There was a time when a pharmacy was a pharmacy. People needed medicine and they came to a pharmacy to get it.
Then the world changed. Mass merchandisers discovered that pharmacies were not only profitable in their own right, but also could generate traffic that led to other sales. And pharmacies discovered that they too could capitalize on the traffic-generating powers of “healing” to generate sales of items from cosmetics to photo and electronics and everything in between, including a vast array of “wellness” products.
As the boundaries between different types of retailers blurred, pharmacy owners found themselves managing multi-product businesses and choosing between new “business models.” Would pharmacy dispensing be run as a distinct profit centre doing what it could to make money in its own right? Or would some pharmacy-based profits be sacrificed to generate traffic for, say, health and beauty supplies? Would we even carry non-health-related products like beauty supplies?
In addition, decisions had to be made about the allocation of time, attention and other resources between the different parts of the business. For example:
- How much effort should be spent on vitamins and supplements versus, say, cosmetics or over-the-counter (OTC) products?
- How much assortment and space should be allocated to different products?
- How much space should store newsletters or flyers dedicate to each type of product?
- Which products should be sold where in the store?
Questions like these become especially critical to address when new competition arrives. While there may be a reflex reaction to fight new competitors “tooth and nail” for every part of the business, would it perhaps be more prudent to concede some areas and focus on others?
The Role of Pharmacy
The first question a pharmacy owner should ask is “Are we a pharmacy that carries other products or are we a general merchandise store that also has a pharmacy?” While this may seem like a strange question (“Of course we are a pharmacy!”), at the heart of the question is an understanding of what drives store traffic – and profitability – for this business and for the competition.
One option is to be a pharmacy that wins customers more because of its location and/or specialized advice and services than because of the price of the drugs it sells. This type of store would likely derive the bulk of its revenue from a small base of highly loyal clients whose needs are primarily health related. These clients probably have a set of health issues specific to a particular demographic characteristic (such as age or ethnicity) which predisposes them to pharmacies with deeper product assortment and higher levels of pharmacy service. While focusing on a narrow customer base might reduce sales volume, the customer need for greater convenience or specialized and personalized attention would allow for higher margins and overall profits
A different option is to be pharmacy that wins customers more because of prices. It may still offer extended services but these would likely be no more extensive than those offered by competitors. The lack of differentiation for this type of store usually means lower margins: maximizing its profitability requires either a large customer base or customers who buy a large array of non-pharmaceutical products along with their prescriptions
The difference between these two extremes is more than just semantic. If service-focused or specialty pharmacy is your main profit generator, then every aspect of your operation – staffing, store layout, assortment, stocking policies, level of service and so on – needs to be set in terms of what is required to support the pharmacy’s operations. Even though non-pharmacy products may be profitable, the key business drivers are those required to offer superior pharmacy, because customers come into the store for specialized prescription needs and, while there, buy non-pharmacy products out of convenience.
By contrast, if your profitability is driven mainly by price-related traffic generation, pharmacy operations need to be supported at a basic level, but then key operational decisions must be made to support what is needed to win non-prescription sales. Spending money to create a superior pharmacy service will create costs that reduce pharmacy margins. Since these costs would need to be recovered in non-pharmacy areas, they can make it difficult to be price-competitive on non-pharmacy products unless the customer base is extremely large
Non-Pharmacy Products
Setting the appropriate approach to managing the various non-pharmacy products will depend upon the role played by the product in defining your short- and long-range strategy. For most retailers, products will fall into one of three groups:
- Share-focused: These products define your business and are seen as essential to your credibility with customers. They may or may not generate big profits directly, but they are key to generating customer traffic. As a rule, this collection of products will have a common focus of low price, best value or product superiority (at premium price): the same characteristic that defines your overall business strategy. You must dominate in these areas, so you are constantly looking to build share.
- Promotion-focused: These are regularly purchased products that are hard to differentiate on quality or service, but customers expect you to carry them. Everyday pricing is important but not critical. However, customers do respond to special offers, so the key is to be opportunistic. Manufacturer promotions, seasonality or perhaps fads in buyer desires would create an opportunity to enhance profitability.
- Cost-focused: These products are staples but are not necessarily purchased on a regular basis. Customer need for these products is highly situational or driven by unusual circumstances such as moving, minor household accidents and the like. As such, promotions do not tend to result in large sales increases and pricing does not need to be overly competitive. Profits will be driven by your ability to reduce your cost of carrying these products.
Try this approach to categorizing products to help you choose a portfolio of products that is consistent with your choice of short- and long-term strategies.
Written by Ken Wong
