Successful discounters have a model for success. If you want to compete and thrive you need to have your own well-formulated strategy, say Bruce Annabel and Mal Scrymgeour
At first glance Bentonvile, Arkansas and Tamworth, NSW have little in common. Both just happen to be the ninth largest cities in their respective states. Both have populations of approximately 40,000 people, both have a strong agricultural base surrounding them and both have a populous who seem unjustifiably proud of their small cities.
But look a little deeper and you can see where that pride emanates from—both have a lot more going for them than those from elsewhere might think.
Tamworth is the home of country music in Australia and has a strong aviation history. Bentonville’s major claim to fame is that it is the home of Walmart. Even today, it remains the global headquarters of Walmart.
It might seem an oddity that the world’s largest retailer, with more than 11,000 stores, 2.2 million employees and sales of USD$514bn still bases itself in small town America.
As staggeringly large as Walmart is, it’s DNA hasn’t changed. It is all about keeping prices as low as possible. Having a head office in a low cost environment keeps prices down. Even senior executives fly in economy class, share rooms and staying in modest accommodation. It all keeps costs down. Even Walmart’s head office has office furniture that are all samples from suppliers.
Using the right levers
Walmart achieves low prices by using four levers:
- Huge volume of sales achieved via wide range, high average basket and convenience locations
- Supply Chain management system which is possibly the best in the world—reducing costs
- Minimisation of overheads and operational costs
- Leveraging buying power—forcing suppliers to lower prices
For the past 30 years, Walmart’s cost of operating has been less than half of what it’s largest competitor K-Mart USA’s costs were. As a result, K-Mart USA has stumbled rather badly. At its peak K-Mart had 2500 stores in the US, now it has just 43. Walmart is typically 15% cheaper than its next lowest price competitor and yet it is still more profitable. You can’t attack Walmart and expect to win.
In Australia, Chemist Warehouse has been driving a similar model for just over 20 years, yet many pharmacy groups and individual pharmacies continue to embrace discounting to ‘compete’. It’s not a winning strategy.
Taking on Chemist Warehouse’s biggest strength (lowest price), regardless of whether you are an individual pharmacy or a pharmacy group, is perilous at best. Confronting an established hard discounter and expecting to win doesn’t usually work. Just ask Masters hardware stores.
The value principle
Patients vote with their feet. ‘Value’ is more than just the price paid. Principally, traditional pharmacies offer location convenience (saving time), relationships with a trusted adviser and a very different customer experience.
A number of these pharmacies have pharmacists operating ‘at the front’ and in the healthcare service precincts. In these pharmacies, the most important aspect of ‘value’ is the benefits patients receive.
Effective differentiation is the only answer. In a recent conversation with NSW pharmacist Nick Logan who has a Chemist Warehouse just 50m away, he hasn’t lowered his prices and his pharmacist professional service quality is at the highest level. He estimates only one or two people per week question his pricing. In other words, the discussion is not about price. Nick doesn’t match prices. Ever.
Nick’s focus on pharmacist professional service is what patients continue returning for. Those just wanting low prices and large range aren’t his customers anyway and they choose the discount pharmacy 50 metres away.
With Australia returning to some sort of normalcy, it’s time to prepare and plan for a world with SARS-COVID-19 as part of how we live and work. It will be very different as the economy re-builds. The success of pharmacy will depend on having the right strategies particularly regarding price and merchandise selection.
It costs traditional pharmacy about $9 on average (range $7 to $12) to dispense a script item. Pitcher Pharmacy Services client series average income (gross profit $$) per script last financial year was $12.48, suppressed by discounting, while differentiators earn significantly more.
By comparison, Chemist Warehouse’s lower cost structure allows them to profitably sell discounted scripts and OTC lines.
Non dispensary section
Script dispensing will hold up during the forthcoming recession, but OTC will likely experience change as consumers reduce discretionary spend. Consumers have cut credit card debt by $4.2bn since COVID-19 arrived and 400,000 credit card accounts have been cancelled.1
Replacing sundry retail ranges with expanded health related departments will hold up well during the economic downturn. It is critical not to discount these valuable lines as they help service debt, meet overheads and fund pharmacist professional service.
Crucially, these departments contribute 60% to 75% of a traditional community pharmacy’s retail section sales and GP dollars and will likely increase. Constant price and category management are vital. Promotions and supplier deals won’t cut it.
Strong margins do not equal overcharging. If you don’t offer anything of additional value, then you will be overcharging.
A differentiated pharmacy with a strong health and wellness offer and great pharmacist advice is something that patient’s value. And that means a premium is justified as the costs are higher, but so is the value and the benefit. This can’t be something you just imagine you must deliver it
The key questions
If you have patients asking about price, consider these questions:
- If customers complain about price, why did they visit your pharmacy?
- Is a non-price based ‘value’ element more important? What is it?
- Is your pricing ‘right’? If it is, don’t price match hard discounters, reduce prices only very selectively.
- Do you have a highly differentiated patient offer like Nick?
- Do you price confidently and courageously?
- Is your offer desired, valued and with obvious benefits to patients?
- Are the customers seeking price discounts yours? If not, let them go. The cost of retaining them often isn’t worth it.
- Are you just filling scripts and/or do you have product-at-a-price promotions as your focus?
If you are honest with yourself about your business, you’ll know whether you are a price maker because you offer great value, or a price taker because you think you are Walmart. Our advice? Focus on not being Walmart. Be you.
See our September print edition, or online magazine, for more data and tables on the information in this article