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 quick
revamp. Big industry houses like Ranbaxy (Fortis), Reliance
Retail, ADAG ( Reliance Health Venture), together with other big
multi-verticle, multi-format, retailers like Pantaloon (Tulsi) and
Subhiksha as well as other regional healthcare players like Apollo
Pharmacy (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 (Lifetime
Healthcare), 98.4 (Global Healthline), Body Shop (now acquired
by French beauty major L`oreal), Guardian Pharmacy (Guardian
Lifecare), are rolling out their plans to set up thousands of
pharmacies and healthcare stores in the coming three to four years.

Even, the traditional chemists, numbering over 5 lakh, in the face

of formidable competition, are also trying to organise themselves
under the banner of their trade association- All India Chemists and
Druggists Organization (AICDO), which for decades has been
fighting to protect their business interests, by registering itself as a
company.

The pharmacy trade in the country generates an estimated business

of Rs. 32,000 crore, apart from about Rs. 18,000 added by hospital
pharmacies and exports. Almost all the chemists beside selling
allopathic medicines also offer OTC and alternate medicines,
surgicals, rehabilitation aids and bodycare products like soaps,
tooth pastes, hair oils, shampoos, cleansing lotions and
neutraceuticals, among others, for sale which according to rough
estimates generate an additional turnover of about Rs. 15,000
crore.
Take a look at retail plans of some of the existing/ local players,
not counting the likes of Wal-Mart, which does formidable drug
retail business in the US: Apollo is ramping up its present network
of over 120 pharmacies to 1,000 phamacies by 2009. Subhiksha’s
tally of over 500 now now, is set to increase to 1,200 within a year.
Fortis, healthcare services arm of the pharma giant Ranbaxy
Group, which has set aside Rs. 800 crore will roll out 1,000
phamacies in 400 towns, within a cople of years. 250 of these will
go 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 brother
Mukesh Ambani is on the verge of buying a generic drug
manufacturing company to meet the requirement of pharmacies to
be set up within Reliance Retail outlets.

To understand the frantic pace at which even regional healthcare

players are planning their moves in this sector, one will have to
just 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 plans
ramp up the tall to 200 stores within a year and to 700 stores in the
next three years. On the other hand North based Global Healthline
owned “98.4,” which set up its first shop in Gurgaon in 2003, is
investing Rs. 100 crore to set up 300 shops by 2011. It will follow
‘concentric circles’ expansion strategy, initially concentrating on
the northern region. Ahmedabad based, Planet Health, wants to
expand its network international class deluxe pharmacies from 14
to 150 within a couple of years. Another North India based retailer
Guardian Pharmacy, Guardian Lifecare Pvt. Ltd, has over 50 shops
is also looking at expanding its network. Medicine Shoppee, a
master franchisee of the $75 billion Cardinal Health Inc., is
planning to have 700 franchisee shops by 2010.
Tags: Retail Analysis
Anil Dogra // Mar 5, 2007 at 9:31 am
I do not think the impact of organized retailing on the stand alone
chemists will be too much. May be 20 percent to 30 percent will
eventually wind up. The drug companies to marketing with the
local doctors and make medicines available at the local chemist.
This may not be possible with the organized retailers because of
central buying procedures.
Hemjit Singh // Mar 27, 2007 at 11:24 am

The organised retail is at infancy stage in India and it is here to

stay. And every type of players will have some thing different to
offer to the customers. The independent stores are also going to
evolve 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 farm
International.
kk // Mar 28, 2007 (5 weeks ago) at 6:23 am

Mr Hemjit Singh
‘Thanks a lot for your interest in our blog. We also thank you for
pointing 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 exploring

business 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, specially

in rural and urban areas.This requires specialist staff. Also, many
doctors are prescribing medicines of small companies, which are
giving a solid commissions.
 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. Nandini
Patwardhan takes a look at the new emerging trend in
pharmaceuticals industry.

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

"Pharma retailing is popularly considered to be a neat, respectable

and clean business. The healthcare industry has been steadily
growing and hence, the spin-off of this onto the booming retail
industry is pronounced," explains Gautam Thadani, Managing
Director of the Delhi-based Global Healthline Pvt Ltd (GHPL), the
promoters of 98.4o. "Hence, it is but natural that any serious player
entering the market with retail ventures will surely get into pharma
retailing as well," he continues.

