ustries The ASX-listed Australian Pharmaceutical Industries is the parent company of Priceline Pharmacy, Soul Pattinson Chemist and Pharmacist Advice. Services for the Melbourne-based company, which recently celebrated its 105th birthday, include wholesale product delivery, retail services, marketing programs and business advisory services. Starting life as a small co-operative of three pharmacists, today API is a multi-national organisation and one of Australia’s leading health and beauty companies. The API network boasts 425 Priceline Pharmacy stores, 100 Soul Pattinson Chemists, 72 Pharmacist Advice pharmacies and 750 pharmacies participating in its Club Premium member program. Justin Grey: How has business been this financial year for Australian Pharmaceutical Industries? You’ve got to be pleased with those half-yearly results… Stephen Roche: We’re grinding away. The issue is it’s a very competitive market out there, so you have to be on your game. I think the half-year [results] really just amplified the fact that we’re growing the business through our organic assets, particularly our Priceline Pharmacy business. We are a credible retailer in the pharmacy and health and beauty sector. With that, with store growth and continued positive like-to-like performance, that delivers some rewards to shareholders. JG: How many of the Priceline stores have the pharmacy component as part of their business? SR: Look, I can tell you there are about 140, or thereabouts, shops that don’t have a pharmacy attached to them. JG: How do you go about converting them to Priceline Pharmacy stores? That’s the goal right? SR: Oh, absolutely. We’ve said for some years that that’s our growth vehicle. We think that we’ve got a viable offer and brand for pharmacists to be engaged with if they choose to be. JG: That’s interesting that pharmacy is where the growth potential lies for Priceline, because the health and beauty and cosmetics component of Priceline has gone from strength to strength in recent years. Has that also been a big investment for API? SR: Absolutely. Let’s recognise that we are absolutely known for both product and advice, whether that be beauty or health-related. As soon as you put a pharmacist in that health area, that only grows that potential business. JG: The pharmacies are all franchisees; how’s the sentiment in that group? SR: I think you don’t generate the sales performance that we are without a network that’s united and focused. We spend a lot of time communicating and also effectively trying to drive some profitability through our own franchise partners wherever we can. JG: Is the 80 per cent rise in net profit after taxes in line with expectations for the half-year? SR: We’ve seen for some time that we’ve got scale now within our infrastructure. We’ve invested significantly in our supply chain. Now, with our SAP platform, once we got a network that crossed the 370 stores in number, that generated real efficiency for us, which is what’s dropping to the bottom line. JG: Do you expect second-half trading to carry on with the positive trends API enjoyed in the first half? SR: We expect to be at a similar levels. We’re expecting that, plus the fact that our store network will grow to about 440 by the end of the current year. All things said, for us it’s just continuing to keep on doing what we’ve been doing well for a number of years now. And that’s executing the strategy. JG: That strategy seems to be working, with Priceline in particular performing quite well in recent years… SR: Yeah – 10.5 per cent comps for the two prior years until this half, so that now equates to nearly 13 per cent over two and a half years. That’s a pretty credible performance at a sales level. We haven’t given away margins in consequence of driving that sales activity. Our brand awareness and delivery to customer expectations has also been matched, if not increases. So we’ve just going to keep doing those basic elements right, and continue to provide the right offer and then create the right instore experience for our customers and they’ll keep coming back. JG: What challenges are unique to pharmacy retail? The Pharmaceutical Benefits Scheme is obviously a big one for all pharmacy operators… SR: I think that you can always hide behind that if you want, but I think it’s like every other retailer. We’ve got, arguably, amongst pharmacists and other 4800 or so competitors out there at a pharmacy level. You then go to grocery where there’s arguably another 1500 to 1600 stores that sell health and beauty products in some way, shape or form. The, cast your mind into some specialty retailers.       