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 98.4^o, 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 98.4^o. "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 Mangalorkar Principal AT Kearney

Muralidharan Nair Associate Vice-President Risk and Business Solutions Ernst & Young

Gautam Thadani Managing Director Global Healthline Pvt Ltd

Asitava Sen Principal Consultant Pricewaterhouse Coopers

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.

98.4^o 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.

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.

Home delivery service offered by 98.4o

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 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.

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.

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.

editorial@expresspharmaonline.com