A new prescription for growth

Rajarshi Bhattacharjee / December 12, 2011, 0:38 IST

Organised players and national chains are redefining the age-old business model of pharmacy retail. Retired government official Viren Inamdar was in for a rude shock last weekend as he sat down to offer his ailing wife a dose of the medicine prescribed by his family doctor. This Mumbai-suburb resident discovered the tablets he had picked up from the corner medicine shop earlier in the day were well past their best before date. When he rushed out to exchange the strip, he found the chemist had downed the shutters for the day. Of course, the friendly neighbourhood chemist apologised profusely and replaced the strip when Inamdar went back to the shop next morning, but the 64-year-old promised to himself he would never pick up any medicine before checking the label.

When he narrated the incident, Inamdars neighbours were not surprised: If the incidence of spurious drugs is not unheard of in this country, the expiry dates on medicine strips are often illegible, if not deliberately snipped off. While Inamdar vowed to be more careful, industry experts are optimistic that the picture will change for the better with the expansion of organised players who promise both easy availability and better services across the country. Today, the pharma retail market in India stands at Rs 50,000 crore, according to PricewaterhouseCoopers estimates. The organised segment of this market would be in the vicinity of Rs 4,000 crore in 2011 and is expected to grow to Rs 22,500 crore by 2016. The relatively high margins in the business between 25 and 35 per cent, according to market estimates despite price controls, make it an attractive investment opportunity. Little wonder, the sector has seen a rash of new players including corporate groups as well as also those with a pharmaceutical or healthcare background. And if media reports are anything to go by, many international players are also waiting in the wings hoping for policy changes to the plunge into India. Currently, regulations permit 100 per cent foreign direct investment (FDI) only in single brand stores. Pharma retail, falling in the multi-brand category, is waiting for FDI relaxation to take flight say observers. The pharmacy business all over the world is quite a distinct business, says Ashutosh Garg, chairman and managing director, Guardian Lifecare, which has 230 company-owned and 45 franchised pharma outlets across the country. The organised pharmacy sector is now a well established channel to distribute medicines and other products to the Indian consumers, and holds unprecedented potential considering the market response and its fragmented nature. The company plans to add about 100-150 stores every year across both company-owned and franchised formats. In the next three years it aims to have at least 600 stores across the country. The organised outlets are able to deliver customers all that they have missed so long superior service and shopping experience at no extra cost. So the crowded neighbourhood medicine stores are being slowly replaced by swank, relatively large-format pharmacy chains that not only guarantee better control over over-the-counter and ethical drug sales, but also allow shoppers to browse through a range of personal and beauty care products . The rate of growth in the market is impressive. The total retail pharmacy market has been growing at an average of 18 per cent annum over the last few years, according to market estimates. Organised pharmacy retail has been growing much higher at an average of 25 per cent, and is expected to grow between 35-40 per cent over the decade or so. We believe that customer migration towards organised pharmacy chains such as ours would be spurred by increased quality consciousness, brand awareness and the value added services loyalty programmes, diagnostics facilities, prescription fulfillment reminders etc that we are able to provide, says Rahul Chadha, CEO, Religare Wellness Ltd. Most organised pharmacy retail stores are manned by qualified pharmacists to ensure customers are served by well-informed staff. The rural markets where healthcare facilities are sub-optimal also offer tremendous opportunity to the organised players. While the rural poor traditionally go to public healthcare facilities for medicines, marketers say, the more affluent consumer segments in these areas continue to be under-serviced. Realising the need to cater to this large untapped market, a handful of companies are customising their offerings for rural areas. Apollo Pharmacy, for instance, has tied up with ITCs e-Choupals (Choupal Sagar) and Godrej Aadhaar to bring quality medicines to under-served rural markets.

