The state of the industry in Australia’s OTC retail pharmacy channel, according to IRI’s Market Moves report
IRI’s Market Moves provides a compelling overview of the most influential trends and ‘market truths’ shaping the evolution of Australia’s over-the-counter (OTC) retail pharmacy marketplace.
Utilising IRI’s scan and shopper panel data, the report contains expert opinion, fact-based analysis and
insights to pinpoint what is driving performance in an industry generating $6.7bn in sales annually.
Three key themes were identified in 2017, these include: contraction and consolidation; divergence and disparity; and appealing attributes.
Contraction and consolidation
The pharmacy market over the last 12 months has been contracting.
Contraction was experienced across different states, retail banners and categories in the form of contracting growth, price, and range as well as consolidation.
Since 2012, the pharmacy OTC market has had approximately 3–4% value growth each year, with 2016 a
marked exception. OTC pharmacy sales in 2016 exploded to $6.5bn, up half a billion dollars plus, with 9.8% value growth and 6.7% unit growth (see Figure 1).
The one question on everyone’s lips was would this growth be sustainable? 2017 proved it wasn’t, the market contracted 74% by mid-year with unit sales growth outpacing value growth.
This is an unhealthy predicament for a market that now needs to spend more money to get unit sales, which means it’s costing more to operate in this channel. This has put pressure on
retailers to use aggressive pricing as a key lever to drive sales.
Reviewing the quarterly trend for the last two years, growth contraction was marked in the first half of 2017 with negative growth recorded for the first time.
The good news for the channel is the market recovered in quarter 4 with growth at approximately 2%, just over CPI.
When we look at growth around the country, we see a mix of results. While the eastern states continue in
growth, Western Australia (–0.8%) and South Australia (–7%) were in decline.
South Australian has been struggling with the entry of My Chemist and the focus of other discount chains. Victoria, with the opening of the 24-hour super pharmacies, will be a state to watch in 2018. In terms of dollar growth, all states have seen year-on-year contraction of at least 50%.
Contracting categories and range rationalisation
Seven out of the 27 OTC categories recorded stronger growth in 2017 than a year ago. They include: Honey and Syrups, Allergy, Cough and Cold, and Prestige Skincare. However,
two of these seven categories—Weight Management and Small Appliances—remain in decline. Weight
Management’s decline, in part, is due to diluted value with consumers, who can purchase these products in health food stores and grocery.
Ten categories posted a decline in 2017, that’s double the number of categories compared with 2016.
These categories have seen a price per unit decrease and include Analgesics, Vitamins and Minerals (VMS), which represent a third of all OTC sales in pharmacy. However, we must remember that 2016 was an unusual year.
Last year also delivered range rationalistion in pharmacy with 70% of categories incurring 5–6% SKU
reductions. Some of the categories driving these reductions include: Animal Health, Small Appliances, Baby Care, VMS and Smoking Cessation.
Retailers are getting smarter about how they range products by adopting the processes of grocery. SKU
rationalisation has been occurring because there are too many brands and not enough shelf space for them in small stores.
Retailer contraction and consolidation
Only four retail banners grew in 2017, with My Chemist and Priceline, holding a more concentrated market share than two years ago.
My Chemist was in strong double- digit growth in 2016, value growth was 17% compared with 2015 calendar year. Over 2016/17 growth slowed to approximately 13%. Priceline’s growth was closer to 9% in 2016, with growth slowing to 2% mid-2017. Priceline changed its strategy to drive sales by incorporating more health and professional services with beauty.
Continued growth put pressure on other pharmacies to consolidate into larger retail groups and differentiate their position.
Chemmart Pharmacy and Terry White Chemists joined forces in 2016 to become TerryWhite Chemmart (TWCM), the largest retail pharmacy network in Australia, with approximately 500 pharmacies. TWCM positioned itself as the “leaders in the delivery of accessible frontline health care”.
Priceline has redefined its retail focus to be “Australia’s favourite mass market health and beauty retailer”.
Also in 2017, Malouf Pharmacies joined forces with Ramsay Health Care with the goal to have many more pharmacies.
Diversification was seen via the expansion of some Australian brands overseas. Chemist Warehouse
expanded its footprint into New Zealand, with the opening of its first store in Auckland in November 2017.
When IRI’s 10,000 household shopper panel was asked about the retail brands they most recognise in OTC pharmacy–the top 3 were Chemist Warehouse (79%), Priceline Pharmacy (67%), and TerryWhite Chemmart (48%).
Price has become increasingly important as consumers battle inflationary healthcare costs. Chemist
Warehouse gained from shoppers’ focus on price to become home to more regular shoppers’ pursuit of value.
