Too many pharmacies have been coasting for too long, but they’re soon about to stall without a change in strategy, say Bruce Annabel and Mal Scrymgeour
One of us is currently teaching an offspring to drive. For reasons lost in the mists of time, we decided that a manual car was the vehicle of choice for a novice driver to learn in. The argument was advanced that learning to drive using all three pedals, and understanding concepts such as engine braking, makes for a better driver.
Businesses operate a little like the three pedals in a manual car. You can choose to brake (cut costs), or decide to accelerate (grow sales and margin), or you can carry on with business as usual (foot on the clutch, either coasting along or about to change gear).
Many business owners have their foot on the clutch—just coasting and not sure whether to change gears up or down. Business performance doesn’t change when you have your foot on the clutch. There is just a lot of noise and no progress. That’s not sustainable.
The problem with coasting
Because many owners still ride the clutch, we’ve seen very little change in general across community pharmacy. Unfortunately, no change means no growth.
This coasting has seen three major consequences emerge:
1. Patient visits falling:
The Pitcher Pharmacy (PP) client series, like-for-like pharmacies, shows patient visits for the past three financial years have fallen by 3.3%, 2.1% and 2.2%, respectively. The world and the consumer have changed markedly.
2. Community pharmacy sundries sales are shrinking rapidly:
The PP client series also shows that during the past two financial years sundries sales have fallen by 9.7% and 6.6%. However, the good news is that sales from the retail health departments grew by 2.5% and 4.4%.
So, not surprisingly, we noticed that clients who reduced sundries merchandise to be simply a convenience offer did well. They also built large extensive retail health departments. In addition, they had higher margins and didn’t have to discount to hold volumes and patient numbers.
3. Price is no longer a major value driver unless you’re Chemist Warehouse.
Table 1, below, illustrates this point. Both pharmacies hold large sundries ranges that customers can easily buy elsewhere. Volume is only retained via discounting.
Ten ways to accelerate profit
We’ve talked about price and margins before so here are another 10 ways to accelerate profit through product offer and product range. To achieve this, pharmacy needs to meet two objectives. First, find new customers. Second, build new—or expand—sources of revenue.
Buying well, cost control and substitution rates are relegated to ‘hygiene factor’ status—they don’t solve the conundrum pharmacy is in today.
1. Pharmacist professional service solutions
Innovate with pharmacists providing patients with highly valued health solutions including minor ailments. The average sale and profitability are high because there is often more than one item needed to solve the problem. Those items attract higher margin %. Price doesn’t enter the conversation.
The twin objectives of increased patient visits and growing income are met. The latter is evident in the very important KPI Retail Health Sale where innovators generate circa $15.00. That compares with soft discounter 1 (Table 1) $12.44, soft discounter 2 (also Table 1) $9.51, and city suburban pharmacies $9.99. In bottom line terms, if a pharmacy engaging with 70,000 patient visits p.a. can increase this KPI by say $3, that adds about $94,000 to net profit. This is the number one income accelerator.
State governments are extending the vaccinations pharmacies are permitted to offer patients. The Queensland state government recently added a large flotilla of new pharmacy immunisations including travel, flu shots for children older than 10 years plus others.
Our objectives are met as patients are attracted to pharmacies and the service is very profitable. Innovator pharmacies charge $29.95 for a flu vax service which, after cost of the vaccine and pharmacists time, generates net profit of circa $15.00. Assuming volume of 500 flu shots generates a total net profit of $7500, some do many more.
Some pharmacies may find themselves in conflict with a nearby medical practice, in which case care must be taken and, where necessary, opt for other income growth opportunities.
3. Medication management services
This goes to the heart of a pharmacist’s knowledge/training, yet we often see opportunities go begging.
One opportunity is to improve patient compliance and adherence using dose administration aids (DAAs). For example, in response to the interim report released in November by the Aged Care Royal Commission, the federal government increased the number of in-home care packages to 135,000.
