The proposed merger, announced last month, will form one of Australia’s largest retail pharmacy networks with a combined retail turnover of $2 billion and approximately 500 pharmacies.
There are two typical objectives for mergers:
- Improving current performance (or economies of scale); and
- Reinventing a business model (for example, when an established business buys an start-up to acquire new technology or a new market).
In the particular instance of Terry White Group-Chemmart, the declared merger strategy, as stated in a release from Terry White Group, is to, “leverage scale and combined capabilities to increase the competitiveness and marketing strength of the pharmacies and to improve service levels and health delivery to customers”.
According to Terry White Group CEO, Anthony White, Terry White and Chemmart have, “a substantial array of core retail capabilities and support platforms which are scalable to handle this growth and support future network expansion. Significant investment in our Enterprise Resource Planning system is already driving efficiencies and improved operations, allowing pharmacists to raise customer service levels and drive strong retail sales growth.”
In short, they are pursuing economies of scale.
Yet, according to The Big Idea: The New M&A Playbook, an article published by the Harvard Business Review in March 2011, study after study puts the failure rate of mergers and acquisitions at somewhere between 70 per cent and 90 per cent.
When you quote the opportunity to invest in Enterprise Resource Planning as a primary motivator for a merger, all signs suggest your priorities are backwards.
Or maybe the Terry White Group-Chemmart merger is really all about an eventual IPO, and not about raising customer service levels and building a business. Hello Dick Smith.
Legitimate scepticism on the Terry White Group-Chemmart merger can be raised by the following three points:
- When you already have 200+ pharmacies in a country the size of Australia, then scale is not your issue. And besides, when your key suppliers are global pharma companies, 500 stores does not really buy you much more clout than 300 stores does. After all, where else are you going to buy your Nurofen from? And remember that the major supermarket chains already sell most of your product lines, and they have many more stores than you do, or will, ever have.
- The behemoth they are creating will simply be a bigger version of what they already have, crippled by additional layers of bureaucracy and systems and confounded by incompatible cultures.
- The merger does not solve the actual, very real problem that exists in the pharmacy channel – which is very poor customer service. Cheaper prices, cheaper SMS marketing and so on and so forth are not examples of better customer service.
You may still want to argue the first two of the three points outlined above, but not many people will argue point three. I have worked with a few pharmacies over the years and I have asked individuals the same question: What do most of your customers have in common?
Not once did I get the reply I was hoping for – that being that most pharmacy customers are actually patients. And if not an actual patient, they are nonetheless certainly seeking some form of treatment. And this category of consumer has very specific needs, which all but a few old-school mavericks are brave to enough to meet. And what these consumers don’t need is the ability to walk into an even bigger warehouse filled floor to ceiling with cheap crap. That is what supermarkets are for.
I would suggest that one operator in that high volume, low margin space will do just fine, and that the real opportunity is to differentiate on patient (ie, customer) care, and not the desire to screw down your suppliers another few cents.
Retailers can learn a thing or two from the proposed merger of Terry White Group and Chemmart, and the reasons the parties involved have publically given as motivations for getting into bed with each other and how those reasons compare to best practice, common sense and past experience.
There is, according to the Harvard Business Review article referenced above, a 10 per cent to 30 per cent chance that the two pharmacy groups can pull this off successfully, but I won’t bet on it. I wonder if the shareholders will.