feb 07 report

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Retail pharmacies; the next big battle ground?

February 16th, 2007 5 Comments

The pharmacy retail trade, which is highly fragmented and until

now dominated by small chemists, is bracing up for a quickrevamp. Big industry houses like Ranbaxy (Fortis), RelianceRetail, ADAG ( Reliance Health Venture), together with other bigmulti-verticle, multi-format, retailers like Pantaloon (Tulsi) andSubhiksha as well as other regional healthcare players like ApolloPharmacy (Apollo Hospitals Group), Medicine Shoppee(international drug retail chain), Dial fo Health (Zydus Cadilla),Planet Health (Sagar Drugs & Pharmaceuticals), Life Spring

(Morepan), Health & Glow (Dairy Farm), LifeKen (LifetimeHealthcare), 98.4 (Global Healthline), Body Shop (now acquiredby French beauty major L`oreal), Guardian Pharmacy (GuardianLifecare), are rolling out their plans to set up thousands ofpharmacies and healthcare stores in the coming three to four years.

Even, the traditional chemists, numbering over 5 lakh, in the faceof formidable competition, are also trying to organise themselves

under the banner of their trade association- All India Chemists andDruggists Organization (AICDO), which for decades has beenfighting to protect their business interests, by registering itself as acompany.

The pharmacy trade in the country generates an estimated businessof Rs. 32,000 crore, apart from about Rs. 18,000 added by hospitalpharmacies and exports. Almost all the chemists beside sellingallopathic medicines also offer OTC and alternate medicines,surgicals, rehabilitation aids and bodycare products like soaps,tooth pastes, hair oils, shampoos, cleansing lotions andneutraceuticals, among others, for sale which according to roughestimates generate an additional turnover of about Rs. 15,000crore.


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Take a look at retail plans of some of the existing/ local players,not counting the likes of Wal-Mart, which does formidable drugretail business in the US: Apollo is ramping up its present networkof over 120 pharmacies to 1,000 phamacies by 2009. Subhikshas

tally of over 500 now now, is set to increase to 1,200 within a year.Fortis, healthcare services arm of the pharma giant RanbaxyGroup, which has set aside Rs. 800 crore will roll out 1,000phamacies in 400 towns, within a cople of years. 250 of these willgo on stream during the current year, itself.

Ambani brothers are also gung-ho on the pharmacy business.While, Anil Ambani owned Reliance Health Venture has set aside

Rs. 1,200 crore for investment in pharma retailing, elder brotherMukesh Ambani is on the verge of buying a generic drugmanufacturing company to meet the requirement of pharmacies tobe set up within Reliance Retail outlets.

To understand the frantic pace at which even regional healthcareplayers are planning their moves in this sector, one will have tojust look at the expansion plans of some of these players.

Bangalore based LifeKen, owned by Lifetime Healthcare Pvt Ltd,which now has over 60 stores in Chennai and Bangalore has plansramp up the tall to 200 stores within a year and to 700 stores in thenext three years. On the other hand North based Global Healthlineowned 98.4, which set up its first shop in Gurgaon in 2003, isinvesting Rs. 100 crore to set up 300 shops by 2011. It will followconcentric circles expansion strategy, initially concentrating onthe northern region. Ahmedabad based, Planet Health, wants to

expand its network international class deluxe pharmacies from 14to 150 within a couple of years. Another North India based retailerGuardian Pharmacy, Guardian Lifecare Pvt. Ltd, has over 50 shopsis also looking at expanding its network. Medicine Shoppee, amaster franchisee of the $75 billion Cardinal Health Inc., isplanning to have 700 franchisee shops by 2010.


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Tags: Retail AnalysisAnil Dogra // Mar 5, 2007 at 9:31 amI do not think the impact of organized retailing on the stand alonechemists will be too much. May be 20 percent to 30 percent will

eventually wind up. The drug companies to marketing with thelocal doctors and make medicines available at the local chemist.This may not be possible with the organized retailers because ofcentral buying procedures.Hemjit Singh // Mar 27, 2007 at 11:24 am

The organised retail is at infancy stage in India and it is here tostay. And every type of players will have some thing different to

offer to the customers. The independent stores are also going toevolve with passage of time.

