Pharma retailing set to come of age

Amrita Nair-Ghaswalla, TNN, Jan 10, 2007, 01.02am IST

MUMBAI: Cheaper medicines are to be available soon. Free medical check-ups are in
the offing. Tie-ups with laboratories and hospitals will ensure faster turnaround and
cheaper diagnostic reports. The stuff of dreams?

Not likely. The $6-billion pharmaceutical retail market in India is priming itself for major
changes, aiming to keep ahead of competition. The first off the block is the crowded
neighbourhood chemist store, with its potent painkillers and antibiotics.

Not only will drugs be available at a 10% discount in pharmacies and chemists across
Maharashtra by the month end, the 32,000 drug retailers who are affiliated to the Retail
Dispensing and Chemist Association across Mumbai are gearing up for an unprecedented
retail boom.

Taking on the biggies, especially multinational pharmacies, these chemists will flag off
their initiation with a discount offering. Scores of freebies like area-wise, free medical
check-up, concessional rates on drug testing reports and tie-ups with laboratories and
hospitals across the city are on the anvil. Pathologists, doctors and front-end managers
have already been enlisted for the pharma retail venture.

What has brought this on? Competition from other retail dispensing chemists like
Subhiksha, Apollo and Medicine Shoppe to name a few. Both the Ambani brothers, who
have showed more than an interest in investing in pharmacy chains, as also the influx of
retail giants entering this premium space, has got chemists and druggists across India
grouping together to stave off competition.

All of last year, the Reliance Anil Dhirubhai Ambani Group was said to be talking to the
All India Organisation of Chemists and Druggists for its pharma retail venture. Talks
failed, because of "reliability and monetary issues with the group," said Kishore Shah, ex-
president of the all-India body. "The all India committee body decided to go it alone. We
would not give a readymade platform on a platter to any of these retail giants," he added.

The association raised Rs 66 crore from Maharashtra alone in one month's time. All the
chemists in Maharashtra are now affiliated to the Maharashtra State Chemists and
Druggists Association. We have floated the company and issued equity shares of Rs 10
each. Operations are set to start in another month," said Shah.

Other states have been asked to fall in line. Gujarat with its 7,000 chemists, followed by
Karnataka, Tamil Nadu and Orissa will slowly follow pace and become members of the
limited company. The apex all India body is to be based in Mumbai.
"Subhiksha has flagged off its pharmacies with a 10% discount. We will also offer the
same. We are also looking at membership cards, and other concessions in addition to
other value-added services for our consumers," Shah said. Another competitor, the US-
based Medicine Shoppe International, the largest franchiser of independent community
pharmacies in America, s gearing up for a fight.

An official with Medicine Shoppe India said: "Get ready for a tough fight. For, nine out
of 10 blockbuster drugs in the future will be bio-tech based, requiring special storage
facilities and transportation. Most existing pharmacies in India would be unable to meet
any of the stringent requirements. It's at that time that our strength and reach will be
realised."

Modelling pharma retail

The absence of Foreign Direct Investment (FDI) has driven Indian pharma retail trade
players to grow through diverse business models, and compelled MNCs to take a back
door entry. Arshiya Khan explores models that may work in a highly fragmented Indian
set up

According to various estimates, Indian pharmaceutical retail segment is expected to grow