One of the reasons for active interest on part of the corporates in

pharma retail is that all the other segments like food and grocery,
apparel, consumer durables, personal care, sports and leisure
already have established players. Also, pharma products, being
need-based, unlike fashion, are not prone to sudden alterations in
demand.

In addition, the demand for medication has increased manifold

over the past few years on account of a changing disease profiles
(from infectious to lifestyle) of the patients, longevity of life and
introduction and usage of drugs for new therapeutic areas. As a
result, the Indian patient needs to visit the pharmacy more
frequently. People are also spending more on health-related
products. 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 billion
this 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 by
2010," confirms Raman Mangalorkar, Principal, AT Kearney. "Out
of this, only two to three percent of pharma retailing is with the
organised players, the rest is unorganised. In India, there are about
60,000 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 of
the total retail pharma sales respectively.

"In India, there are around nine players having 500 outlets in the
organised retail sector. In the coming three to five years, the
growth of the organised retail is expected to be huge but will be
limited to metros and tier-1 cities," explains Muralidharan Nair,
Associate Vice-President, Risk and Business Solutions, Ernst &
Young.
 Raman Muralidharan Asitava Sen
Mangalorkar Nair Gautam Principal
Principal Associate Thadani Consultant
AT Kearney Vice-President Managing Pricewaterhouse
Risk and Director Coopers
Business Global
Solutions Healthline
Ernst & Young Pvt Ltd

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 full
steam. The past few years have witnessed the rise of many retail
chains and the organised sector in general. These players have
entered the industry at the time when the distribution network is
not optimal and there is no assurance on quality and integrity. At
the same time, many non-compliances and retail substitution that
happens today are detrimental to human health. "There are moral
issues, economic issues and technology issues with the current
distribution network. Therefore, there is a strong case for people to
migrate from the current distribution network to a more organised
one," elucidates Nair.

However, the picture may not be as rosy as it sounds. Low

revenues coupled with high expenses (salaries to qualified
professionals, sales tax, rents, electricity charges) are forcing these
players to adopt various business models to survive in today's
disintegrated and competitive scenario. "From an ownership point
of view, many companies are either going in for fully owned
stores, franchise model or a combination of ownership and
franchise stores. Another emerging model is the e-store model,
wherein the consumers can order drugs online," reveals Nair.
In addition, there are players, who set shops to sell just their
products 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 just
pharmaceutical products," states Mangalorkar.

For instance, Medicine Shoppe, promoted by Mumbai-based

Melrose Trading Company, was recently in the news for
establishing its 100th store. The company has adopted the
franchise model for its stores. However, the company's initial plan
was to attract existing chemists to join the franchise. "We knew
that chemists were entrepreneurs and would never want to work for
anyone so we used the franchising model to attract them," states
Viraj Gandhi, Managing Director, Melrose Trading. "This did not
work as we had planned. So, we started attracting entrepreneurs,
who wanted to make a difference and change. And that is how our
franchising business started," he adds.

98.4o currently has 15 stores in operation and GHPL is going in for

a 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 to
consolidate our presence in the NCR and then move on to other
cities in the north before going on to the rest of the country," states
Thadani.

Current State: Margins

1.25-1.5% +
CFA
expenses
Stockist 8% (Scheduled
drugs)
10% (Non-scheduled
drugs)
 Pharmacist 16% (Scheduled
drugs)
20% (Non-scheduled
drugs)
Source: Ernst & Young

As against the retail chain format, Pantaloon Retail has rolled out
Medicine 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. "So
while 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 provide
to the consumer. This is because the average spend is also high,"
informs Rahul Bhalchandra, Head, Wellness Business, Pantaloon
Retail.

There is a two-fold rationale behind adopting such varied models.

First, it is necessary to differentiate yourself from the unorganised
sector. The question is—why should a consumer come to your
store? How do I compete against the unorganised sector that
bypasses sales tax and other expenses?