Logistics management Pharmaceutical retailing in India is highly fragmented, and the unorganised segment currently dominates this space commanding over 97 per cent of the total market. The entry of pharmaceutical companies and organised players in the domain is changing the landscape of pharmacy retail beyond recognitionfrom sourcing and stocking to the whole look and feel of the consumer touch points. Modern pharmacy retail chains have more organized supply chain and logistics systems in place to manage inventory. Products are usually acquired directly from the manufacturer, transported to temperature-controlled warehouses and stored at the pharmacies in refrigerators. With large-scale operations, these pharmacy retail chains are able to negotiate better rates with respect to procurement of medicines and in turn pass on the benefits to the end consumer. We typically follow a hub and spoke model wherein all the outlets are connected to a mother distribution centre. This makes the distribution centralized and there is no scope of spurious drugs getting into the system, says Atul Ahuja, vice-president, retail, Apollo Pharmacy. Goods move from distribution centre to the outlets in company-owned temperature-controlled vans. Another important aspect of organised pharma product management is the tracking of products batch and expiry date across the supply chain. The operational process at Apollo Pharmacy is developed in a way that right from procurement till the counter sale of products, the batch number and expiry dates are traceable, he adds. Religare Wellness reportedly conducts independent tests for its products at government approved facilities to ensure potency of the pharmaceutical ingredient and ensure that it is sourcing the right products. profile of the patient, providing information about drugs, their usage and offering support in a range of disease management services. Fake and spurious drug delivery has also been a persistent problem with independent street-side pharmacies. The high costs of the drugs and return policy are big hurdles for them. Since the distribution system is very fragmented, it is difficult for any company to recall any drug that may have some defect (or a batch of drug that may have any defect). With a robust supply chain it becomes easier to prevent such incidents. The organised pharmacies have been able to address this issue with the help of more efficient structure and processes/techniques (such as bar coding) thereby generating higher levels of credibility with consumers. However, some consumers sometimes miss the personal touch when dealing with larger chains, points out Rohit Bhasin, retail and consumer leader, PricewaterhouseCoopers India. Interestingly, many lifestyle brands are also making their way into the shelves of organised pharmacy retail chains. That is because modern retail offers shoppers a convenient, comfortable and reliable environment to browse and shop. Take Guardian Pharmacy which has entered an exclusive tie-up with GNC, Americas largest selling nutritional supplements brand. This helped Guardian Pharmacy position itself as a pharma retail chain that is more concerned with the overall wellness of the customer. To offer customers best of both worlds, the company has launched its private label, Guardian Brands. It has a range of over 785 stock-keeping units and the number is growing. The range it covers includes general nutrition, sports nutrition, vitamins, hospital care, health care, personal care, body support, mineral water and diapers. A section of the independent retail pharmacy operators, however, insist its business as usual despite the rapid expansion by their organised counterparts. Overhead expenses of pharmacy chains are much higher than independent stores like us, says Raj, proprietor of Raj Medical Store that is operating in the Delhi suburb of Mayur Vihar. A pharmacy chains will offer, say, a 5 per cent discount to its customer on the purchase of more than Rs.1,000 worth of medicines, that too only through loyalty schemes, which means only to its regular customers. We, on the other hand, offer 10 per cent discount on most products to all customers and still run profitably. So why are consumers flocking to the new branded outlets? The assortment of related health and wellness products offered at the store ensures that customers get the entire gamut of products and services. The stores are manned by qualified professionals as mandated by law, labeling interventions ensures that products are traceable to the source of supply. Chadha of Religare says, We also have a strong line of supplements under the Vitamin Shoppe brand, exclusive to Religare Wellness. Our outlets also offer free home collection for a full range of pathological tests which is especially convenient for elderly and patients who are unable to move. Among the range of value-added services a well-organised player will be able to offer are free home delivery of medicines, round-the-clock operations, prescription reminders, loyalty programmes with reward points, information centres and helplines for queries related to medication that are at times answered by doctors, free health camps and free health newsletters and healthcare books at the stores. Many organised pharmacies also offer discounts to senior citizens and some chains throw in free health insurance for regular customers. The benefits are obvious but it will take some time before organised retailing in the segment takes flight. Till then, consumers like Inamdar need to be on their guard against fakes and forgeries.

Pharma retail and FDI

EXPERT TAKE Estimated at $10 billion the Indian retail pharmacy market is growing at approximately 20 per cent fuelled by the growth in the pharmaceutical sector, increase in healthcare spending, attractive retailer margins, changing disease profile and growth in the over the counter (OTC) segment. Inefficient supply chain, presence of counterfeit drugs (estimated at 35 per cent) and fragmented nature of industry (more than a million pharmacies) are the main deterrents. Will the relaxation of the foreign direct investment (FDI) norms trigger further growth in the pharmacy sector and

address the above challenges? Further, are the concerns being raised against FDI in multi-brand retail relevant to pharmacy retail as well? The impact of FDI in pharmacy retail would be fundamentally different from that in other multi-brand retail as medicines are consumed on a need basis rather than being driven purely by better bargains. Investments would bring efficiencies in the supply chain and lead to organisation at a faster rate. The retail distribution network in India is in dire need of investment. Many drugs require careful climate control throughout their transit period leading to spoilage. The infrastructure for cold chain management is still developing. The long supply chain increases the time to market. The local pharmacist may not be storing drugs in requisite manner leading to quality issues. The pharma companies have to keep all stock-keeping units at all times given the high level of brand substitutions. A fragmented distribution network makes it impossible for companies to recall drugs. Investment would propel technologies such as RFID (radio-frequency identification) which would track products and limit the quantum of spurious drugs. The market is highly fragmented with organised players accounting for a mere 3 per cent of the sales as compared to approximately 50 per cent in the US and the UK. The organised segment has been growing at approximately 25 per cent which will accelerate with FDI. Categorised as defensive play the segment has already started attracting private equity investment. Consumers will get better pricing (especially for the generics). Organised retail would also reduce mis-selling of drugs due to lack of awareness (many consumers go to a pharmacist for minor ailments) as well as curtail illegal selling. Foreign investment would also bring in best practices being used abroad. Since most of the concerns against multi-brand retail like farmers being short changed, disintegration of existing supply chains, SMEs becoming victims of predatory pricing do not hold for pharmacy retail, the arguable concern would be the employment of those working at the one million pharmacies across India. Given that every neighbourhood would always need a pharmacist, organised retailers may like to adopt the franchisee model where many of the existing pharmacies would be absorbed. Of course, some jobs may still be lost in the short term but higher growth in the long term should lead to creation of additional jobs. Given that the benefits significantly outweigh the concerns, the government could in fact use FDI in pharmacy retail as a test case before allowing for it across all goods. With inputs from Chinmay Singh, assistant manager, PricewaterhouseCoopers India Rohit Bhasin Leader Retail Practice, PricewaterhouseCoopers India