The impending shake up
The entry of organised players in pharma retail, the initiatives being undertaken by the All India Organization of Chemists and Druggists (AIOCD), all point towards the upheaval underway and the imminent changes that will take place in the distribution structure. Nandini Patwardhan writes
The distribution scenario in Indian pharmaceutical industry will form an interesting case of game theory at play. While the players involved in distributing drugs are still in the process of squaring off their final positions, there will be much action till they reach the golden equilibrium of the win-win situation.
|“Currently I think the total organised trade is only to the extent of three percent from the retail perspective. We expect that in the next 4-5 years, the number will be another 10,000-11000”
– Muralidharan Nair Vice President, Risk and Business Solutions,
Ernst & Young
On one hand, the players from the organised sector are making inroads into pharma retail and on the other hand, there are the chemists and druggists with shops close to the consumers’ homes. Traditionally, 95-98 percent of the trade has been controlled by the representing association of chemists and druggists. However, the set-up is very fragmented in nature and the average sales per retailer is not very economical. “The way we operate today has been in an extremely fragmented fashion and that is how we existed all along,” reveals Muralidharan Nair, Vice-President, Risk and Business Solutions, Ernst & Young. “You must have observed that according to the 2005 figures, India has a $5.2 billion domestic trade. Also, we have 60,000 stockists and close to 5,00,000 retailers, with the number constantly changing,” he adds.
This fragmented setup has resulted in average sales per stockist/retailer being very low and uneconomic enough to develop capabilities that are required for pharma distribution. “Today you have protected and good margins of about 8-10 percent plus many other schemes. So clearly we have been able to survive in spite of such large numbers. However, the Pareto principle is applicable here,” states Nair. “There are some very big stockists, big retailers having sales of more than Rs 1-2 lakh per day, and at the same time the average retailer earning (his net after adjusting the costs) could be Rs 40,000-50,000 annually,” he adds. Hence, the disconnect is huge.
|“The hardest thing is to determine how to maximise the availability and range of products while minimising inventory costs”
– Anup Gupta Chief Operating Officer
Med Plus Health Services
Also, distributors have to bring in the capital and expertise required to bring various products to market and which require different capabilities. “For instance, new biologicals have special handling requirements in terms of cold storage to ensure the necessary temperature to maintain these products,” opines Anup Gupta, Chief Operating Officer, Med Plus. In order to effectively retail medicines, channel members need to set up the entire chain to handle and distribute medicines with care, have the systems in place to track individual batches of medicines and expiry dates, and ship those medicines to retailers in a way that does not damage them. There is a lot of logistics involved. “There are a vast number of companies and products available; and probably the hardest thing for retailers anywhere, and particularly pharma retail, is determining how one can maximise the availability of products and the range of products while at the same time, minimising your inventory costs,” reveals Gupta. Minimising inventory costs would be easy if the industry had reliable market intelligence, but in India this area is also weak.
Initialising the game
|“It will be interesting to see the reactions from small players once organised players enter retail”
– J S Shinde
The Maharashtra State Chemists & Druggists Association
Given this backdrop, and going forward, things are certainly set to change. For starters, the number of organised players themselves has increased in the past one year. The pharma retail business is a comparatively cleaner business from the margins perspective and till date has not witnessed fierce competition and price wars. Naturally the organised players are interested. There are regional retail pharmacies like the South-based Med Plus, North-based 98.40, which are looking at having their own set ups and expanding in a phased manner. Then there is the franchise model-based Medicine Shoppe with more than a hundred outlets. There are Pantaloon and Subhiksha with a pan-India presence in retail and now training their guns on the pharma retail. In the midst of the din, there are pharma companies going retail like Zydus and Dial for health, J B Chemicals and Lifeken, and the more recent Reliance Lifesciences which has announced its desire to enter the segment. “Currently I think the total organised trade is only to the extent of three percent from the retail perspective with the number close to some thousand plus in terms of number of retail outlets that are a part of chains. We expect that in the next 4-5 years, the number will be another 10,000-11,000. This is one area that is going to witness a different type of market place,” opines Nair.