"It is a big challenge to answer this question, when the small-time

entrepreneur from the unorganised sector offers various services,
such as giving artificial bills to the consumers, at times giving
medicines without prescription, giving credit facilities and so on,"
says Asitava Sen, Principal Consultant, PricewaterhouseCoopers.

So the first question is—How do you

differentiate? "You can add the beauty
component or an impulse purchase to your
pharmacy, which is better than normal
chemists because normally, chemists

Home delivery service

offered by 98.4o
focus more on the medicine part. May be, a retailer can also stock
imported beauty care and health supplement products which will
make it more comprehensive from a consumer’s point of view,"
answers Sen.

Another reason for adopting a combination of ownership-

franchise model or a diversified model is that the
organised players are at a cost disadvantage, when
compared to their unorganised counterparts. "The
organised players will follow all the norms and pay taxes
on 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," says
Bhalchandra. In many states, it now required by law for a
pharmacy to be air conditioned. But one can hardly find any small
time entrepreneur having an air conditioned pharmacy. So they still
get by.

"An organised player will not do this. Every person on the rolls of
an organised player will have to be paid salary and PF will have to
be 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 playing
field as of now," adds Bhalchandra.

Business matters

The pharma retail segment is characterised by a distribution

channel consisting of many tiers between the manufacturer and the
consumer 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 company
has 20-30 CFAs, while the number of stockists may range from
few hundred to even thousands. Even with such a large number of
channel partners, the domestic pharma industry largely caters to
the urban population, only with an insignificant penetration in the
rural market," states Nair.
In addition to the poor rural penetration, the pharma retail segment
is fraught with various issues that need to be sorted out to make
pharma retail a more competitive segment.

Distribution woes

The distribution set-up in the Indian pharma industry is evolved on

the basis of the two tiered sales tax structure- the Central Sales Tax
(CST) and the Local Sales Tax. While the inter-state sale of goods
attracts CST, inter-state transfer of goods does not attract any tax.
This has resulted in almost all the medium and big pharmacos
appointing CFAs or establishing company depots in each state to
move goods under the inter-state stock transfer. As against this, the
smaller companies, having sales less than $20 million, have
adopted the super-stockist model. There are also a few companies,
who have distribution 'hubs', where the produce from different
manufacturing units is aggregated before being dispatched to
various CFAs.

Low revenues per store

Like the channel partners, the Indian retailers are also fragmented,
with the number exceeding 500,000 and the average annual
turnover per retailer aggregating to approximately Rs 3.6 lakh. "In
fact, both for the retailers and wholesaler segment, the Pareto
Principle holds good, with 20 percent of their numbers accounting
for 80 percent of the business, indicating that majority of them
have a very low turnover," states Nair.

Players in Pharma Retail

Some of the No. of
Players outlets
 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 as
deterrents to investments in systems and technology, which can
effectively monitor sales and inventory at the secondary and
tertiary 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 the

supply chain for counterfeits but also facilitates easy entry of
counterfeits, which is estimated to constitute approximately 20
percent of the domestic market, into the channel.

In such a scenario, direct sourcing by organised players is viewed

as a panacea for all the problems. But sceptics believe that this will
not happen till the time the organised sector gathers critical mass;
for there is a direct linkage between the size of the player and the
power he can wield on the distribution channel.

Direct sourcing
Yet another issue that plagues organised retail in pharma, is that,
unlike the other segments, presently, it is not possible to source
products directly from the manufacturer. "It will happen over a
period of time. It needs some critical mass, which will take time to
build," states Bhalchandra. Explaining the situation, he adds, "If
you look at it from the company's point of view, 99.5 percent of
the sales come from small entrepreneurs. Suddenly, one chain
comes up and seeks to bypass the distributor to source products
directly. So the question is for this 0.5 percent, do I risk my 99.5
percent?"

