How healthy is the pharmacy sector?

Revenue in the pharmacy sector will grow at an average annualised rate of 1.7% over the five years to 2009-10. Growth was achieved mostly from the dispensing of prescription pharmaceuticals despite participant efforts to provide a total pharmacy offer in line with their changing operating environment.

At the same time, government regulations and technological developments (introduction of new, more expensive medicines and greater availability of pre-packaged medicines) also had a bearing on the performance of the industry over the current period.

The introduction of fundamental reforms to the Pharmaceutical Benefits Scheme also had significant implications for industry performance in recent years.

Pharmacies are thought to derive a considerable proportion of their net profits from prescription dispensation and have been affected by an increasing reliance on generic products.

Pharmacy profitability has also been impacted by rising competitive pressures and tight (if not falling) margins. In addition, pharmacy costs are currently increasing at a higher rate than revenue. Recent years have also witnessed the development of new formulae including niche pharmacies, larger super-chemists and discount or warehouse style outlets.

In view of recent recessionary conditions, a rapidly growing number of consumers are thought to be favouring warehouse pharmacies. The advent of online and mail order pharmacies and the increasing number of cheap non-pharmacy outlets have posed a threat to traditional pharmacies. In an effort to combat these increasing competitive pressures, a number of pharmacies have joined various marketing/buying groups.

Long-term underlying economic, demographic and social trends; and continued product development and innovation are expected to contribute to the continued moderate growth of the industry. At the same time, however, growth rates will be constrained by flat PBS volumes and the continued loss of market share to external forces.

Overall, growth in industry revenue is expected to average 2.7% per annum over the five years to 2014-15. As in the past, the regulatory nature of the industry will provide a framework for the overall growth profile of the industry. Competition between various pharmacy chains is expected to intensify constraining profit margins.

Aggressive internal competition among the pharmacy segment is believed to represent a greater threat than external forces, such as supermarkets.

Regulatory changes, combined with rising input costs, will exert downward pressures upon industry margins. To combat this, pharmacies may increasingly seek to differentiate themselves from low cost competitors on the basis of the professional value added services. They will also seek further operating efficiencies in order to compensate for falling margins.

Continued moves to switch the status of various industry products in the pharmaceutical segment from prescription to OTC status will affect the long-term functionality of the industry. Similarly, the increasing growth in the relative importance of complementary or alternative medicines will also impact the product profile of various industry participants.

Continued developments in technology, including the increasing use of the internet, eCommerce and the development of net markets, will also serve to gradually change the profile of the industry.

Key success factors for operators in the industry:

• Membership of joint marketing/distribution operations. A key success factor for companies in this industry is having an association/affiliation with a buying group or chain.
• Ability to control stock on hand. Companies need to ensure adequate stock controls are in place in order to reduce inventory costs and increase stock turns.
• Superior financial management and debt management. Companies should ensure that effective cashflow management controls are in place.
• Production of goods currently favoured by the market. The product mix needs to be appropriate for the target market; the products stocked are perceived as offering value for money.
• Experienced work force. The quality of staff needs to be high to ensure quality customer service.
• Attractive product presentation. The store layout and display of stock must encourage customers to purchase and reinforce the company image.
• Proximity to key markets. The store needs to be located where there is a high volume of passing traffic and preferably near a medical practitioner or a medical centre.

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Robert Bryant is the general manager of business information firm IBISWorld.