October 6, 2006
GHQ: Headache Remedy
By David Rogers
Through special arrangement, what follows is an excerpt of a current article from Grocery Headquarters magazine, presented here for discussion.
Pharmacy is a major growth sector for supermarkets and — if executed well — it can compensate for the center store sales being lost to alternative formats. It is also an important point of difference from highly segmented supermarket formats.
Statistics from the National Association of Chain Drug Stores (NACDS) suggest the supermarket industry has been doing very well with prescription volume growing at a rate second only to the mail order/Internet channel between 1997 and 2004.
In-store pharmacies offer four key benefits to supermarket companies:
- First, as a result of the aging of the population, they are a growth business.
- Second, they fit with the supermarket’s customer profile (primarily female) and shopping function (convenience goods).
- Third, they contribute to a whole health image.
- Finally, they can synergistically boost spending on non-prescription items and support new services such as in-store health clinics.
There are reasons for caution, however, which argue against the current shotgun-style expansion of supermarket pharmacies. They include:
- The costs of installing and operating a pharmacy including inventory pharmacists’ compensation.
- Cost controls by insurance firms and governments have reduced pharmacy gross margins to as little as 19%.
- In-store pharmacies can take a long time to mature — five years is the norm — and Year 1 sales may equal only 45% of the mature level.
- There is rampant competition from drug chains that are opening hundreds of new stores annually.
- Drug chains are not the only competitors. Wal-Mart is currently embarking on a major promotional campaign for its pharmacies, and the mail order/Internet channel is making major inroads, encouraged by the failure to control drug price inflation.
There is, therefore, the increasing danger of saturation in local markets. Pharmacies need to be located on the basis of professional site research, not simply from checklists or point systems, or from “free” research that depends on the subsequent sale of pharmacy services.
If a supermarket operator has a “fixed” food-drug combo format, the sales potential of the pharmacy needs to be accurately identified as part of the site-development decision.
Market studies should be based on research into existing pharmacy performances and consider the availability (or otherwise) of multiple sources of business.
Trade area demographics are of particular importance since they have a major impact on the available market demand. However, the key demographics influencing prescription demand are very different from those driving expenditures on supermarket merchandise in general.
Incomes are of little or no importance. The local age profile is, however, of crucial significance together with gender and ethnic background.
In summary, supermarket operators need to stop, research and think before installing a pharmacy in a new store. There will be an increasing number of situations where it is appropriate to install a local licensee reducing the degree of competition, or to do without a pharmacy at all. A relatively small investment in market analysis can avoid a lot of wasted time and money in the future.
Discussion Questions: What are the critical factors, as you see them, in determining if a pharmacy should be built in a given area? Where should pharmacy
lie in the decision tree hierarchy when it comes to deciding if it makes sense to build a store on a given site?
BrainTrust
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Discussion Questions
Poll
The primary consideration is staffing. If you build it, can you get licensed pharmacist to staff it? If you can get staff, will you get the top notch professional that can build your business or will you just get someone who pushes pills?
These folks are rare. The available supply is such that a major grocery chain recently announced that they are building and funding a pharmacy school to try and make sure they get the professionals they need. These are the people that make sure the pharmacy grows and reaches maturity in the shortest possible time. The real trick for retailers who want to get into this business revolves around compensation plans.
Plans should be set up to attract new pharmacists and retain them. I believe compensation for a newly licensed pharmacist is running around $135,000 a year for a 40 hour week. The average pharmacy will need 5 to 6 pharmacist to operate. You had better be committed to these people and treating them properly before you move into the pharmacy space.
A very relevant subject, given the profitability hit Pharmacies are taking from Med D, the squeeze by PBM’s and, of course, the Wal-Mart $4 generics buzz..
The decision to open a pharmacy within the store, while dependant upon profitability, is not simply a dollars and cents decision as it allows supermarkets to:
1) create perception of “total health and well being”
2) brings people into stores
3) expands the time spent in-store during a visit
4) allows cross selling of OTC and wellbeing products
5) ensures a human interaction element during the store visit
Expanding the concept into diabetes, immunization clinics/seminars and in-store health clinics also allows for cementing the relationship with the customer.
Any chain supermarket company with pharmacies already knows their existing location profitability. So they already have a model business plan for in-store pharmacies that will predict the bottom line, based on their typical real estate and personnel costs and margins. The supermarket owners with no previous in-store pharmacy experience can invite lease department operator candidates to make bids.
In the past, many department stores leased out their shoe departments, for example. Based on the lease operators’ sales, they calculated the likely gross margins and personnel costs, to determine whether they should eventually end the leases and run the shoe departments themselves.
In-store pharmacy remains a very viable fit for supermarkets. Although their volume of prescriptions filled is still far below that of a traditional drugstore, the full-store connection to wellness and good health makes it a win-win. I’m waiting to see a supermarket operator truly embrace pharmacy as a core category to their operation and provide integrated messaging throughout the shopping experience. Once that is mastered, the model will truly excel.
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The primary consideration is staffing. If you build it, can you get licensed pharmacist to staff it? If you can get staff, will you get the top notch professional that can build your business or will you just get someone who pushes pills?
These folks are rare. The available supply is such that a major grocery chain recently announced that they are building and funding a pharmacy school to try and make sure they get the professionals they need. These are the people that make sure the pharmacy grows and reaches maturity in the shortest possible time. The real trick for retailers who want to get into this business revolves around compensation plans.
Plans should be set up to attract new pharmacists and retain them. I believe compensation for a newly licensed pharmacist is running around $135,000 a year for a 40 hour week. The average pharmacy will need 5 to 6 pharmacist to operate. You had better be committed to these people and treating them properly before you move into the pharmacy space.
A very relevant subject, given the profitability hit Pharmacies are taking from Med D, the squeeze by PBM’s and, of course, the Wal-Mart $4 generics buzz..
The decision to open a pharmacy within the store, while dependant upon profitability, is not simply a dollars and cents decision as it allows supermarkets to:
1) create perception of “total health and well being”
2) brings people into stores
3) expands the time spent in-store during a visit
4) allows cross selling of OTC and wellbeing products
5) ensures a human interaction element during the store visit
Expanding the concept into diabetes, immunization clinics/seminars and in-store health clinics also allows for cementing the relationship with the customer.
Any chain supermarket company with pharmacies already knows their existing location profitability. So they already have a model business plan for in-store pharmacies that will predict the bottom line, based on their typical real estate and personnel costs and margins. The supermarket owners with no previous in-store pharmacy experience can invite lease department operator candidates to make bids.
In the past, many department stores leased out their shoe departments, for example. Based on the lease operators’ sales, they calculated the likely gross margins and personnel costs, to determine whether they should eventually end the leases and run the shoe departments themselves.
In-store pharmacy remains a very viable fit for supermarkets. Although their volume of prescriptions filled is still far below that of a traditional drugstore, the full-store connection to wellness and good health makes it a win-win. I’m waiting to see a supermarket operator truly embrace pharmacy as a core category to their operation and provide integrated messaging throughout the shopping experience. Once that is mastered, the model will truly excel.