Smooth sailing or a wild ride?


light bulb with gears

As community pharmacy sails into a new reality, Bruce Annabel and Mal Scrymgeour present their top five initiatives that will help you innovate, thrive and survive

With our 2018 Christmas dinner barely digested, news that department store chain Myer had a loss of $486 million was reported. Myer is not alone. US chains JC Penney, Macy’s, Sears, Nordstrom and Kmart closed thousands of stores in 2018. In the UK Debenhams closed 50 stores, House of Fraser is shutting stores at a jolly rate while even Marks & Spencer are closing 100 stores. In early 2019 Crabtree & Evelyn announced the closure of all Australian stores. Even casual observers couldn’t help but notice that department stores are in for a wild ride.

In Australia, pharmacy has sailed into a new reality. It’s no longer smooth sailing. The long-established truths driving successful pharmacy no longer apply. Pharmacy hasn’t experienced change like it for at least 30 years. By the end of 2019 we may have just two major wholesalers while GSK and Pfizer will likely have a merged healthcare business.

These changes have been forecast and building for a long time, particularly since 2008. Yet the reaction from Australian pharmacy has been myopic, with a series of band-aids applied that masked the true situation. We’ve had ephemeral generic discounts many thought were normal, Guild/Government agreements, the weight loss craze and for some—the daigou phenomenon. Below the surface the current pharmacy model is obviously no longer bullet proof. Many pharmacies have not survived; others are struggling.

The 2018 data bears this out[1]: net profitability improved across the board only because income per script increased by 48c thanks to the 32c/script risk share and CPI fee uplift on 1 July 2017. However, of great concern are flat script volumes while customer visits and retail sales both continue falling—despite more discounting. This suggests decreasing market relevance.

Consequently, the return owners are achieving on their pharmacy financial investment (stock, fit out, equipment, goodwill and working capital) has fallen to 13%. In extraordinary news, client members of one of the largest banner group’s return fell to 8.9%, which is lower than bank shares yielding fully franked grossed up dividend yield of about 9.5%!

Despite all this, some pharmacies are going incredibly well. You might ask, how? It’s a good question. Here are our top five initiatives that will help you cover those fissures and stay ahead of the curve:

1. Don’t snooze

Expecting success via the industry peak bodies providing continuous profit growth is a delusion. Yes, they do an extraordinary job creating the environment including regulation and good dispensary remuneration. But, about five years ago when price disclosure finally hit the bottom line, that was no longer enough.

Unfortunately, many owners and pharmacists snoozed, based on the assumption that everything will continue to be okay because it’s always been so. But these days snooze and you lose.

The successful pharmacy owners in the meantime accepted the wonderful environment provided and maximised the opportunities that were presented. They were awake to the fact that the most important opportunity provided by the peak bodies and government is the volume of customers who walk through their front door followed by the range of remunerated professional services.

2. Give them a reason to become a repeat shopper

Ask yourself this question: “Why will a customer choose my pharmacy over another and how will I keep them coming back?” Primarily the answer is that you offer a convenient place to have scripts filled and buy OTC lines. But that’s not enough. Some defect to hard discounters, others buy in supermarkets or online while some get scripts from online providers.

Discounting has lost traction and become beige. Everyone is doing it yet Chemist Warehouse is distinctly cheaper than everyone. Due to broad competition and the explosion of digital/online offers, traditional pharmacy retail department sales like beauty and brand leading vitamins are being smashed.

Most pharmacy owners say their business purpose is to make money. However, the fact is that often results in devolving to price as the value driver which is failing. This impacts bottom lines, returns and sustainability.   

In contrast, the business purpose espoused by successful pharmacy owners, with varying nuances, is to help patients instead of selling to customers. While ‘patient’ may not be the most appropriate term in pharmacy, the concept connotes an overarching business purpose of helping improve patient health in some way every time they visit. And it works—they see growth in scripts, patient visits and profit.

3. Help patients, help yourself

Treating those coming in to the pharmacy as people with a health issue in need of a health solution is the place to start. Sure, some want a specific product or have a script but it’s the same thing—they’re flagging to you they have a health issue.

The standard interaction one has in these circumstances is usually with an assistant who asks “would you like the cheaper version (or our preferred brand)” or “have you had this before”. Neither are particularly helpful to most customers and certainly there’s no ‘wow’ or ‘aha’ moment that makes them think ‘I must come back here’.

The initiatives pursued vigorously by successful pharmacies are dominated by pharmacist professional service are set out in Table 1.

TABLE 1: SERVICES PERFORMED BY PHARMACISTS IN THE HEALTH SOLUTION SERVICE MODEL

PHARMACIST PATIENT CARE ‘SERVICE’

WHY – BENEFITS

Script checking, interaction and patient history

Base

Hand out every script with relevant patient counselling

No exceptions

Medication management, including DAA, MedsChecks, HMR

Core

Actively collaborate with patient’s GP – interests of all parties

Enhance care

Minor ailments include S3/2, CAMs and relevant health lines

Solve primary care problems

Wound care

Add value and range

Diabetes, asthma and cardio vascular management

Improve health

Screenings and health events

Detect, diagnose, refer, solve, fee

Vaccinations

Perception / income

Blockbuster health conditions – e.g. diabetes, sleep, CVD, wound care, chronic pain, asthma, diet/wellness

Reputation, new patients, fee

 

Those who do this find that patients respond very positively to the professional service received—they keep coming back and become brand ambassadors. The result is transactions and script volumes growth well above the industry average.

4. Grow income

Pharmacies consistently delivering this style of service are focused on their top line. With a persons’ health at front of mind they’re generating average retail health sale per patient of $18 with a 45% GP compared with the client average[1] of $12.87 at a GP% of 35.1%. The income difference is $3.60 per visit that offers on average an additional $300,000 ($3.8m turnover and 84,000 customer visits pa) to the bottom line of the successful pharmacies. Opportunity!

Furthermore, successful pharmacies earn much larger services income. particularly ‘low hanging fruit’—those funded through the 6CPA. On average, pharmacies are receiving circa $30,000 pa services income whereas the successful pharmacies generate over $100,000 while some generate $200,000+ pa.[1]

Critical success factors include pharmacists out the front at all times, pharmacists appropriately trained, technicians looking after dispensary administration, severely rationalised sundries departments, large health product departments, large practitioner ranges, and pharmacist expertise in all 6CPA services and a specialty area—such as wound care.

5. Avoid discounting

Pharmacists are generally good at COGS, but not as astute when pricing those same products out. Excessive price discounting is usually misplaced. Lower margins are commoditising the pharmacist profession. Lower margins have a consequence—usually lower wages, fewer staff, poor service and reduced product ranges.

In contrast, successful pharmacies we deal with do not have these problems to the same extent. The key—principally because they have retained margins by not discounting while pharmacist professional service provides value through health benefits.

These pharmacies have an overall GP% of >40% which is significantly better than others—as shown in Table 2.

TABLE 2: OVERALL GP%

PHARMACY GROUP

MARGIN

Our best in class group

45.0%

Average pharmacy

35.8%

Banner Group A

34.7%

Banner Group B

33.6%

Banner Group C

38.0%

Banner Group D

35.0%

These concepts are poorly understood by most, but more owners are doing it with great results and you can too. Start now, make 2019 your year of change. Innovate, thrive and survive. It’s your choice—a wild ride by not changing or smooth sailing by embracing a new business model.

  1. Pitcher Pharmacy Services 2018 client base averages.

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