at 11 percent over the next five years. Getting down to numbers, there are almost
8,00,000 pharma retailers in India, dispensing about $5 billion worth of pharma products
per year. India ranks 13th in the world pharma market in value and 4th in volumes. The
pharma market is roughly around Rs 38,000 crore per annum. If we add to it the
healthcare and beauty care segments, it works out to Rs 45,000 crore per annum. Out of
this, organised pharma contributes just Rs 400-600 crore which is roughly 1.5 to two
percent of the total market size with players such as Apollo Healthcare, Medicine
Shoppe, MedPlus, Guardian Pharmacy and Subhiksha.
There are approximately 25 organised retail chains in India, and still increasing,
contributing to three percent of the market. However, this number is expected to increase
due to the growing awareness about health and wellness which has increased the average
consumer spend on health from eight percent to 20 percent in just two decades. In the last
ten years, organised players have made a foray in pharma retail business, which was
traditionally about 'Mom and Pop' stores, but their share of the market is less than one
percent. Though, hospital chains, few pharma companies and big retailers have emerged,
the retail segment largely remains a fragmented sector with its own set of challenges.
Impact of globalisation
Globalisation of any business brings in international best
practices, access to new technologies, opening up of new
markets and reduction in prices for the consumer. But this is limited to some extent in
case of the Indian pharma retail segment, as globalisation has had a negligible impact on
the same.
The concept of organised pharma retail started to make its presence felt in India only
during the last few years. Ashutosh Garg, Chairman and Managing Director, Guardian
Life Care, offers an insight, "Even though FDI in the pharma retail trade segment is
banned in India, the organised retail chains are bringing in international best practices
into their operations." Although, international pharmacy chains have still not established
a major presence in the country, the Indian Government has taken tentative steps towards
achieving the ultimate goal of allowing 100 percent FDI in retailing by permitting single-
brand stores to set up shop here, paving the way for entry. However, this is also serving
as a boon, as this brings in an opportunity for domestic players. Elaborating, Dr Amit
Rangnekar, Centaur Pharmaceuticals, highlights that the absence of FDI will impact only
the foreign entrants and locals should see this as an opportunity to build and consolidate
their presence. “Private equity players are active in smaller regional chains. So far, this is
not a major impact as organised pharma retail chains from abroad have not yet entered
India, although some Indian organised pharma retail chains have emerged in anticipation.
Striking a similar chord, Anupam Shukla, Managing Director, Medica Health Shoppe,
Medica Pharmacy, says, "The absence of FDI has also resulted in organised retail
operations of large local business houses to expand, and MNCs are finding backdoor
entries to the country by forming alliances with local business houses. So through such
alliances locally-owned retail chains are rapidly expanding throughout the length and
breadth of the country and this has enabled R&D in this field."
Roadblocks
There may be various reasons for restricting FDI in this segment, which also includes
limited investment capabilities and stringent regulatory environment. Prabhakumar BG,
International Procurement, Manipal Cure and Care, cites another reason. He elaborates
that on account of economic progress as a result of globalisation, there is a perceptible
impact on the retail pharma sector with the emergence of organised chain pharmacy and
modern retail outlets with a professional approach besides providing value added service.
But this phenomenon is confined to metropolitan cities. He remarks, "A great deal of
concern has been expressed at various forums that globalisation will wipe out traditional
outlets. This concern is more of an emotional outburst rather than a reality. Look at the
vastness of the country in terms of geography and population. Traditional outlets will
continue, but such outlets in order to survive must change for the better."
Shukla points out yet another hurdle. Indian pharma retail segment is strongly dominated
by All India Organisation of Chemists and Druggists (AIOCD) that plans to corporatise
its operations by building pan Indian drug retail chains, enrolling AIOCD members as
shareholders of state specific companies under various levels of registration. "This
association has total control on the manufacturers, hence limiting the supply of drugs
only through the authorised wholesale distributors, limiting the margins and controlling
the additional volume discounts that could be passed to the consumers and hold organised
chains at ransom by restricting supplies or blocking it at their will," he remarks. He
continues to say that the licensing norms further lead to bureaucratic delays and also
leave it at the discretion of the inspectors' interpretation on compliance, leaving the
retailer high and dry after making substantial investments in the outlet. He cites an
example—every geographical area may have a different interpretation for the same norm
by each individual inspector. So, one possible way out is to have a re-look at the licensing
norms with business friendly environment, which would drive large investments into
organised pharma retail.
Adding to this, problems like multiplicity of formulations, lack of effective regulatory
mechanism, inadequate return on investments, lack of due recognition as a service
provider, mushrooming growth, particularly in the urban areas, and ill equipped
personnel are some of the key concerns of the retail
"Private equity segment. The need of the hour is to have an effective
players are active regulatory mechanism and uniform implementation to
in smaller regional tackle the issue of multiplicity of formulations and
chains. So far, this effective enforcement, and also to encourage investments
is not a major by providing higher returns as well as a provision to
impact as organised pharma charge service fee when prescriptions are dispensed.
retail chains from abroad However, the existing Drugs and Cosmetics Rule to curtail
have not yet entered India, mushrooming growth is vague, but in a country like India,
although some Indian where there is unorganised growth, it will be a tough
organised pharma retail proposition to address this issue, feels Prabhakumar.
chains have emerged in Lastly, though there have been attempts to upgrade the
anticipation" qualification for registered pharmacist at par with the
- Dr Amit Rangnekar developed countries, the existing minimum qualification
Centaur Pharmaceuticals and of a diploma in pharmacy does not provide competent
visiting faculty at leading knowledge, and therefore, needs review. Also, a
MBA colleges in Mumbai compulsory periodic refresher course for renewing
"Even though FDI pharmacy registration will be a good option, remarks
in the pharma Prabhakumar.
retail trade Developments
segment is banned
in India, the Making its way out through all these problems, pharma
organised retail chains are retail trade has picked up pace during the last decade.
bringing in international best There is certainly a proliferation of chemist counters
practices into their across India in the past decade, but the pharma retail trade
operations" has grown more due to the introduction of higher priced
- Ashutosh Garg new drugs and combinations than due to increase in
Chairman and Managing existing drugs. Also, the growth rate of drugs for high
Director Guardian Life Care priced chronic therapies like cardiovascular diseases,
diabetes and mental health disorders is more vis-à-vis the
"A great deal of traditional acute therapies like cough, cold, pain and anti
concern has been infectives. Moreover, the contribution of sales from drugs
expressed at has also reduced with the average chemist, as he also
various forums stocks and sells an increased amount of OTC drugs,
that globalisation cosmetics, toileteries and personal products. At present,
will wipe out traditional there are approimately 25 chains with total outlets
outlets. This concern is more aggregating to 2,000. This number has been achieved in
of an emotional outburst the last three years; however, the growth in number of
rather than a reality. Look at oulets is 60-100 percent per annum which will change the
the vastness of the country in scenario in next five years.
terms of geography and
population. Traditional Business models
outlets will continue, but
such outlets in order to
survive must change for the
better"
- Prabhakumar BG
International Procurement
Manipal Cure and Care
Less than one percent of the pharma retail industry is now occupied by organised
retailers. Most drug retailers, known as 'medical shops', are stand-alone neighbourhood
stores. The pharma market has nearly 8,00,000 retailers competing for customers. In this
set up, business models that are operational are—company owned and franchisee model.
However, expansion through company owned model will have its own limitation of
investments, and then, the challenge of biting away into the existing market share. On the
other hand, the franchisee model will enable stand-alone chemist shops to be absorbed by
organised retailers, triggering a consolidation wave. But the AIOCD, which represents
5,15,000 pharma retailers across the country, acknowledges the potential for
consolidation in pharma retail.

