‘Turnover is vanity, profit is sanity, cash is reality, discounting is profanity’, write Bruce Annabel and Mal Scrymgeour
One of the best pharmacy owner managers I know said that ‘Turnover is vanity, Profit is sanity, Cash is reality, Discounting is profanity’.
For most owners it’s all about script volume and turnover growth while net profit tends to be overlooked as a top priority until the accountant delivers sanity in the end of year financials.
Pharmacy owners work assiduously on the elements (buying, generic switching and keeping costs down) that should, hopefully, deliver a net profit.
In the meantime cash flow informs the reality of whether the business is going okay or not.
But profanity is common
Net profit is a KPI (key performance indicator) measured monthly by few, so the management of discounting doesn’t happen and the impact isn’t noticed.
Time and again pharmacists state unequivocally how they must match a hard discounter script price to avoid losing a customer or accord with a soft discounter head office discounting policy because…well, because.
These owners are offer price discounting as their value proposition are leading with their chin and inevitably find themselves with profitless sales and dispensing safety net scripts at prices below the cost of dispensing them.
Sanity and reality must eventually prevail
So yes ‘discounting is profanity’ for the pharmacy owner, as opposed to a rational KVI (known value item) approach, because profit and cash flow effects can significantly impact valuation, ability to service debt and fund business improvements.
Independent owners are in control
Now this can be a good and a bad thing.
While being a banner group member suits many owners a lot have chosen the alternative of remaining independent supported by a set of foundation services offered by several groups the largest of which are Pharmacy Choice (Symbion), Pharmacy Alliance (alliance with Sigma) and Club Premium (API) plus several smaller groups such as Advantage Pharmacy.
Based on my information there are well over 2,000 pharmacies comprising 40% of all pharmacies availing themselves of these services that permit:
- Good operators to regain control of pricing, margins, merchandise selection and marketing suitable to their business objectives and local market conditions.
- Owners who value fiercely their independence.
- Cheaper banner fee costs.
- Those owners who seek all of the above.
Typically these independent groups offer myriad services:
- Buying power and access to supplier deals
- Lower fee structure
- Assistance with merchandise selection and category management
- Advertising and marketing
- Customer membership management systems
- Private label range
- Optional banner signage, pricing and fit out support
- Training and services
Good operators who have a competitive market position and strategies to deliver it weave these services in to fill the gaps utilising the economies of scale and skills offered.
And the numbers are growing as more owners seek control over their circumstances during these competitive, challenging and turbulent times.
My data and experience demonstrates clearly that the very good independent owner operators earn the highest net profit/sales % and return on investment in the industry.
They are free to manage higher margins, avoid excess discounting, enjoy lower overheads and benefit from less capital investment (fit out, stock, systems).
Of course there are many members of independent groups that aren’t well run who, while they save a few dollars on membership fees, deliver industry norm returns (refer table 1).
Look out for Part 2 in tomorrow’s (Tuesday) newsletter.