One correction was to be made in the fact given above-Health and Glow is now not owned by RPG rather by Dairy farmInternational.kk // Mar 28, 2007 (5 weeks ago) at 6:23 am

Mr Hemjit SinghThanks a lot for your interest in our blog. We also thank you forpointing to our mistake as regards ownership of Health & Glow.This has now been corrected.GURURAJ // Apr 2, 2007 (4 weeks ago) at 4:28 pm

Good Blog to understand about retailers movements and exploringbusiness opportunity.harsh pal singh "banty" // Apr 16, 2007 (2 weeks ago) at 9:43 pm

I think organized retailing is very tough to apply in India, speciallyin rural and urban areas.This requires specialist staff. Also, manydoctors are prescribing medicines of small companies, which aregiving a solid commissions.


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Time for a makeover

Organised players are slowly making inroads into the

highly fragmented Indian pharma retail industry, thereby

changing the dynamics of the segment. NandiniPatwardhan takes a look at the new emerging trend in

pharmaceuticals industry.

Pharma segment might be the last suspect for firms, who arecontemplating a foray into retail. Yet, the last few years havewitnessed inception and growth of various retail chains like theMedicine Shoppe and 98.4o, as well as, the entry of corporateplayers like Pantaloon Retail (Medicine Bazaar), Zydus Cadila(Dial for Health), Dr Morepen's and Himalaya. As these firms roleout their blue prints for expansion, pharma retail is set to witness asea of change in the business of selling medicines.

"Pharma retailing is popularly considered to be a neat, respectableand clean business. The healthcare industry has been steadilygrowing and hence, the spin-off of this onto the booming retailindustry is pronounced," explains Gautam Thadani, Managing

Director of the Delhi-based Global Healthline Pvt Ltd (GHPL), thepromoters of 98.4o. "Hence, it is but natural that any serious playerentering the market with retail ventures will surely get into pharmaretailing as well," he continues.

One of the reasons for active interest on part of the corporates inpharma retail is that all the other segments like food and grocery,apparel, consumer durables, personal care, sports and leisurealready have established players. Also, pharma products, being

need-based, unlike fashion, are not prone to sudden alterations indemand.

In addition, the demand for medication has increased manifoldover the past few years on account of a changing disease profiles(from infectious to lifestyle) of the patients, longevity of life and


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introduction and usage of drugs for new therapeutic areas. As aresult, the Indian patient needs to visit the pharmacy morefrequently. People are also spending more on health-relatedproducts. This is driving the growth in the health sector and

making a way for retail players in this sector.

The number game

AT Kearney pegs the overall Indian retail industry at $300 billion.The numbers in the pharma retail segment added to Rs 300 billionthis year, against Rs 280 billion, last year.

"We are expecting it to grow at 11 percent cumulative average

growth rate over the next five years, to be around Rs 500 billion by2010," confirms Raman Mangalorkar, Principal, AT Kearney. "Outof this, only two to three percent of pharma retailing is with theorganised players, the rest is unorganised. In India, there are about60,000 distributors distributing to almost eight lakh pharmacies,"he adds.

Organised pharma retail in India is still in its nascent stages. Is the

US and UK, retail chains contribute to around 54 and 48 percent ofthe total retail pharma sales respectively.

"In India, there are around nine players having 500 outlets in theorganised retail sector. In the coming three to five years, thegrowth of the organised retail is expected to be huge but will belimited to metros and tier-1 cities," explains Muralidharan Nair,Associate Vice-President, Risk and Business Solutions, Ernst &Young.


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Raman

Mangalorkar

PrincipalAT Kearney

Muralidharan

Nair

AssociateVice-President

Risk andBusinessSolutions

Ernst & Young

Gautam

Thadani

ManagingDirectorGlobal

HealthlinePvt Ltd

Asitava Sen

PrincipalConsultant

PricewaterhouseCoopers

Making of retail giants

While the numbers are still small when compared to the overall

retail scenario, the pharma retail train is chugging ahead with fullsteam. The past few years have witnessed the rise of many retailchains and the organised sector in general. These players haveentered the industry at the time when the distribution network isnot optimal and there is no assurance on quality and integrity. Atthe same time, many non-compliances and retail substitution thathappens today are detrimental to human health. "There are moralissues, economic issues and technology issues with the current

distribution network. Therefore, there is a strong case for people tomigrate from the current distribution network to a more organisedone," elucidates Nair.

