Script for higher sales

The players

Clicks, which began adding pharmacies to its core health and beauty offering in 2004, is the market leader, with 224 pharmacies across its 354 stores.

Shoprite, whose canny CEO Whitey Basson understands the value of services that attract customers and keep them in the store longer, is hot on its heels. Its MediRite chain is the second largest in the country, with about 100 stores.

Pick n Pay has been frying other fish, but with its corporate management software system virtually complete and the centralisation of distribution in hand, the retailer has the room to tackle this market more aggressively. It has 17 in-store pharmacies, all of them in hypermarkets. But this will change fast. It plans to open another 40 pharmacies this year.

Spar, too, intends to join in and will pilot “a couple of stores” in the next few months.

Woolworths, however, has not made a success of its foray into pharmacy retail and is rethinking its strategy.

This is despite its partnership with Netcare, which was responsible for obtaining the pharmacy licences and staffing and managing the dispensaries.

Setting the competitive benchmark for these newcomers is Dis-Chem, a well established competitor with 47 stores. It plans to open 16 more this year.

The start of pharmacy retail

Retailers have been investing in pharmacies since 2003, when legislation was passed relaxing the provision that a pharmacy must be owned by a pharmacist.

It became possible for companies to own chains of pharmacies and install a pharmacist to run the dispensing operation.

This will put pressure on the independent pharmacies. Profits are already under pressure because of regulated pricing. And without the economies of scale enjoyed by the large retailers, they will struggle to compete on price.

In the first four years after the legislation was changed the number of corporate retailers increased by 15% — and it's increasing at a faster pace now.

“It's very simple,” says Clicks CEO Michael Harvey. “It's about attracting feet into the store.”

It seems to be working for Clicks. In its 2009 financial year Clicks pharmacies processed 1,2m prescriptions a month and generated turnover of R1,4bn.

This will grow significantly as the company gets closer to achieving its target of 500 stores, with a pharmacy in each one.

The benefit of the increased foot traffic is visible in other areas — for instance sales in health products grew by 30% last year, as dispensary sales continued to gain momentum. In a short time Clicks has grown its share in retail pharmacy to 11%, while its share of the front-shop health market has increased to more than 37%.

Not a cash cow

The pharmacy business is not a money-spinner, however. “With the legislation governing the dispensing of medicines, there is minimal profit around the dispensary itself,” says Pick n Pay merchandising director Kevin Korb.

But, he adds, where a dispensary is placed alongside a traditional health and beauty section, footfall can increase by 20%. A pharmacy presence also allows a grocery retailer to introduce a more premium beauty offering, which is more profitable than products that fall into an economy or midtier band, he says.

Department hindrances

However, there is a small obstacle in the way of unfettered growth: pharmacy licences.

“The department of health makes up the rules as it goes,” says Dis-Chem MD Ivan Saltzman. “There is an unequal distribution of licences and this has been a hindrance for corporates.”

The way around the problem, he says, is to buy up pharmacy businesses that are no longer in operation, but still hold a licence. “It's a farce,” he says.

International trend

The introduction of pharmacies within retailers is a global phenomenon. In the US the world's largest retailer, Wal-Mart, has barged into the pharmacy game with its usual gusto. It has 3500 in-store pharmacies.

Though shopping at its giant stores is not the quick in-and-out experience that local pharmacies can offer, Wal-Mart compensates by ensuring its pharmaceuticals, over-the-counter medicines and other products are the cheapest available.

In the UK, where the trend has been slower to emerge, the recession has forced the top retailers to consider new and collaborative strategies to increase sales and develop new revenue streams. Waitrose and Boots (whose business model Clicks emulates) are working together to expand their market reach.

The retailers will stock each other's ranges, with the pharmacy chain supplying health-care and wellbeing products and the grocer supplying a range of foods. In addition, they will open branded pharmacies in a number of grocery stores.

Retailers like Shoprite tend to watch the Wal-Mart model closely, but other global trends seldom pass unnoticed.

SA-specific

There is another uniquely South African reason for retail interest in pharmacies: national health insurance and SA's lower income earners who will pay for better health care.

All the retailers are aware of the potential. Clicks is working hard to promote the role of the pharmacist in primary health care.

“All our pharmacies have a clinic attached,” says Harvey. “This is not unique to Clicks. Pharmacy can play a bigger and wider role in bringing down the cost of health care.”

Similarly MediRite has positioned its pharmacies to advise customers on minor ailments. Of its 81 pharmacies, 19 are located in underdeveloped areas where residents do not have easy access to health-care facilities.

The retailers have been approached by government to partner it in its HIV counselling and testing programme. The goal is to test 15m people by July next year. The retailers will provide the service free, while government will supply the materials.

“We want to show that corporate [pharmacies] can be part of the solution,” says Harvey.

Source: Financial Mail