Just like baking a cake

Is there a recipe or formula to get the right product mix in your pharmacy, ask Bruce Annabel & Mal Scrymgeour 

Bking a cake should be a relatively simple task. After all, the ingredient list is spelt out and the method to take those ingredients and combine them is detailed in the recipe. How hard can it be?

Those who bake will know that baking is both an art and a science. It can be tricky to it get right.

The ingredient mixture for a cake isn’t much different to getting the ingredients for the right product range in pharmacy. But like baking a cake, it can be a difficult thing to get right. Like a cake, the ingredients in pharmacy can be measured, but getting the order right, the quantities right, in the right places and in the right combinations suddenly makes it much more complicated.

The recipe

The recipe for product ranging in pharmacy is relatively simple—it’s that familiar combination of science and art. Let’s deal with the science first. Measuring category performance is assessed using these measures:

  • Category and department data
  • Shelf space linear metres
  • % of total space the category occupies
  • Stock on hand value $
  • % of total Stock on hand
  • Gross Profit $ and %
  • Net Profit $
  • Clearly stated goals for shelf and stock performance

The science of this is beyond debate. There is, however, quite an art to putting the ingredients together.

In the pharmacy example below (Table 1), the mix was wrong:

Table 1

Profitable and health related lines are minimised, while loss making and shrinking basic/convenience categories were allowed to dominate. Clearly management had lost the recipe for success and arguably the purpose of their business.

At this point, we need to enlighten you on our category definitions:

  • Signature – medicines S3/2, practitioner lines, wound care/surgical, OTC compounding
  • Blockbuster – sleep disorders, chronic wound care, chronic pain, cardiovascular, diabetes
  • Priority health – digestion, eye and ear, brand leader vitamins, sun, quit smoking, therapeutic skin/hair, dental
  • Basic/convenience – cosmetics, gifts, fragrance, jewellery, bags, fluffy toys, oral, lollies, men’s, fem hygiene, general skin/hair

Also note that Net Profit (EBITDA) was calculated by deducting from Gross Profit $ relevant department expenses of the pharmacy including rent, wages, advertising and sundry indirect costs.

In this case, the owners were shocked at how their retail offer had deteriorated after viewing the retail performance summary (see Table 1), backed by the detailed department report. They had lost their recipe for success.

Part of this is explained by the fact that they are a member of a national banner group. They accepted the banner product selection and space allocations. Further, pharmacy assistants were permitted to buy lines on the promise of high margins. That was a mistake.

Good or bad retail management

The real issue is the owners didn’t have a recipe or an effective retail management process for range selection. And unfortunately, like many, they took for granted the profitable medicines and retail health departments were maxed out thus believing expanding the basic convenience lines was good retailing. It isn’t.

Below are some key messages conveyed by the data revealed in Table 1:

  1. The retail section lost net $26,041pa after expenses.
  2. Signature departments contribute net profit of $76,848 pa utilising only 17% of shelf space resource and 13% of the stock investment.
  3. Blockbuster (sleep disorders) were modestly profitable due to high servicing costs and priority health sections generated good returns.
  4. The first three sections show there is a distinct correlation between ranges/products that offer health solutions, combined with pharmacist professional service, and net profit.
  5. In contrast basic/convenience departments, not possessing those elements, lose $128,689pa yet occupy 60% of the shelf space (expensive rent and fit out costs) while wasting $152,957, 55%, of the owners’ stock investment. Many of those departments are shrinking requiring more discounting to hold volume. Not all sales are profitable.
  6. Absence of a plan, recipe or effective management have cost the owners dearly. Meanwhile dispensing and OTC medicines comprised 79% of total sales (ex HCD) yet occupy comparatively modest space and stock investments.
  7. Huge effort and resource went in to managing and marketing the basic/convenience departments that should be redirected into the profitable, differentiating and patient health solution departments.

Mix well

Clearly the merchandise mix was inappropriate. Here are the actions taken to correct the situation:

1. Purpose: Assembled a plan based on an agreed purpose—“We’re here to improve our patient’s health today and every day”—that demanded ranging items serving that purpose while minimising the stuff that doesn’t.

2. Stock Level: We set level of stock investment based on ‘Stock intensity’, not stock turns. Formula is retail stock at cost divided by retail floor space. It’s important to keep stock levels up and avoid cutting back just to lift stock turns because that will cut GP$ and net profit. Aim is to carry $900 to $1,100 per m2.

3. Balance: Rebalanced available space and stock allocations: signature 50%, blockbuster 10%, priority health 30% and basic convenience 10%. i.e. virtually the reverse of the current balance.

4. Drivers: Built large retail health departments that drive enhanced professional health solution service sales, fast stock turns and high margins.

5. Authority: Maintain high stock levels in departments presenting a perception of market authority or leadership in patient health solutions and services.

6. Range: Replaced most of the basic/convenience lines through curtailing/removing: gifts, four of the six cosmetic brands, toys, prestige fragrance, vitamin brand leaders (kept the 20% that sell) and major reductions in general skin/hair, hand and nail, men’s, general oral, etc. Retained Baby because of the presence of young mothers and babies.

7. Location: Placed the signature, blockbuster departments and priority health departments near the dispensary and with easy access by pharmacists. S3/2 medicine shelf space was more than doubled from 40 shelf linear metres to 90 linear metres, a large range of practitioner vitamins and supplements was introduced, wound care range extended, and sleep disorder space and stock doubled.

8. Prices: All health-related department prices were reviewed that lifted retail margin over 40%—necessary to fund the higher paid pharmacist professional service offer.

9. Agreement: The banner group agreed to the strategy and assisted greatly with changes, presentation and specific product selections.

10. Measurement: One of the owners is responsible for regularly monitoring department performance working with a senior assistant.

Benefits of the above approach are evident in a pharmacy of a similar size and demographic that is well into the process of adopting the ranging principles (see Table 2).

Table 2

Implementing the principles of space and stock allocations skewed towards health related, high margin and growth departments lifted margins and net profitability. Once in place the task is ongoing slavish category management and constant range reviews while acknowledging the different roles of each department.

The ‘front end’ offer is something that is crucial to the success of any pharmacy recipe. Making a great cake and making a great pharmacy rely on executing the right recipe in the right way. 

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