Bruce Annabel explains the predicament eating away at the profitability of soft discounters stuck in the middle of the pharmacy landscape
The first verse of the 1972 song ‘Stuck in the middle with you’ by Stealers Wheel seems to sum up the predicament of soft discounter pharmacy owners:
‘Well, I don’t know why I came here tonight
I got the feeling that something ain’t right
I’m so scared in case I fall off my chair,
And I’m wondering how I’ll get down those stairs
Clowns to the left of me, jokers to the right,
Here I am, stuck in the middle with you.’
Soft discounters are popping up faster than golfers at first light in response to:
- Banner head offices chasing higher margin dollars via pushing volume growth and
- Pressure from hard discounters plus other sophisticated retailers including supermarkets and on-line.
Compared with hard discounters soft discounters rely on:
- Smaller foot print prime convenience locations
- Higher quality fit out
- Less clutter
- Usually higher service quality.
- Promoting several hundred products across various sectors
Yet suffering from a much smaller range offer and a higher cost base makes it very difficult to compete effectively against hard discounters who win through combining price as a ‘strategy’ with the biggest merchandise range delivering huge basket size and top line sales.
Hard and soft discounters can work side by side if the latter focuses on attracting different customer types.
The headline KPIs for a typical soft discounter banner group versus traditional community pharmacies and hard discounters are displayed in Table 1.
Table 1: KPIs for soft discounter banner group versus traditional community pharmacy
Hard discounter *
Traditional pharmacy **
Floor space m2
Gross profit margin %
Wages + on-costs + rent/sales %
Net profit (EBIT)/ sales
It’s interesting to see the mix of costs and income lines:
- Soft discounters carry a much smaller range.
- Dispensing income delivers majority of the income.
- Overheads are 60% greater than hard discounters forcing wage cuts hence service levels.
- Hard discounters have forced more price and wages cuts.
As more pharmacies gravitate toward the professional service health solution service model and hard discounters are being squeezed by supermarkets et al soft discounters are more and more finding themselves stuck in the middle.
By way of illustration, needing to buy an s2 and s3 medicine, I found myself choosing between a shopping centre soft discounter, a convenient strip centre soft discounter and Chemist Warehouse.
I went for convenience buying the medicines from a pleasant assistant who did nothing more than try switching me from the brands I requested. Despite being the only customer in the store the pharmacist took no interest in me or my ailments whatsoever.
There was no discernible point of difference and convenience aside there is no reason to choose that pharmacy again.
Of course it’s possible to compete against a hard discounter. Some ideas:
- Adjust prices up of certain non-price sensitive lines, especially medicines.
- Improve the quality of pharmacist professional service and services.
- Add value through alternative means, such as health benefits, other than just price.
But in the absence of these the predicament some soft discounter pharmacy owners perhaps find themselves may be found in the words of Stealers Wheel:
‘Trying to make some sense of it all,
But I can see it makes no sense at all
Yes, I’m stuck in the middle with you,
And I’m wondering what it is I should do
Losing control, and I’m all over the place’
*Source: Industry knowledge and hard discount pharmacy KPIs
**Source: Pitcher Pharmacy client series 2015/16