COMPANY PROFILE: Terry White Group
Headquartered in Milton in Brisbane’s inner west, Terry White Group Limited is the parent of the Terry White Chemists and Chemplus pharmacy brands. Acquiring the Chemplus group in mid-2015 boosted Terry White Group’s store network by 50 stores, to 225 stores nationally. All store are franchised. The group has just posted a first-half EBITDA of $3.59 million, which included a like-for-like sales rise of 18 per cent. Net Profit After Tax was $1.53 million for the period.
Justin Grey: The first-half results you’ve just released suggest business is trending in the right direction for Terry White Group. Have expectations been met?
Anthony White: A few years ago we evolved a new retail strategy we call ‘value health’ to rejuvenate and enliven the pharmacies. That involved major changes to the look and feel of the pharmacies – to the merchandise hierarchy and the marketing plan that related to it. We also built a major ERP system and built out a major product label portfolio. It takes a few years before consumers realise what you’ve done, for the response to come through in the markets. We had some legacy businesses that were tailing off, [but] this last six months has been very strong. It’s kept going through February – for the eight months through the end of February we’re up nearly 19 per cent now.
JG: What are you putting this overall improvement down to?
AW: It’s just aggressive pricing, good merchandising. Our merchandise hierarchy with our signature categories is really spot on the market. We’ve picked the right categories to be in – the categories where our brand is well known. It’s got strong capacity to carry categories like medicines, skin care, fragrances and vitamins. Those four signature categories and prescriptions, we’re seriously focused on it.
There’s certainly a halo effect from this growing Asian consumer. There are a lot of Chinese people coming to Australia on holidays. They really love Australia’s clean, green and high quality products and the legislation with the TGA [Therapeutic Goods Administration] is extremely tough in Australia. They’re not exposed to fraudsters and people ripping off IP.
JG: What challenges are unique to pharmacy retail?
AW: The main thing that pharmacy is just getting an absolute pounding on is the affects of the federal government’s pharmaceutical benefits scheme reforms. They’re absolutely massive. Every six months there’s this thing called a price disclosure mechanism that pulls down the pricing of a large range of medicines. The deflation in the dispensaries across Australia is absolutely massive. The PBS is growing now at a rate far lower than the GDP growth of the country, and the expert reports are predicting it’s going to be a very small part of GDP in 10 years time. The financial pressure on pharmacies that rely on that dispensary/prescription trade is massive.
The damage the government has done and the instability caused as a result of these policies is massive. The amount of bankruptcies is growing. It’s not expected to decline. This reform to the PBS that the government’s put through is by far the biggest problem. The doctors haven’t been whacked to the same degree. No one else is carrying the load to the same degree as what pharmacy is. I just can’t see how we’re not going to see more of a rationalisation of pharmacies as time goes on.
JG: What percentage of your business is prescriptions dispensary?
AW: It’s about half of our business now. It used to be more, but because of the deflation and because of the growth in our retail business, we’re driving hard strategically to provide a hedge against the government’s reforms. For major pharmacies, 80 per cent of their business will be in the dispensary. It’s a very significant issue.
JG: There are some very strong brands in pharmacy in Australia – Priceline for one, and Chemist Warehouse drives very hard on price. Where are your brands placed in the market?
AW: Chemist Warehouse has got about 350 stores; it’s very hard to get reliable information on them. They’re probably about a three and a half billion in terms of total sales. We’re 1.25 [billion], Priceline is 1.65. Those three are by far the biggest; the next biggest under us is Amcal, which is about $900 million. Those three represent 41 per cent of the industry. The interesting point is that the number of outlets that those three [excluding Amcal] have is only about 860 out of 5500. You’ve got 41 per cent of the industry by value being represented by 16 per cent of the outlets. These three have the biggest change in terms of total store sales, but they’re also the biggest substantially in terms of average store volumes. The average pharmacy in Australia is doing two and a half, three million. Ours are about five and a half to six million. They’re at a higher margin than warehouses, so their volumes are higher.
