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Killing off the chemist

Do discount chains mean local pharmacies are dead?

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It's a David versus Goliath scenario. Small independent pharmacies up against the might of discount chemist chains.

Will it be a battle to the death? Or will there be enough market space for both to share?

There are 5250 community pharmacies in Australia and 12 per cent of those are completely independent, according to research firm IBISWorld.

But these independents are expected to gradually be "forced out of the industry", IBISWorld researcher Arna Richardson says in her January 2014 report Pharmacies in Australia.

Richardson points to an increasingly competitive industry due to the introduction of low-cost warehouse-style pharmacies coupled with proposed changes to the Pharmaceutical Benefits Scheme by the federal government, which could affect pharmacies' revenue.

Australia's pharmacy industry is worth $12.2 billion, with annual growth of 1.6 per cent in the five years to 2014. But Richardson predicts growth will slow to 1.2 per cent in the next five years.


Aggressive price discounting and the one-stop-shop style of stores such as Chemist Warehouse has presented a real threat to the traditional neighbourhood pharmacies.

Discount pharmacies, including Chemist Warehouse, Discount Drug Stores and United Discount Chemists, currently account for 25 per cent of the market, Richardson's report shows.

Chemist Warehouse has stores across Australia and, impressively, has doubled sales in five years to record an estimated revenue of $2.3 billion in 2013-14, according to the report.

The Pharmacy Guild's New South Wales president and independent pharmacy owner-operator Paul Sinclair says the rapid rise of discount pharmacies has forced independents to change their business models by cutting prices and emphasising their personalised service.

"They've had to differentiate themselves by providing exceptional service," he says.

"It comes back to the notion that our businesses are based on our relationship with clientele. Customers come to their local pharmacist because they have are trusted and have a good knowledge of medicine."

Customers come to their local pharmacist because they are trusted and have a good knowledge of medicine.

What's happening in your area? Have local chemists closed?

Pharmacists were ranked seventh in a 2013 Reader's Digest poll of Australia's most trusted professions. This reputation will ensure independent pharmacies will always have a permanent stake in the Australian market, Sinclair says.

"It's challenging, but we are well up for that challenge," he says.

"Community pharmacy has faced challenges in the past and is very resilient.

"But there will be some degree of reinvention of businesses."

Managing director of Medici Capital, Frank Sirianni, agrees. He says small players need to reassess their business structure if they want to take on the big boys.

"There is still a place for independents, but only in specific locations and they'll need to make a market niche and build on it," he says.

Sirianni, a management and financial consultant who specialises in the pharmacy industry, says it's incredibly hard for independent pharmacies to compete with low-cost pharmacy chains.

He says discount or big-box operators have a strong advantage over smaller, traditional pharmacies because they pay lower overheads and labour costs.

"They generally locate themselves in redundant retail spaces such as ex-hardware stores, video stores or small supermarkets so they can have low overheads," Sirianni says.

"Rent is the second-most expensive cost for pharmacy and labour is the highest.

"The big-box discounters keep labour costs low because they use a checkout model rather than having staff on the shop-floor."

Discount pharmacies have been credited with starting pharmacy price-wars and ultimately ensuring consumers pay less. Sirianni labels them "category killers", likening them to Bunnings in the hardware industry.

"It basically means that they have literally rebuilt the whole market and are what Bunnings was to hardware," he says.

Some pharmacists have found another way to beat the competition. By banding together and ordering stock into a central warehouse that is then distributed to individual stores, these pharmacists have managed to snare better wholesale prices.

However, IBISWorld predicts the rollout of discount pharmacies will continue in the next five years at the expense of independent pharmacies and those associated with traditional banner groups such as Amcal, Guardian, Soul Pattinson, Chemmart, Soul Pattinson and Priceline.

The growth of warehouse-style pharmacies will account for many of the 195 new pharmacies expected to open and most of the 1.3 per cent rise in employment for the industry.

Chemist Warehouse media officer Rutene Wharekawa declined to comment.