Location and expert advice remained important, but location and price out ranked expert advice as the must-have elements driving pharmacy store choice.
Surprisingly, in-store promotions, loyalty card schemes and in-store services ranked only as ‘nice to have’.
Ninety-four per cent of those surveyed said they trust pharmacists’ advice, 58% said the pharmacist plays
a role in influencing their decisions, and 25% said they might go to a pharmacist first—an opportunity for pharmacists, who can focus on using credibility and expertise to have a more active role in the care of their patients.
Fluctuation and concentration
Categories that were real drivers of growth in 2016 became drivers of decline in 2017. Some of the worst performing categories in OTC pharmacy were: VMS whose $203m sales grew in 2016 then declined by –$41m mid- 2017, and Analgesics grew $11m in 2016 but declined by –$20m mid-2017 (see Figure 2).
Footcare, Home Self Care and Antifungal also experienced significant decline. The VMS decline was due to a conscious change of strategy for brands who went direct to China. While the Analgesic decline was mostly due to the removal of PBS reimbursement for Panadol Osteo.
Despite a slow-down in 2016/17, Baby Care played a critical role in driving pharmacy growth and accounted for 61% of all channel growth. This success was due to exports to China.
The ‘Daigou Dichotomy’
China spends and shops online more than any other country. China’s rapidly expanding middle class love the ‘clean, green, safe, healthy and celebrity usage’ products produced and/or sold in Australia. This continues to have a huge impact for all pharmacy categories especially for Baby Care and VMS.
Daigou is a channel of commerce in which a person outside of China purchases commodities for mainland Chinese consumers. It is estimated there are 60–80,000 diagou in Australia.
Exports through the OTC pharmacy channel were $849m (MAT to 4/03/18), representing 13% of total channel sales.
From a marketing perspective, the brands that are doing well are focusing on ‘naturally functional’, ‘specialised and targeted’ and ‘professional grade at home’.
Chemical-free, natural and functional products are growing in demand with brands highlighting these features very clearly in their packaging and promotion. Sukin and Comvita are examples of these.
Naturally functional aligns with the wider trend towards clean labels, and are associated with four core themes:
- Natural and organic ingredients
- Chemical, toxin, GMO and allergen‐fee
- Minimal processing/not factory made
- Simple, short, recognisable ingredient list
Comvita, a superfood prized for its antibacterial qualities, has embraced the idea of natural and functional and is the driving force in the fastest growing OTC healthcare category, up 21.2% in dollar value.
Red Seal has focused on the balance between natural and functional, and is leading growth in Oral Care, due to domestic and overseas demand, with 45% share of Oral Care category growth and 104% value growth. Again, this brand has focused on lean, green natural and functional products in this case, chemical-free/non-fluoride toothpaste.
Specialist and targeted
Specialist and targeted is about finding a wide-space, niche markets and explicitly targeting them. Probiotic brand Life-Space has developed a product suitable for all ages but is specifically targeting women. Life‐Space has also successfully targeted the Chinese export market, with 41% of brand growth driven by exports.
Professional grade at home
Professional grade appeal leverages the credibility of professional use at home. Brands that have performed well include NYX and Bondi Sands. NYX, a L’Oréal brand, targets digitally savvy millennials, who use social media to bring the brand to life. NYX is now the number three growth-adding brand in
OTC healthcare over the last 12 months and has delivered $25m in incremental growth and six share points compared to a year ago.
Bondi Sands is an Australian professional grade brand that can be used at home and its marketing claims have helped create a global brand that has driven $7.6m growth in two years.
Keys to success
The OTC pharmacy market is a microcosm of the national economy:
• Growth trajectory for categories and brands depends substantially on China
• The channel is susceptible to boom–bust, ebb and flow cycles, which create risk but also opportunity
Retail banners are changing and becoming smarter:
• Category reviews are looking at range and pricing
• Be prepared, if you want to be successful take a category perspective
Capitalise on the three trends underpinning high performing brands:
• Naturally functional
• Specialised and targeted
• Professional grade at home
Pharmacy is moving towards a holistic approach to healthcare that is more about engaging, fun, and discoverable purchases, rather than purchases made out of purely healthcare/illness needs.
To engage with customers, developers of new brands or products need to focus on five key areas:
- Identify a need for the product to target the right shopper segment
- Be on top of social trends
- Understand the benefit of the product
- Focus on what the product delivers and be transparent in delivery
- Champion a single, hero ingredient and invest in ingredient understanding.
This article was originally published in the April 2018 issue of Post Script.