JG: What work has Terry White Group done with the Chemplus brand since finalising the acquisition in mid-2015?
AW: All we’ve done is gone to the pharmacy owners and said, ‘Look, we want to leverage our shared services functionality,’ things like our merchandise area and marketing area, our IT area, and finance area. There were some staff reductions – of the total team of about 40 in the Adelaide [head] office, staff reductions were five. We want to continue to support the Chemplus network. There is a move of pharmacies converting to Terry White from Chemplus. We started with 63 when we took it over, and there will probably be about 43 Chemplus stores by June this year. On top of that 43, there’s new Chemplus stores being recruited in as well. We’re recruiting in pharmacies to Chemplus and into Terry White. One of the reasons the merger works so well is the consumer value proposition for both brands is pretty much identical. They’re both about value for money healthcare. From the pharmacy owner’s perspective, the Terry White Chemist’s franchise model is more demanding. It’s much stricter on compliance; its marketing intensity is much higher; and it’s much more aggressive on price and promotions and driving store standards.
JG: Do the two brands complement each other? How much crossover is there?
AW: Terry White’s got very strong representation in the vitamins category and in the fragrance and beauty category, which Chemplus is not strong in. Store size, Terry White’s are larger. Merchandise mix, Terry White’s got this big focus on beauty and vitamins relative to Chemplus. In a country town where there are 2000 people and two pharmacies, Chemplus is a great option. If you’re in the middle of Adelaide and you’re in Westfield Marion Shopping Centre, you should convert to Terry White. It’s a red-hot market in those large shopping centres. Terry White’s well known for being in those places. We say to the [Chemplus] pharmacists, ‘Look, go to Terry White, your return’s are going to be far higher, but to get them, you’ve got to work a lot harder, and you’ve got risk capital you’ve got to put up. You’re going to have to put in more stock’. The consumer proposition is the same, but the pharmacist proposition is quite different.
JG: Is there room in the market for more Chemplus or Terry White pharmacies?
AW: In South Australia we’ve got 80 pharmacies. There’s plenty of room in South Australia – we could go up to 120 pharmacies quite comfortably. There are about 550 pharmacies in South Australia; 20-25 per cent market share is what we’d like to be at. By the end of June the total network should be 230. We’d like to grow it by about another 15-20 or so in the following year. Longer-term, we need to get up to 350-400 stores if you’re looking at a five-year horizon. We do have plans to do further acquisitions like the Chemplus business to get to that level of scale of 400 odd stores, although we are not in conversations with anyone at the moment. It might be a group of pharmacies in Melbourne, for example, that’s got 20-30 stores like Chemplus. As long as they’re like-minded in terms of their consumer value proposition around value for money in health care, it’s a good fit.
JG: How is the Terry White loyalty program functioning in terms of ROI?
AW: It’s fantastic. It’s driven increased basket size and frequency of trips to the pharmacies. Overall, member spend is in strong growth. We’re approaching 1.1 million members. That’s in a pretty short period of time – two and a half years. It’s a tremendously important asset, and it’s growing. We would love to see it at two million members. We’re investing very aggressively.
JG: The group is investing in processes and solutions to improve efficiencies in back of house. What are you targeting there?
AW: That’s the ERP system and the major three modules. One’s a warehousing module, the other a finance module, and the main one is the merchandise module. That’s basically the toolbox for our category managers. We’ve got a data management team of four people and they’re maintaining a very large product file, about 90,000 SKUs. All of those SKUs are properly categorised; we provide a pricing service to the pharmacies as well. There are all these formal protocols to make sure that things are done consistently in terms of descriptions and the like.
We use it also for our promotional support to the pharmacies. When we do a promotion through the pharmacies, you’ll have a window of two weeks. The system is used for making sure that the promotional pricing gets switched on and off for that window. It makes it really efficient for the stores. You haven’t got 225 stores now maintaining their own product file. You haven’t got 225 stores getting an Excel spreadsheet on the allocation of stock. It’s all in their system natively now. It’s just evolving more and more as we go along.
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