The core issue is, customers have choice so you’ve actually got to be clear and defined in what your brand attributes are and what you’re trying to deliver to them, communicate that well, and then once you’ve got them in store, absolutely delight them. It is all wrapped up in to this, what I would call, competitive landscape. JG: Pharmacy, like most other retail sectors, has retailers that are pushing incredibly hard on price, such as Chemist Warehouse. And often that’s what influences purchase decisions the most when it comes down to it… SR: Let me also put to you that we’re competitive on price, too. There’s no doubt that there are other retailers that market themselves at value, and customers will trade there. But we’re going to be price competitive, and you don’t generate those sort of like for like outputs that we have and performance that we have without actually having the suite that’s got itself together. But the point you’re making is a right one. I’ll just play it this way – customers have choice, and if you don’t perform to their expectation, they’ll choose another destination. Simple as that. JG: In base terms, how does the Soul Pattinson retail offer differ from that of Priceline? SR: It is different. It’s probably a more limited merchandise and promotional campaign than one that’s included in Priceline. Soul Pattinson tends to be much more strongly health-related than health and beauty. Again, it’s really a choice for pharmacists at the end of the day about what they think their core offer is for their particular customer base. We don’t demand that people have to be part of Priceline Pharmacy. We’ve got another part of the business that’s effectively a business-to-business proposition for independent pharmacists. If they, then, wish to be part of our Soul Pattinson brand or a Pharmacist Advice brand, we’re delighted with that too. Ultimately we’ve found that part of the ingredients to success here is for us to give pharmacists choice about what they want to be. If they want to be Priceline pharmacists, that’s terrific, because that just builds what we think is a truly national retail brand. JG: Are there any potential acquisitions on the cards for API? Would acquiring one of the smaller pharmacy chains appeal to API at this stage? SR: That’s not our natural instinct; we’ve got nothing on the horizon in that area, to be frank. We still think there’s ample opportunity amongst independent pharmacists to convert to our own brand. We’ve got, probably, still a pool of about 70 or 80 interested parties that are in discussions with us about converting to a Priceline. That’s where we’re putting all of our attention at the minute. JG: What’s the sell, there, Steve? When your team holds discussions with independent pharmacists about coming over to the Priceline brand, what’s the pitch? And what do the independents have to put up to make that conversion? SR: It’s really a matter of credentials, at the end of the day, Justin. Let me say first and foremost, we’ve got Australia’s largest health and beauty loyalty program. Now with six million members within it, 2.6 million email addresses and mobile phone numbers, we can communicate to our core customer more than anyone else in the market. You combine that with, clearly, market leadership in beauty where we’re the number one retailer on cosmetics and skincare in the country. You combine that with some of our training and other credentials around service where we’ve leveraged that into health. For us, we’ve got a range of clear attributes that differentiate us. Then, ultimately, it’s about the pharmacist deciding whether that’s the particular strategic position that they want for their customer and their market, then for them to be partners with us. JG: You’re slated to open 15 new Priceline stores over the next four months. Are those mostly existing pharmacies converting to the Priceline brand? SR: Yep. About 95 per cent of them’, absolutely. JG: What is the strategy behind the new store format for Priceline? There’s a big emphasis on showcasing exclusive cosmetic brands and offering personalised health advice. SR: Females in this country expect us to have the new and exclusive products. We’re famous for it, and that’s part of what sets us apart. Like I said, pharmacists, in joining us, can clearly see those attributes. They then need to align and also clearly decide that that’s what they want to do in their market, and for us to partner accordingly where we can be jointly successful. Our next generation store is all about making sure you innovate. Taking the customer for granted is at your peril. We’ve listened and tried to develop the latest in technology and other services that means that customers have got even more reason to come back and shop at our stores. We’re launching two of those over the next four to five weeks – one in Warringah Mall in Sydney, and the other out at Doncaster in Melbourne. JG: The Priceline loyalty program is a major success in terms of member numbers. How is it working as a mechanism for driving drive purchases and increasing basket size? SR: I think it’s the cornerstone. As I’ve said, it’s without peer, really, in the current Australian market. For us it’s about communicating regularly, making sure that they remain loyal customers, that they love us, and that they do choose us at the end of the day. For us it’s an absolute marketing asset that we use in conjunction with some of the other assets we have with it, that being ambassadors, our catalogues, our media, and our social media activity. You put them in combination and we think they certainly are unrivalled in this country. JG: What are the plans for the rest of the year and then into next for API, other than other than expanding the store network? SR: It’s all about the opportunity for us. There’s still somewhere to go. We still think there’s a number of potential Priceline Pharmacies out in the network. We continue to grow our positive like for like store sales. That then makes us a pretty significant retailer when it’s all said and done.