However, the picture may not be as rosy as it sounds. Lowrevenues coupled with high expenses (salaries to qualifiedprofessionals, sales tax, rents, electricity charges) are forcing theseplayers to adopt various business models to survive in today'sdisintegrated and competitive scenario. "From an ownership point

of view, many companies are either going in for fully ownedstores, franchise model or a combination of ownership andfranchise stores. Another emerging model is the e-store model,wherein the consumers can order drugs online," reveals Nair.


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In addition, there are players, who set shops to sell just theirproducts or ones who have also diversified into beauty products."Himalaya has retail outlets that sell all of the company products.There are some like the Health and Glow and others who are trying

to diversify the whole experience and sell more than justpharmaceutical products," states Mangalorkar.

For instance, Medicine Shoppe, promoted by Mumbai-basedMelrose Trading Company, was recently in the news forestablishing its 100th store. The company has adopted thefranchise model for its stores. However, the company's initial planwas to attract existing chemists to join the franchise. "We knew

that chemists were entrepreneurs and would never want to work foranyone so we used the franchising model to attract them," statesViraj Gandhi, Managing Director, Melrose Trading. "This did notwork as we had planned. So, we started attracting entrepreneurs,who wanted to make a difference and change. And that is how ourfranchising business started," he adds.

98.4o currently has 15 stores in operation and GHPL is going in fora very rapid rollout of new stores. The plan is to have around 50

company-owned stores by the end of 2006-07. "We will prefer toconsolidate our presence in the NCR and then move on to othercities in the north before going on to the rest of the country," statesThadani.

Current State: Margins

CFA1.25-1.5% +expenses

Stockist 8% (Scheduleddrugs)10% (Non-scheduleddrugs)


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Pharmacist 16% (Scheduleddrugs)20% (Non-scheduleddrugs)

Source: Ernst & Young

As against the retail chain format, Pantaloon Retail has rolled outMedicine Bazaar to be a part of either Big Bazaar or Food Bazaar.There is a huge market for lifestyle medication, wherein,consumers or patients buy medicines like a monthly purchase. "Sowhile you are purchasing your grocery, there is a chance that if I

can get the consumer to also spend on monthly medicine purchase,and this is where, there is a high value addition that I can provideto the consumer. This is because the average spend is also high,"informs Rahul Bhalchandra, Head, Wellness Business, PantaloonRetail.

There is a two-fold rationale behind adopting such varied models.First, it is necessary to differentiate yourself from the unorganisedsector. The question iswhy should a consumer come to your

store? How do I compete against the unorganised sector thatbypasses sales tax and other expenses?

"It is a big challenge to answer this question, when the small-timeentrepreneur from the unorganised sector offers various services,such as giving artificial bills to the consumers, at times givingmedicines without prescription, giving credit facilities and so on,"says Asitava Sen, Principal Consultant, PricewaterhouseCoopers.

So the first question isHow do youdifferentiate? "You can add the beautycomponent or an impulse purchase to yourpharmacy, which is better than normalchemists because normally, chemists

Home delivery serviceoffered by 98.4o


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focus more on the medicine part. May be, a retailer can also stockimported beauty care and health supplement products which willmake it more comprehensive from a consumers point of view,"answers Sen.

Another reason for adopting a combination of ownership-franchise model or a diversified model is that theorganised players are at a cost disadvantage, whencompared to their unorganised counterparts. "Theorganised players will follow all the norms and pay taxeson all their sales; that itself gives them a disadvantage.

The pharmacies or small entrepreneurs do not pay taxes, typically

employ small kids for home delivery and other similar work," saysBhalchandra. In many states, it now required by law for apharmacy to be air conditioned. But one can hardly find any smalltime entrepreneur having an air conditioned pharmacy. So they stillget by.

"An organised player will not do this. Every person on the rolls ofan organised player will have to be paid salary and PF will have tobe covered by ESI and so many other things. The minute you have

air conditioning, that adds to your cost. So it is not a level playingfield as of now," adds Bhalchandra.

