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 this 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.

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.

Making of retail giants

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 to a more organised network," elucidates Muralidharan Nair, Associate Vice-President, Risk and Business Solutions, Ernst & Young.

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.

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. "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," states Viraj Gandhi, Managing Director, Melrose Trading.

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. "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 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.

Also, 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 and 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. Other than that, there are many more mammoth issues like the complex distribution structure of Indian pharma. The fragmented nature of the retail segment results in low revenues per store. Indian distribution system also gives way for counterfeits and there is also apathy to embrace technology which increases this problem manifold. 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.

If tomorrow comes

However, analysts are optimistic that organised retail will catch up in coming years and gain critical mass. That is when sourcing will also happen directly from the manufacturers. 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.