Turning the tide


While many of pharmacy’s fundamentals remain unchanged, adjusting for the major trends is essential for businesses to survive

Shortly before dawn, on a crisp August morning in 1875, Captain Matthew Webb dived off the Admiralty Pier at Dover, England. After 22 hours of swimming a very zig zag course, he emerged triumphant at Calais.

Because of strong currents, Webb swam 64 kilometres intead of what should have been a 34-kilometre course.

It is notable that the fundamentals of Webb’s achievement are precisely the same today. People seek to achieve. And we seek good health with exercise.

The changing trends of pharmacy

While the fundamentals of pharmacy remain unchanged, the industry is impacted by the trends of the day. A look at the past 20 years shows us how trends come and go.

We’ve seen gift as a major category come and go; cosmetics was huge for many and is now a side bar for all but two of the largest banner groups; weight loss was big business and, for a few years, NRT seemed to have a bright future.

The trend today is the digital revolution which impacts buying, services and information. In addition, the more health-conscious consumer is changing the way they buy. That extends to sundries and unscheduled health lines and which channel they choose to buy through. These trends present positives and negatives for pharmacy, particularly with respect to retail categories.

Figure 1, based on the Pitcher Pharmacy Services client series, shows the trend in community pharmacy average retail sale per patient during the past four financial years. (Average sale formula: non dispensed sales divided by every patient who transacted buying retail and/or script items.)

The good news is that during that period the average sale grew by 84 cents, or 5.7%, and the retail health component (excludes script sales and patient contributions) grew even more strongly, up 88 cents, or 9.4%.

Meanwhile sundries sales fell by 4 cents per patient, which would have been much greater but for sales spikes in masks and sanitiser. If we leave out 2019/20 sundries sales component fell by 31 cents per patient and the health share grew by 50 cents indicating health consumers are choosing to buy sundries elsewhere.

These include, although are not limited to cosmetics, general hair/skin care, fragrance, gifts, etc.

With more health-conscious consumers and a slow decline in sundries market share, more community pharmacy owners should begin to address the mismatch in their merchandise and space investments.

Table 1 demonstrates the investment made, and the returns generated during 2020/21 for ‘Pharmacy A’.
Eighty percent of the total retail section income is generated by health departments from 45% of space and 57% of stock investments.

Clearly that is disproportionate which becomes even more stark when the bottom five performing departments’ performance are reviewed in Table 2.

Table 1: Pharmacy A top six health departments v bottom five.

Top 6 departments

Sales

 

GP$

Shelf space lm

Stock @ cost

Stock turns pa

Medicines

$264,000

$125,000

35

$19,000

7.3

Vitamins

$184,000

$79,000

32

$26,000

4.1

1st aid wound care

$107,000

$42,000

40

$14,000

4.5

Digestion

$87,000

$40,000

14

$6,000

8.1

Eye & ear

$56,000

$25,000

11

$8,000

4.1

Condition management

$55,000

$27,000

3

$23,000

2.6

Totals

$784,000

$338,000

134

$95,000

4.7

% of retail section

77%

80%

45%

57%

 

By comparison with the top six performers, the bottom five produce 9% of the retail section’s income from investment in 33% of space and 24% of stock. The productivity (GP$ per shelf linear metre) of the top six is $2,522 per shelf linear metre while the bottom five is a miserable $390, well below the $800 cost to hold each linear metre. That is, the bottom five departments generate a $40,000 pa net loss after expenses including rent.

Compare that with the top six departments generating bottom line net profit of over $200,000!

Figure 1 shows us that community pharmacy is losing sundries market share yet we over invest in those departments. Table 2 (below) demonstrates that it sells poorly and produces losses. The tide has turned. It’s time to change strategy.

Bottom 5 departments

Sales

 

GP$

Shelf space lm

Stock @ cost

Stock turns pa

Hair – general

$11,000

$4,000

41.4

$4,000

1.8

Skin – general

$46,000

$17,000

27

$11,000

2.7

Gift

$5,000

$2,000

12.6

$4,000

0.7

Cosmetics

$34,000

$12,000

12

$19,000

0.6

Glasses

$6,000

$2,000

4.5

$2,000

1.7

Totals

$103,000

$38,000

97.5

$41,000

1.1

% of retail section

10%

9%

33%

24%

 

Running at a loss

We see many pharmacies carrying a lot more investment in loss-making sundries departments which should be redirected to health departments. We aren’t suggesting sundries departments be scrapped, merely rebalanced in favour of building up areas customers demand and need.

In the case of Pharmacy A, we would suggest doubling medicines space and stock plus lifting digestion, vitamins/practitioner lines, eye/ear and condition management. Investment in space and stock would be reduced principally in general hair and skin, gift and cosmetics.

By comparison Pharmacy B has focused investment in the dominant health departments summarised in Table 3.

Table 3: Pharmacy B top six departments v bottom five.

Retail sections

Sales

 

GP$

Shelf space lm

Stock @ cost

Stock turns pa

Health departments

$863,000

$403,000

236

$112,000

6.2

% of retail section

71%

81%

61%

71%

 

 

 

 

 

 

 

Sundries departments

$74,000

$25,000

62

$11,000

4.7

% of retail section

7%

5%

16%

7%

 

Those in charge of deciding merchandise selection and space allocations should direct investment into departments that provide returns, patient health solutions and enhance the competitive offer. Dominant health departments present a strong health image to health consumers which, increasingly, is what the data tells us they want.

As the business environment continues to change with COVID-19 lockdowns and the hurried adoption of vaccinations, we may find that the tide is turning on government funded stimulus and super low interest rates. While the fundamentals remain the same, the trends and data are clear. Now is the time to make improvements and changes to reflect what the market wants from pharmacy.

Don’t freestyle your merchandise offer; plan your merchandise and space investments, adjusting both to maintain relevance and continued growth. Without planning and executing your merchandise offer, strong currents will see your business drift off course. Instead, swim with the tide.

 

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