UK Supermarket Reversal – Offloading Pharmacies Instead of Acquiring Them

Sainsbury Supermarkets occupy the Number Two position in the market share chart of UK supermarkets.
But it has shown a decline in market share and turnover in the last financial year, and this has been attributed to the discounters Lidl and Aldi.
Aldi had the greatest impact with its sales increase being to the order of 36 percent for the full financial year.

Sainsbury has reacted by making a decision to sell its 281 pharmacies to the Lloydspharmacy chain for 125 million pounds.
The business rationale is quite sound.
The pharmacies that Sainsburys have incorporated within their supermarkets were established with little cost as they were able to exploit a 100 hour “loophole”.
So the sale price almost represents “pure profit”, which will be applied back to the core business through marketing services and strategies to combat Lidl and Aldi.

Lloydspharmacy has agreed to lease back the space the pharmacies occupy, so Sainsbury Supermarkets will also have a substantial return in the form of a stable rental income.
Lloydspharmacy has also developed a profitable business model that provides clinical services and clinics as a primary part of its offering.
One of the key areas of Lloydspharmacy success has come from their up-front installation, (called the Health Bar), where pharmacists and clinical assistants are anchored to the Health Bar, in the front third of the pharmacy.

Wireless communications with the dispensary and other key service personnel complete the system where the pharmacists triage services and give clinical advice while the clinical assistants act as “runners” completing the transactions and filling any service “gaps”.
PSA in Australia have proven through a trial that pharmacy incomes elevate markedly when they base a pharmacist outside of the dispensary.
They are yet to “join the dots” to see the effect of giving those pharmacists a permanent home so that they can have a complete divorce from the dispensary and generate separate income streams.

The Sainsbury supermarket sale of pharmacies is significant because what Sainsbury management determined was they had more to lose by leaving their core grocery business unprotected.
If the pharmacies had been showing significant profits they would not have been abandoned.
Sainsbury actually has the best of both worlds now because Lloydspharmacy will provide a better pharmacy service than Sainsbury could, and that improves its retail offering.
Add the significant capital input from the sale, and Sainsbury is in a much better position to take on Aldi and Lidl.
This is an intriguing situation because in Australia, Aldi has taken market share from Woolworths particularly (and Coles to a lesser degree).
Woolworths is in a slightly weaker situation than Sainsbury finds itself.
It is more vulnerable because groceries constitute the major contribution to their total turnover, and with Lidl entering the Australian market shortly, their prospects have become less attractive to investors and consumers.
Share prices are reducing and retail prices have been too high for too long.

Woolworths has long held ambitions to own pharmacies in Australia and are known to still harbour those ambitions.
From a pharmacy perspective we are hopeful that the Lidl entry to the Australian market will pin Woolworths ambition down, because they have to protect their market share in groceries.
This will eliminate any profit reserves that may have been held back as a “pharmacy war chest”.

Some other UK observer analysts have stated that it is only a matter of time before other UK supermarkets will follow suit and sell their pharmacies as well.
There are at least four supermarket chains that have similar vulnerabilities to Sainsbury.

Lloydspharmacy paid an average of 450,000 pounds per pharmacy.
Future sales from other supermarket chains may not reach that level, as there are few buyers that can purchase on a bulk scale.
The prospective purchasers have yet to develop their pharmacy models to the profitability level of the Lloydspharmacy model.

In comparing UK supermarket pharmacies to US supermarket pharmacies, the US models are far superior.
This is mainly due to the work done by Walmart under the direction of Roger Corbett in developing supermarkets as integrated health destinations.

So the big issues for Australian pharmacy revolve around:

* Will Roger Corbett accept the Woolworths offer to come back as chairman?

* If he returns, will he institute the successful Walmart model that he helped develop.
It would be almost impossible to stop that sort of ambition.

* The entry of Lidl supermarkets to Australia does not immediately impact pharmacy but it will make all retailing generally tighter.
This will impact with pharmacies that have a high level of retailing in their turnover mix.

* And finally, will the new competitive retail market make those retailers less able to take on pharmacies, even if they had the legal ability?
The Sainsbury (and others) experience may turn their strategic thoughts to protecting their core business and not waste time and effort in picking off more difficult pharmacy markets.

The Australian supermarket duopoly of Woolworths and Coles, have long held market shares that other western economies would not tolerate.
Through efficient political lobbying they have been protected to become the most expensive supermarkets in the world in retail price and also the highest profit margins in the world.

Australian retailers, including pharmacies, will be welcoming the entry of Lidl and the continuing expansion of Aldi, because it reduces Coleworth ability to continue their predatory practices against pharmacy.

No thanks to our political masters though.

Independent pharmacies will not feel any slackening in their daily survival activities.
But they can learn how the Aldi and Lidl business thrive on low overheads with a steady investment in innovation and systems development.

This is also the secret ingredient that will work for community pharmacies and provide competition to the business model of Chemist Warehouse.
That group has been given a head start and the lead-time has allowed them to cement their market share.
It can be peeled back, but the missing ingredient across all aspects of community pharmacy is the lack of leadership and direction.
There is modest activity – but no dynamism to enthuse the profession to a high degree.

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