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Business planning

Pharmacy franchises and buying groups: advantages and drawbacks

The first franchise of a multiple in the UK, Lloydspharmacy, recently opened in Gloucester. But what are the advantages of joining a franchise or buying group — and do they differ from one another?

Being part of a buying group or franchise can help pharmacies benefit from increased buying power, improved marketing and administration support. In the UK, only Lloydspharmacy offers a full franchise scheme

Source: istockphoto.com

Being part of a buying group or franchise can help pharmacies benefit from increased buying power, improved marketing and administration support. Although buying groups are popular in the UK, only Lloydspharmacy offers a full franchise scheme.

Celesio, Lloydspharmacy’s parent company, has offered franchise options across Europe for the past five years but has only recently launched the model in the UK. Nigel Swift, marketing and sales director at Celesio UK, says: “We’ve launched this now because of the changing nature of community pharmacy: margins are being squeezed [and] independents face more competition from supermarkets and online operators.”

Andrew Lane became the first and, so far, only pharmacist to buy a Lloydspharmacy franchise in 2014, and has been trading since December. “I had experimented previously with quasi-franchise formats… where you take on brands and dip into various service offerings,” Lane explains. He currently owns three pharmacies — the Lloydspharmacy branch and two independent pharmacies. “You’ve got to have a leap of faith when you join a corporate brand but I would say that Lloyds had to have a leap of faith, taking on an unknown independent using its name,” Lane says.

Franchises are a more popular option in other countries, such as Australia, America and Canada. In the UK, being a member of a buying group is common — Numark claims that over a third of all independent pharmacies are members, and Avicenna has over 1,000 members.

Being part of something larger

Satyan Kotecha owns two independent pharmacies, Kasli Pharmacy in Nuneaton and Belgrave Pharmacy in Leicester, both of which are members of Numark. He bought Kasli Pharmacy in 2005 and quickly joined the buying group. “I spoke to customers about their buying habits and they had the impression we were expensive. I did some checking, and I found that we were no more expensive than the multiples — in fact, we were probably cheaper,” he explains. “However, my customers had the mindset that a stand-alone independent would be more expensive.

“I wanted to give the impression that I was part of something bigger to try to change this mindset. Joining Numark gave me independent status but allowed me access to the marketing, advertising and negotiating skills of a larger group,” Kotecha says.

Lane emphasises that better branding and marketing are important advantages of being a franchise owner. He explains that large multiples “tend to be successful not only because of the quality of service but equally because of the marketing of their brand”. He adds: “I don’t have a marketing budget that gets me on television… I think that’s part of our problem as independents — we don’t get the exposure that the corporates can afford.” Additionally, Lane has noticed that customers of his franchise tend to spend more money than those in his other two stores.

In New Zealand, Green Cross Health member Peter McSweeney also has experience with owning independent pharmacies. “I have owned independent pharmacies in the past but I have recently brought all the pharmacies into the group. In the past, services and marketing were largely focused on the retail side of the business so I could not see the point of having my Medical Centre Pharmacies involved in the group. However, over recent years there has been a real push by Green Cross Health to increase and improve the scope of professional services that pharmacists offer,” McSweeney says.

“The key benefit of belonging to the franchise is the discipline that comes with it,” he adds. “I believe our branded stores are of a far higher professional standard than our non-branded independent pharmacies.”

Fees and feedback

Green Cross Health operates two models, McSweeney says. “They have equity interest pharmacies, where Green Cross Health has a shareholding in the pharmacy,” he explains. “Then there are licensee pharmacies. These are like my pharmacies, where Green Cross Health has no shareholding in my pharmacy but I pay them a monthly licence fee, as well as monthly fees to support the loyalty scheme we operate.”

Lane initially paid a one-off franchise fee and now pays a monthly royalty fee, which was the only option available from Lloyds. “I actually own the goodwill of the business, so it’s my pharmacy,” he says. This means that the company does not set any financial or clinical targets for Lane, but he explains that he does have to maintain parity of pricing with other Lloydspharmacy stores. “From a customer’s perspective, it would be confusing if they found 48 Nurofen priced differently in our franchise than 48 Nurofen at a Lloydspharmacy down the road,” he says, adding that he must also operate offers such as “deal of the week”. Swift, from Celesio, adds: “Their store will then be expected to operate exactly as one of ours would, offering the same customer experience and quality service.”

