promotion in your business. Often the volumes don’t change much.
If the volume does change, check the cannibalization from one brand or pack to others in the same category.
Promotions often simply swap volume between packs. Some promotions actually make the retailer worse off by directing more volume to the lower profit margin or lower sales value items.
Being worse off by promoting isn’t usually a recipe for success. Analysing financial results of those increasingly using price/product catalogue advertising to pursue volume growth reveals some interesting facts.
Last financial year a number of national banner group members saw their retail items sold fall by 1.4% compared with the prior year despite increased promotional activities and more aggressive discounting. And both script volumes and customer numbers were flat.
Do consumers still see value in catalogue promotions and discounted prices when it has become so common?
Owners are gaining modest results achieving little apart from lower margins with resulting in the retail section no longer contributing much if any net contribution to bottom line.
An unhealthy addiction
To make matters worse, Australian consumers are becoming more addicted to promotions in grocery than ever. The evidence in pharmacy is no different.
In the past eight years the percentage of products sold on promotion in Australian grocery has increased from 30 percent to 40 percent. The only country more addicted to promotions than Australia is New Zealand, where nearly 60% of grocery products are sold on promotion.
You might wonder why this is even remotely interesting to the pharmacy industry.
Well, it’s because on average consumers visit supermarkets three times a week and this sets the benchmark for consumer perception.
If you have visited Chemist Warehouse you’ll notice that they seemed to have joined or even exceeded grocers as everything seems to be on sale all the time. Our industry is the same as grocery, we’ve also had a sustained surge in promotions as banner group management offices and suppliers elusively seek growth in a flat and increasingly competitive market.
Those promotions don’t make the difference they once did. Promotions are running out of puff and because so many banners are doing it how do consumers distinguish one pharmacy retailer from another.
In fact, research shows that in Australian grocery, price promotions are increasingly being viewed as undifferentiated. Promotional fatigue has set in. There are so many promotions that they are making less and less impact on sales.
Pharmacy is just the same. Promotions are generating lots of noise, increasingly less traction and even less value to pharmacy owners.
This addiction is easy to understand. Once your competitor promotes, you have to retaliate, so you promote too. On it goes, but it’s a behaviour that generates no winners as soft and hard discounter competitors converge.
You just permanently lower the profit in the industry in the meantime placing even more pressure on wages, costs and efficiencies in the forlorn hope of holding profitability. It’s obvious you must differentiate and get off this mad spiral.
Five ideas for successful promotions
- Promote what your customers really want, not what you want to sell.
- Determine what makes you different. Promote that.
- Focus on services, convenience, range including hero/destination health categories.
- Reinforce health – the key reason people visit a pharmacy.
- Promote fewer items and have fewer, more focused stories.
If you are a hard discounter, like Chemist Warehouse, then price promotions are all the rage and are a table stake. If you are not a hard discounter then a high frequency of promotions, and especially a high volume of promotions is not such a good idea. We should point out that it’s not as though price promotions are not permitted.
Community pharmacy price promotions can be a legitimate tool but should be used carefully and as a hygiene factor only. If you are well differentiated with a great health offer ideally you won’t need to use price promotions at all. Give consumers a reason to visit that removes price from their value equation.
Remember ultimately the purpose of promotions, done with a differentiating purpose in mind, is to position the business and generate increased revenue and profit. But it always pays to be clear on the different promotional objectives that might achieve this.
1: Increase the number of customers (get more customers into the pharmacy)
a: Create an event. We’ve seen suppliers work with pharmacies to offer various screenings. Offer health services.
2: Increase the number of transactions (sell to more consumers)
a: Once you have more customers, the challenge is to convert more of these customers to purchasers, the right product offer will do that. Have a pharmacist on the shop floor offering advice might be a great start. Especially at script out.
3: Increase the basket size (get each customer to buy more)
a: Have the right products in the right place. Having the right product adjacencies will have a big impact. Practitioner only evidence based vitamins beside, in or near the dispensary is a good option.
4: Increase the number of units (have each customer buy more)
a: Something as simple as having tissues or hand sanitizer on the counter might seem a small deal. But if you sell an additional 100 a day and make just $1 of profit per unit that makes a pleasing $36,000 per annum of additional profit. Just a thought.
5: Increase sales from a specific category (switch customers to categories that are more profitable)
a: The margin on Pain Relief is around 50% GP in well run community pharmacies. Let’s assume an average retail price of $10.00, that’s $5.00 of real profit. The average margin on soap powder is 5% and it sells for $5 which is just $0.25 per unit. In other words you’d need to sell 16 times as many units of soap powder to make the same profit as just one unit of pain relief. Fish where the fish are.
If you think that’s too hard, it’s not. Imagine the difference you could make simply by focusing on selling health related categories and pharmacist advice versus selling increasing amounts of low margin retail products.
If you are part of a banner or buying group you might find they do the hygiene factor for price with their catalogues, while you need to engage in a differentiating strategy by using health related categories that differentiate you in your trade area.