How could a listed Chemist Warehouse look?


Chemist Warehouse Woden, September 2013.
Chemist Warehouse believes there is not enough competition under the current pharmacy model.

Chemist Warehouse could list its management structure, but does it actually need to? asks one industry analyst

Earlier this week the Australian Financial Review’s Street Talk column suggested that Chemist Warehouse could be considering a “potential run at the ASX-boards”.

The group has reportedly met with fund managers and investment bankers in recent months.

AJP spoke to pharmacy consultant Bruce Annabel about how a listed Chemist Warehouse could work – as well as how vulnerable the Kiwi pharmacy sector is to its slick operation.

“If they wanted to, Chemist Warehouse could potentially list the management structure,” Mr Annabel says.

“The difficulty there is the management structure receives commercial services income and can’t directly take a direct interest in the profit from the underlying pharmacies, and for the same reason it doesn’t necessarily control the capital of those underlying pharmacies that produce the income.

“This has always been an issue for any pharmacy groups wanting to do business with private equity or consider listing on the stock market.”

Under the existing ownership laws Chemist Warehouse would not be able to obtain equity in these underlying pharmacies, receive a profit share, direct the sale of and the allocation of capital within these businesses, he says.

“So you can list a management structure, but how much of the income flows back to that management structure – that’s the question everyone’s got around Ramsay.”

He says Ramsay Health Care “wove their way through the regulatory requirements” and must have been able to demonstrate to the Queensland Pharmacy Board that their documentation and structure did not represent a pecuniary interest in the income of pharmacies.

“So potentially, there’s nothing stopping Chemist Warehouse from listing their management structure if they want to – but the question is why would they want to, what do they get out of it, unless someone wants to take cash off the table or they need more money for expansion into another market?

“Apart from that they don’t necessarily need it.”

 

Simply the best

“When you think of Chemist Warehouse, the things they bring to our country plus now New Zealand is that they want to emphasise their position as dominating the lowest price, widest product range segments of the market,” Mr Annabel says.

“And so they’re able to dominate those two market positions, and from the consumer’s point of view they know the more they buy the more money they will save.

“It’s a massive issue which is forgotten, or overlooked, or not considered by other community pharmacy owners and groups: it’s not just price. It’s the combination of the price and the range, which is where the strength comes from.

“And because they do it consistently, they have become known in Australia to be a genuine brand.

“In Australia they now have about 25% of the market in Australia in an overall sense, and 45% of the retail market, the non-prescription market. They only opened their first pharmacy in June 2000, and here they are 17 years later with 400 and a 25% market share. It’s incredible.

“They have extraordinary buying power, which keeps their purchase costs down, and therefore the ability to reduce their prices; they’re able to run a very low overhead model in rent, wages, advertising and marketing and general expenses, a very low overhead structure, and you’ve got to have both of those if you’re going to win the price battle.

“Chemist Warehouse is the best in our market here.”

 

Across the Tasman

New Zealand pharmacies are likely to be highly vulnerable to competition from the Chemist Warehouse juggernaut, Mr Annabel says.

Australians have had a while to get used to the discount giant as it grew, but Kiwis will be up against a mature operation.

“Most pharmacies you go into in New Zealand are very heavily merchandised in front of shop,” he says.

“The reason for that is that the dispensary profit is about a third of what Australian pharmacies get for the dispensary function – they make between $4 and $5 a script, whereas Australian pharmacies are making over $12. So they don’t make a lot of money out of scripts.

“This is why Green Cross and other pharmacy groups have gone quite heavily into front of shop categories, including OTC medicines, other health lines and in particular, the beauty market. And it’s quite apparent, when you go over there, that’s what they’re trying to do.

“And that’s where Chemist Warehouse are very strong: the front of shop. And they’re going to use the deals they’re doing on prescriptions to attract New Zealand consumers away from their traditional pharmacies.

“So pharmacies in New Zealand could struggle a bit: they’ll lose some script business but also front of shop business.”

Thanks to price disclosure generics deals are not what they were in Australia, but New Zealand doesn’t have this “luxury” at all.

“All the trading discounts are retained by the Government, as they do all the buying through Pharmac,” Mr Annabel says.

“So they don’t even have the Get Out of Jail Free card that we’ve had.”

A Chemist Warehouse spokesperson has told New Zealand media that another 10 sites are lined up across the country, including in Auckland, Wellington and Christchurch.

Mr Annabel says that it won’t take too many Chemist Warehouses popping up to start changing consumer perceptions.

“While there’ll be 10 of them, that could have quite a significant effect on the rest of the industry, like it has here,” he told the AJP.

“Chemist Warehouse will target the fragrance and the beauty market very aggressively, and OTC meds: the bread and butter of front of shop profit contribution for traditional community pharmacy in New Zealand.

“The other thing is that Chemist Warehouse has an extraordinary range. So price, range, market presence and particularly marketing – I gather they’re already sponsoring sporting teams in New Zealand – are all working for them.”

New Zealand pharmacy groups may be able to take advantage of changes to pharmacy ownership across the Tasman, if it’s opened up so that any “fit and proper” person can own a pharmacy, he says.

“It many help the pharmacy groups in New Zealand to get some more collateral together, more capital, if it’s opened up, to be able to develop their business further – in order to perhaps not directly take on Chemist Warehouse but compete more effectively with them.”

In the meantime, his advice to both Australian and New Zealand pharmacies is not to try to compete on Chemist Warehouse’s terms.

“Those pharmacies need to move more and more towards professional services, minor ailments, and in many cases reducing or rationalising stock range, in some cases reducing the floor square meterage footprint,” Mr Annabel says.

“Go for things like medicines management, compliance – the services pharmacists are actually getting paid for in New Zealand, though of course the government wants to cut it – pharmacists spending time with their patients.”

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