4. DAA services
Current government-remunerated medication management services include HMR (30 month), RMMR, QUM, MedsChecks, staged supply, and the simple yet powerful device referred to as the DAA. The community DAA service is especially valuable to many health consumers because of the improved compliance and management benefits. It carries a weekly patient service fee plus the government incentive for qualifying patients.
The improved compliance makes the community DAA patient the most profitable in pharmacy. Some pharmacists think this service is unprofitable. Nothing could be further from the truth and patient visits increase because they have a very important reason to return. Most pharmacies charge a weekly service fee of $6.60 which patients are happy to pay. Those who don’t charge a fee misunderstand the value of the service. It should not be discounted—this is tantamount to devaluing a vital pharmacist professional service.
5. Leave Certificates
This is wonderful opportunity to attract patients in need who can benefit from the access a pharmacy provides to obtain a certificate and also receive treatment if the issue is a minor ailment. If not, it’s an opportunity to collaborate with and refer to the GP. Innovator pharmacies charge $34.95, some a little more.
6. Condition management
Candidates include diabetes, sleep disorders, wound care, mother and baby health, blood pressure, mental health, asthma, screenings, compression therapy, wellness/wellbeing and chronic pain management, among others. These all require work to build, including specialist expertise, ranging and communication, yet generate a lot of patient visits and, as critical mass builds, generates significant income. These services allow the pharmacy to gain a reputation and gather patients from a wider trade area.
With the volume of current and new emerging technology drugs, often provided in the hospital and specialist practitioner settings, many patients suffer significant side effects. Community pharmacists in some cases may be able to help them deal with those, providing advice and products to assist including collaborating with the patient’s medical advisor.
7. Opioid replacement services
An excellent, profitable service that pharmacists charge $5.00 and some up to $7.00 for. In financial terms, each FTE person will generate about $1400 bottom line net profit p.a. Many won’t do it due to the disruption, however it’s a useful service to many and pharmacies are well remunerated for providing it.
8. Practitioner complementary medicines
Community pharmacies have lost the majority of the market as brand leader vitamins are heavily promoted by hard discounters, soft discounters, warehouse sheds, supermarkets and online. Innovator pharmacies keep the 20% of items that people buy in their pharmacies and use the space and money freed up to invest in practitioner ranges and other OTC ranges not yet commoditised.
However, to make the investment work, wide ranges are a base necessity and pharmacist expertise is critically important. These pharmacies utilise these ranges helping solve minor ailments and generate margins of 40%+ compared with 27%–34% in pharmacies whose ranges are dominated by the commoditised brands. Herbals dispensing is another opportunity.
A client refers to compounding as ‘the new black’, which isn’t surprising, as medicos and patients seek more product solutions alternative to standard prepacked medicines. However, while the margins are attractive, it’s important to realise there is a very high manufacturing labour component plus upfront capital investment and very strict rules. One of the biggest costs is the internal time required to set up and train plus get out and about informing referrers and patients about the offer. Those who have done the hard work are doing very well and built a reputation in the marketplace and with referrers.
10. Retail section ranging
Changing the retail merchandise mix heavily towards health and service/advice related departments delivers good dividends. It permits pharmacies to deliver many of the income accelerating initiatives noted above. In fact it’s essential, requiring pharmacists to let go of what worked in the past but has passed its use by date.
Innovator pharmacies who did this find only 15% of retail sales are sundries resulting in margins > 40% and net profit/sales of 15%. By comparison, those who held on to large sundries ranges find they comprise 40% of retail sales and GP of 34% with net profit/sales of 6%! Presenting a non-sundries image to a health consumer upon entering the pharmacy conveys a health message instead of a mixed message dominated by open selling sundries.
Pharmacy has adopted a sameness in a fast-moving competitive landscape. That’s not smart. Success depends on doing more than dispensing, which is no longer special. Whatever you do, look for ways to be special. To quote one pharmacy owner, “if you want to be special you have to specialise”.
And to be special you can’t coast with your foot on the clutch, you need to drop the clutch and accelerate.