Business matters

The pharma retail segment is characterised by a distributionchannel consisting of many tiers between the manufacturer and theconsumer namely the Carrying and Forwarding Agent (CFA),authorised distributors, stockists and wholesalers, who supply to

the retailers, as well as the hospitals. "On an average, a companyhas 20-30 CFAs, while the number of stockists may range fromfew hundred to even thousands. Even with such a large number ofchannel partners, the domestic pharma industry largely caters tothe urban population, only with an insignificant penetration in therural market," states Nair.


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In addition to the poor rural penetration, the pharma retail segmentis fraught with various issues that need to be sorted out to makepharma retail a more competitive segment.

Distribution woes

The distribution set-up in the Indian pharma industry is evolved onthe basis of the two tiered sales tax structure- the Central Sales Tax(CST) and the Local Sales Tax. While the inter-state sale of goodsattracts CST, inter-state transfer of goods does not attract any tax.This has resulted in almost all the medium and big pharmacosappointing CFAs or establishing company depots in each state tomove goods under the inter-state stock transfer. As against this, thesmaller companies, having sales less than $20 million, haveadopted the super-stockist model. There are also a few companies,who have distribution 'hubs', where the produce from differentmanufacturing units is aggregated before being dispatched tovarious CFAs.

Low revenues per store

Like the channel partners, the Indian retailers are also fragmented,with the number exceeding 500,000 and the average annualturnover per retailer aggregating to approximately Rs 3.6 lakh. "Infact, both for the retailers and wholesaler segment, the ParetoPrinciple holds good, with 20 percent of their numbers accountingfor 80 percent of the business, indicating that majority of themhave a very low turnover," states Nair.

Players in Pharma Retail

Some of the

Players

No. of

outlets


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Apollo Pharmacies 340

Medicine Shoppe 100

Dial for Health 105*98.4o 15

Pill & Powder 12

Medicine Bazaar 10

Lifespring 7

* Out of the 105, 12 outlets are

fully owned

Low investment in technology

There are high trade margins prevalent in the industry that act asdeterrents to investments in systems and technology, which caneffectively monitor sales and inventory at the secondary andtertiary levels. This adversely impacts the planning and forecasting

process, taking up the inventory and logistics costs.Menace of counterfeits

The highly fragmented set-up not only inhibits monitoring of thesupply chain for counterfeits but also facilitates easy entry ofcounterfeits, which is estimated to constitute approximately 20percent of the domestic market, into the channel.

In such a scenario, direct sourcing by organised players is viewedas a panacea for all the problems. But sceptics believe that this willnot happen till the time the organised sector gathers critical mass;for there is a direct linkage between the size of the player and thepower he can wield on the distribution channel.

Direct sourcing


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Yet another issue that plagues organised retail in pharma, is that,unlike the other segments, presently, it is not possible to sourceproducts directly from the manufacturer. "It will happen over aperiod of time. It needs some critical mass, which will take time to

build," states Bhalchandra. Explaining the situation, he adds, "Ifyou look at it from the company's point of view, 99.5 percent ofthe sales come from small entrepreneurs. Suddenly, one chaincomes up and seeks to bypass the distributor to source productsdirectly. So the question is for this 0.5 percent, do I risk my 99.5percent?"

"Also, direct sourcing will purely depend on the manufacturer,

supplier and the retailer and also their relative sizes. For instance,direct sourcing from a Ranbaxy or a Novartis may take years, butplayers can do it with a small, localised, one-brand pharmacompanies," states Sen. "For example, if a 100-crore retailer isselling up to Rs five to six crore of Rs 50 crore pharma brand (of asmall company) through its own network, then it will be easier forsuch a retailer to ask for direct supply. But it cannot be done today,where the suppliers are large," he adds.

Various Segments in the Indian Retail

industry

Segment Percentage of

the overall

retail pie

Penetration

percentage of

organised

retail

Food and

grocery 66 1

Apparel(clothingandfootwear)

7 24


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Medical &healthservices

10 1

Jewelleryand watches

5 5

Durables 5 14

Personalcare andeffects

3 4

Others 2 3

Sports andleisure

2 9

Courtesy: AT Kearney, India

If tomorrow comes

Analysts are optimistic that organised retail will catch up in

coming years and gain critical mass. As volumes increase forchains over time or as more number of chains come up, the better itwill be. That is when sourcing will also happen directly from themanufacturers. Also over a period of time, organised players willprimarily need to invest to 'IT-enable' the trade to enhance integrityof supply chain and improve the quality of trade information forplanning and forecasting. Investments to ensure full compliancewith cGMP requirements (for example, Cold Chain) will also be a

priority. Another important foray would be the expansion oflargely urbane pharma retail in to the rural segments.