"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, but
players can do it with a small, localised, one-brand pharma
companies," states Sen. "For example, if a 100-crore retailer is
selling up to Rs five to six crore of Rs 50 crore pharma brand (of a
small company) through its own network, then it will be easier for
such 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 Penetration
the overall percentage of
retail pie organised
retail
Food and
66 1
grocery
Apparel
(clothing
7 24
and
footwear)
 Medical &
health 10 1
services
Jewellery
5 5
and watches
Durables 5 14
Personal
care and 3 4
effects
Others 2 3
Sports and
2 9
leisure
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 for
chains over time or as more number of chains come up, the better it
will be. That is when sourcing will also happen directly from the
manufacturers. Also over a period of time, organised players will
primarily need to invest to 'IT-enable' the trade to enhance integrity
of supply chain and improve the quality of trade information for
planning and forecasting. Investments to ensure full compliance
with cGMP requirements (for example, Cold Chain) will also be a
priority. Another important foray would be the expansion of
largely urbane pharma retail in to the rural segments.

However, the segment has a long way to go before it consolidates

and the biggest challenge actually is in pharmaceutical distribution,
wherein, a host of issues and challenges need to be tackled first.
That will be a key to completely transforming the business of
selling 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 services

into all levels of the economy, increased
awareness among consumers about the need
for genuine medication and the need for
superior and reliable supply chain
management are some of the growth drivers.
However, the key to sustainability and profits
would be the ability to set-up critical number
of outlets, each of which seamlessly integrate
into the centralised resources of the
organisation. This can be done by employing
standardised methodologies of operations
across 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 to

be tentative and hence, pharmacies tended to
be tagged to other formats or establishments.
It was natural to take the support of the
viability of beauty products or establishments
like hospitals. Today, more and more entrants
are getting into regular pharmacies.

How do you tackle the problems of

counterfeits and expired drugs?

The only way of tackling the above problem

of spurious drugs is by establishing direct or
verifiable channels of access to
manufacturers of genuine brands. Extensive
employment of IT by using methods like bar-
code scanning for all transactions like billing
and stock-transfers, one can prevent the
dispensing of expired drugs very effectively.

What were the reasons for Global

Healthline's foray into pharma retail
through 98.4o?

The markets are large and there is room for at

least some good players. 98.4o was an
obvious extension to the lines of business that
were running when we undertook this
venture. Being extensively involved with the
distribution business abroad has helped us
identify the opportunity quite early. We are
quite keen to get our business model right
and thereby, ensure that our growth is
sustainable. The key to the success of such
ventures is the ability to create a back-end
support facility that can ensure seamless
expansion. We have resources built-up into
our back-end centralised management facility
that is scalable as per the demands of
expansion. That is what we have primarily
invested in.

Who are your target audience?

We target all age groups and segments of the

market. We have customers from all walks of
life with different interests, income levels and
expectations.

Because of our customer-centred approach,

we have been able to fulfil the expectations
of all segments of the market and have
become 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 sustainable

growth and not just growth alone. It has to fit
into the overall business model. The market
out there is huge. It depends on the priorities
one sets for oneself in terms of 'occupying'
the marketplace.

How will organised retailing affect the

traditional distribution channel and the
supply chain?

Remnants of the traditional distribution

channels will have to co-exist to serve stand-
 alone stores. However, it's not new for
pharmaceutical companies to deal directly
with large accounts.

It will be in keeping with the normal

progressions of growth and to enable more
sensible business transactions that various
intervening layers in a distribution set up get
eliminated as volumes go up.

The stand alone stores will still have a place

in the market, as it is not that the new retail
pharma chain stores will wipe them out. It is
just that the percentages of their presence in
the market will reduce.

Dabur India plans retail foray with 400 outlets

12 March 2007
New Delhi: Dabur India is planning to foray into organised retail with a chain of 300-400
retail outlets, based on the health and beauty platform, across the country over the next
few 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 as
well as other products such as health food, confectionery, personal and baby care
products and general merchandise. While Dabur is not tying up with a foreign partner, it
is hiring a few foreign expats with wide experience in the retail business to guide the new
venture.

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 that
the company would roll out the first few stores by the end of the calendar year. The stores
would 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 retail
plans 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 complete
Ayurvedic solutions, called the Dabur Ayurvedic Centres.

The company plans to set up 1,000 HealthWorld stores in 400 cities in the next five years
at an outlay of Rs800 crore. These stores are meant as one-stop shops for a consumer's
health 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_te
mplate.asp?autono=217&category=Feature