For pharma chains, the script has gone wrong

They were touted as the next big thing in healthcare some years ago. Spick and span, spread over 300-600 square feet (sq ft), well-equipped with AC, refrigeration and qualified pharmacists, and doling out discounts; organised pharmacies were poised to transform the experience of buying medicines much before the retail revolution zoomed in.

Big names like Apollo Pharmacy, Medicine Shoppe, Guardian Lifecare had plans of opening 500, 700, 2000 outlets, respectively in short spans of time.

Right from 1983, when Apollo established its first pharmacy in Chennai, health industry veterans had predicted these branded pharmacies to gradually wean away business from the neighbourhood “druggist and chemist” who operated from a 180-200 sq ft shop often without facilities for refrigeration and other equipment for storing medicines.
But 28 years later, organised pharmacies are yet to register significant strength across India.

Barring portions in the south, the response to this business model elsewhere, specially in Mumbai and Maharashtra, has been lukewarm, says Prasad Danave, honorary secretary general, Retail and Dispensing Chemists Association.
Medicine Shoppe, the Indian arm of US-based Medicine Shoppe International has more or less exited the sector; while Health and Glow, the south-based wellness and beauty chain relinquished its pharmacy business some time ago. Others like Apollo Pharmacy are closing down outlets with the same speed that they used to open new ones.

Of the approximately Rs50,000 crore pharma retailing market, organised retailing makes up just Rs2,000 crore at present, as per industry data.

“Organised pharmacy as a business model is an extremely tough nut to crack,” sums up Viraj Gandhi, a veteran in the organised pharmacy business.

The challenges are far too many for organised pharmacies which need an investment of Rs12-15 lakh to set up.

“High rentals, infrastructure costs, manpower expenses are drilling holes into this model,” explains Gandhi.

Secondly, average margins on price controlled medicines are 15%, while those on de-controlled medicines range between 18-20%, says Danave. “When compared with the expenditure incurred in procuring the medicines and overheads, the margins are very tight.”

A healthcare consultant says organised pharmacies have to generate daily business of Rs2,200 per sq ft just to cover the realty expenses.

Gandhi says often the average transaction is about `150, which is not enough to cover expenses.

Thus organised outlets need to do more business to sustain their AC and refrigeration costs as well as pay their presidents, managers, officers, pharmacists, marketing people, all of whom are mostly absent in a kirana store.

But this is not possible as unlike FMCG products which often get sold on account of window shopping, medicines are consumed only when the need arises.

“In a kirana, I have family members manning. We have refrigeration but no AC. I don’t have marketing people. So the overheads and other expenses are lower,” says chemist K R Datey, who owns an outlet in Mumbai.

Danave says if a kirana store has to do business of `20,000 per day to survive, an organised outlet has to garner almost double that amount to keep itself floating.

Further, one of the prime elements which organised outlets have failed to lay their hands on is personal touch. Danave, who owns five stores in Mumbai says most of his customers know him and often if they run short of money, he agrees to collect the balance later.
“You have to pull the business with a personal touch. If I want more business, I open my shop early and close late. This is not the case with most organised players,” says Datey.    

Also, pharmacies face competition not just from other outlets but also from doctors, who often themselves dispense medicines.
Nonetheless, if a pharmacy is within a hospital premise, it manages to earn some decent margins on account of less rent and a continuous flow of patients, says Ankur Bharti, of Technopak, a retail-focussed consultancy.

An official who worked with Medicine Shoppe, which once ran 140 stores, says the firm tried the India market for a good eight to nine years. “But we could not make money. So we said it’s enough and exited.”

A regional manager from Health and Glow, which has over 65 stores in southern metros and Mumbai, admits that till six to seven years ago they dangled with the pharmacy business, which cornered about 150 sq feet in a 1000-1200 sq feet shop.
“But getting business for even that 150 sq feet was tough. Now we have only beauty products.”

Apollo Pharmacy, which has 1200 stores, has closed down several outlets which have not reached break-even within 18 months.
P B Ramamoorthy, COO, Apollo Pharmacy says if break-even is not achieved, discussions happen on whether to close down.
But Madhukar Gangadi, founder and CEO of Hyderabad-based MedPlus Health Services, which runs 900 stores, remains gung ho. He says it is natural to see 2-5% of stores closing down in a high growth market.

“I am optimistic that organised pharmacies will grow to make up 25% of the total pharma retailing pie in five years.”
MedPlus plans to open 350-500 stores this year, while Apollo has planned 300 by March 2012.