However, the segment has a long way to go before it consolidatesand the biggest challenge actually is in pharmaceutical distribution,wherein, a host of issues and challenges need to be tackled first.


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That will be a key to completely transforming the business ofselling medicines.

Reach has to be the function of

sustainable growth

98.4o is one of the fastest growing retail

chains in the pharma segment. Gautam

Thadani, Managing Director, Global

Healthline, promoter of 98.4o, shares his

views with Nandini Patwardhan.

What are the growth drivers for the

pharma retail segment?

Increased penetration of healthcare servicesinto all levels of the economy, increasedawareness among consumers about the needfor genuine medication and the need forsuperior and reliable supply chainmanagement are some of the growth drivers.

However, the key to sustainability and profitswould be the ability to set-up critical numberof outlets, each of which seamlessly integrateinto the centralised resources of theorganisation. This can be done by employingstandardised methodologies of operationsacross the entire enterprise.

What are the business models that are in

practice now as far as pharma retailing is

concerned?

The initial forays into this segment tended tobe tentative and hence, pharmacies tended to


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expansion. We have resources built-up intoour back-end centralised management facilitythat is scalable as per the demands of

expansion. That is what we have primarilyinvested in.

Who are your target audience?

We target all age groups and segments of themarket. We have customers from all walks oflife with different interests, income levels andexpectations.

Because of our customer-centred approach,we have been able to fulfil the expectationsof all segments of the market and havebecome a preferred chemist store for all,wherever we operate.

Does a retail chain like yours have a

disadvantage in terms of reach?

Reach has to be the function of sustainablegrowth and not just growth alone. It has to fitinto the overall business model. The marketout there is huge. It depends on the prioritiesone sets for oneself in terms of 'occupying'the marketplace.

How will organised retailing affect thetraditional distribution channel and the

supply chain?

Remnants of the traditional distributionchannels will have to co-exist to serve stand-


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alone stores. However, it's not new forpharmaceutical companies to deal directlywith large accounts.

It will be in keeping with the normalprogressions of growth and to enable moresensible business transactions that variousintervening layers in a distribution set up geteliminated as volumes go up.

The stand alone stores will still have a placein the market, as it is not that the new retailpharma chain stores will wipe them out. It isjust that the percentages of their presence inthe market will reduce.

Dabur India plans retail foray with 400 outlets12 March 2007


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New Delhi: Dabur India is planning to foray into organised retail with a chain of 300-400retail outlets, based on the health and beauty platform, across the country over the nextfew years.

Based on the model followed by foreign health and beauty retailers like Boots and

Walgreens, the Dabur India retail outlets, would sell pharmaceutical and OTC products aswell as other products such as health food, confectionery, personal and baby careproducts and general merchandise. While Dabur is not tying up with a foreign partner, itis hiring a few foreign expats with wide experience in the retail business to guide the newventure.

Retail will be the Dabur group's third major venture after FMCG and pharmaceuticals,and could over the medium-term become as big as the FMCG business. It is expected thatthe company would roll out the first few stores by the end of the calendar year. The storeswould be located inside malls and would be set up in the metros and tier-I cities.

Dabur is said to have set aside an investment of Rs200 crore for its retail foray. The retailplans are expected to be taken up at Dabur's board meeting this week. When contacted,Dabur India group director P D Narang declined to comment.

The company currently operates standalone outlets across the country offering completeAyurvedic solutions, called the Dabur Ayurvedic Centres.

The company plans to set up 1,000 HealthWorld stores in 400 cities in the next five yearsat an outlay of Rs800 crore. These stores are meant as one-stop shops for a consumer'shealth needs with a 24/7 pharmacy which stocks FMCG products and health foods,ayurvedic and homeopathic medicines and also houses a diagnostic centre.

Important Link:

http://www.goodlifeshow.com/goodlifeshow/insidepages/inside_template.asp?autono=217&category=Feature

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