Additionally, a Lloydspharmacy mystery shopper will visit to try out the pharmacy. Lane says: “We haven’t been mystery shopped yet, but I’m assured that there will be a scorecard that comes back to tell us how we performed.”

McSweeney explains that Green Cross Health set targets and budgets for their equity interest pharmacies, but not for their licensee members. “However,” he adds, “they do provide some useful data that enable us to benchmark our pharmacies against others.”

Numark provides similar information for its members, according to Kotecha. “The company gives us a lot of information and data. For example, as an independent, how would I find out about the top 100 sellers in pharmacy, or products coming off patent, or current TV adverts? I would be foolish not to take advantage of purchasing support related to those products,” he says. “The company also helps with other business intelligence reports — for example, it tells me the percentage of my prescriptions that come from local surgeries, and the percentage of local prescriptions that go to my competitors.”

Stocking up

Although a lot of the support franchises and buying groups can offer is similar, certain aspects of business differ between the two models. In particular, Lane’s stock is chosen and managed by Lloydspharmacy directly whereas Kotecha has “total autonomy when it comes to the products”. He says: “I can pick and choose if I want to buy in special brand equalisation deals or special generics deals. We can take advantage of Numark’s marketing but only if we stock the product.”

Anthony Tassone, who owns a franchise of Greenfield pharmacy in Victoria, Australia, explains that there are varying requirements for what must be stocked depending on the pharmacy franchise. “In the franchise that I belong to, there is an expectation to carry a certain core range with some flexibility for the remaining shelf space in each product category,” he says. “At times, the need to carry certain stock lines or participate in certain promotions or services that may not be relevant to your local demographic or customer base [can be a drawback].”

Tassone also points out that different franchises will have different levels of influence on the look and feel of the pharmacy.

Value of experience

As a Numark member, “you don’t have to use the branding or fascias or marketing at all,” says Kotecha. However, he does use the branding in his pharmacies, which can sometimes be a drawback. “If someone has had a bad experience with another Numark pharmacy, that has sometimes been negative,” he explains. “People have sometimes said ‘I didn’t realise that you were an independent’ and have said that they thought we were all owned by one company. It’s not a big problem — I’m talking about two customers in ten years. Of course, I don’t know how many people have said ‘I’m not going to go in there because it’s a Numark’.”

Lane has similar concerns for his franchise. “The risk in the future is if (and it’s a big if) the Lloyds brand were tarnished in any way nationally… then we would have some fallout from that, I suspect,” he explains. “If they got bad press for whatever reason, then we would inevitably be dragged into that, but it’s such a remote risk.”

There are other drawbacks to being a member of a large organisation, as McSweeney explains: “The one disadvantage is that being part of a large group we are essentially more than 3,000 chief executive officers of our own businesses, dealing with a corporate head office, with multiple requirements that can take some time to progress.”

Joining a buying group rather than owning a franchise can have its own challenges and opportunities, Kotecha adds. “I’m not bound to a formula that works for everything. I do have to drive my business and I do need to have some business acumen,” he says. “I think that’s the main difference between a franchise and a buying group. In a franchise you have no autonomy — you have to follow the mould and have total faith in the franchise. In my opinion, for an entrepreneur the buying group is the route.”

In terms of the sales value of the pharmacy, Tony Evans, director of pharmacy at business sales company Christie + Co, says there is little difference whether the pharmacy is a member of a buying group or not. He explains: “The market is such that pharmacy opportunities remain relatively sparse which, when coupled with burgeoning appetite, results in competitive bidding in the majority of cases. Of more significance would be the quality of fit-out and facilities offered by pharmacies, and meeting the requirements and expectations set out in the General Pharmaceutical Council’s premises standards.”

Citation: The Pharmaceutical Journal DOI: 10.1211/PJ.2015.20068661

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