In a typical urban or rural setting, it is very easy to find nearly half the retail pharma
stores making losses. Such shops have the option of shutting down or selling out. Or they
have an incentive to tie up with a brand and continue their business in an attempt to
survive. Organised retail chains have a more wholesome bouquet of services to offer to
customers, thus vaulting them into a different league. Besides, as there are very few
Indian pharma companies into the retail trade, many large retailers and wholesalers of the
past have successfully backward integrated into pharmaceutical manufacturing and
established themselves in the industry. A pharma company markets its own products, but
a retailer sells products of at least 300 companies. Also, for pharma companies getting
directly into organised retails, it helps in driving their company's topline and in the long
run may help them get better margins by eliminating the middlemen. This will not only
help companies with better margins, but will also help them pass better price to the
consumers.

The other model is that of hospitals that are into the retail segment. Hospitals have their
own chains, and hence, stock drugs across multiple in-house pharmacies. Expanding into
organised retail outside hospitals is natural extension of business which not only helps
create brand awareness, but also helps in reaching critical mass that indirectly helps drive
consumers to the hospitals, thereby enhancing the economies of scale and scope of drug
purchases by negotiating directly with companies. As private hospitals by virtue of high
volumes of drug consumption have the buying power and also the understanding of
market dynamics, they can eliminate the margins of wholesalers and retailers and earn
more profits, as well as pass on more discounts to the customers, thus weaning them
away from the fragmented retailers also. The benefit of organised retail is that it will also
ensure a sharp decline in counterfeit drugs, which today is a major concern. But in a
typical set up of a highly fragmented Indian market, a model that may work out is
'product mix change'. Today, most pharmacies sell 70-80 percent medicines and 20-30
percent non pharma. However, in the next five years this ratio will get skewed towards
FMCG ie 50:50 and finally end up 40:60 (limited to 40-50 towns initially), reasons being,
better time management—customer picking larger product category, forcing pharmacies
to stock FMHG's (fast moving healthcare goods like food supplements. Low carb, fat
free, low calorie foods, health aids), beauty products and food items.

But according to Shukla, consolidation and stabilisation will see emergence of three
models—neighborhood pharmacy and rural pharmacy, pharmacy chains varying from
250 to 5,000 sq ft, and clinic cum pharmacy models. But as India is a 'price driven value',
the 250 to 5000 sq ft model will work best. Next would be the pharmacy with clinic and
path lab combined that can drive the segment to a different level, which will be
successful only if backed by a strong distribution network.

Going ahead

There will be a very strong boom in organised pharmacy retailing, where the pharmacy
models will start following the Western world. International pharma retailers are
expected to take advantage of the liberalised FDI rules relating to single-brand stores, and
enter the country. Organised retailing today accounts for a negligible share of the overall
market. But an increasing number of organised players have entered the business of late.
A good example is that of Apollo Hospitals, which has established a formidable network
of 300 stores under the Apollo Pharmacy brand. Himalaya Drugs is also on a major
expansion spree. It has signed up with Reliance Retail—the ambitious retail foray of the
Mukesh Ambani controlled Reliance Industries—to set up its Himalaya Herbal
Healthcare stores.

India and China are the two most promising markets for pharma retailers, but the Indian
market is unique as it has the largest middle income consuming population, many of
whom suffer from chronic ailments. Over the next five years as baby boomers start
ageing, consumption of chronic as well as preventive medications will increase. Pharma
retailers hope to expand their market share significantly, and are going all out to woo this
segment in the market.

Who will drive the market? Corporates and organised pharmacies will drive the change
like Apollo did in 1987 and the 'Dial for Health' initiative by the Zydus group.
Individuals could also be actively involved in developing the model like AIOCD,
Guardian, 98.40, CRS Wellbeing, Life Springs who are still trying the model. Finally, as
it happens in retailing, the international retailers will dominate the scene. The future of
pharma retailing is in for a big shakeout from all the three stakeholders; manufacturers,
retailers and customers, since all are looking at a better value for saving time, costs and
delivering a better value with fast and relevant information, there could not be a better
time for the changes in pharma retail.