For instance, when Reliance, Zydus, J B Chemicals or Pantaloons, Subhiksha and Medicine Shoppe enter the game, they can do things on a much larger scale. They have an ability to give a very different value proposition both to the customer and manufacturer. Also, because of their scale of operations, their cost component is considerably lower than the regular retailer. “It will be interesting to see the reactions from small players once organised players enter retail. It is obvious that these big players will offer good services. Products will be of good quality and discounts will be there,” states J S Shinde, President, The Maharashtra State Chemists & Druggists Association, Hon Gen-Secretary, AIOCD. Moreover, products will be cheaper when bought in bulk rather than from middlemen or agents. This also can also give a stronger assurance in terms of compliance standards (for drugs which require special storage conditions), and integrity (from the anti-counterfeit angle).
Ready to attack
Big players, bigger capabilities, huge investments and technology implemen-tation; all this is expected to change the rules of the distribution game. For starters, organised players are making increasing use of technology from the back end to the front end. Not only do they have the necessary IT infrastructure to track the chain (what products have entered the chain, their expiry dates, inventory levels, etc), but also have implementations which bring them closer to the consumer. The customer’s details (like shopping list, date of birth) are keyed into a central database. This provides them with the necessary market intelligence and helps build their brand by directed promotion.
Established retail chains, who have a standard policy of MRP minus a few percent pricing structure, can offer competitive prices and bundled offerings to consumers as they enter the pharma business. Many of them already have education camps, health awareness programmes and basic diagnostic services on their agenda, to attract the urban consumer. Their deep pockets and scale of operations also help them take advantage of economies of scale thereby keeping a check on the costs incurred.
Another tried and tested way to keep a check on costs is direct sourcing. This system has already become a standard practice for other forms of retail and may soon also be applied to pharma retail. This will be especially necessary as institutional sales (or sales to hospitals) and sale of chronic products increase due to a globally ageing population.
Currently institutional sales form a small part of the overall sales and the manufacturer prefers the stockist route. “As hospital chains increase, the manufacturer may want to sell directly as the proportion of these sales increase, and the hospital too may look at purchasing directly. There can also be a situation, where the Group Purchase Organization (like in the US) plays the role of the logistics provider and undertakes the buying and selling part,” asserts Nair. With respect to high end chronic products; some of them may be most economical if routed directly. They also need the disease management service around them. This is where retailers can form strong partners with the manufacturers in delivering this service to the patient consumers because of their connect and interaction with them.
The counter move
While the retail revolution is moving ahead, there is a parallel revolution brewing among the home-grown traders. Traditional chemists and their representing association, the AIOCD is all set for a makeover, as an answer to the challenge. “You can not compare a giant like Reliance with small time traders. Big players definitely have upper edge in terms of quality, purchasing capacity, service and finance,” states Shinde matter-of-factly. “I am afraid that their entry into this segment will cost small traders and shop owners their livelihoods. It is possible that these shop owners will have to work as servants with these retail giants and the question of survival will soar for workers who used to work under small retailers,” he adds.
Since the market is not sympathetic to small players, the option left to them is become big. They are already gearing up to swim with the biggies as they are busy organising themselves to be ‘corporatised’. With over 5.5 lakh members, the AIOCD is the biggest organisation representing chemists across India. “We decided to form our own corporate body and resultant product is approved from Registrar Of Companies. Today, we are looking at a share capital of around Rs 20 crores of which more than Rs 15 crores have already been collected,” says Shinde. They are contemplating creating 20 other corporate bodies in capable states. They have formed the Maharashtra State Chemist and Distributors in Maharashtra, where they have already collected more than Rs 50 crores of share capital. Besides, they have started forming companies in Gujarat, Tamil Nadu and Bihar.
According to Shinde, AIOCD is looking at changing its structure and upgrading its members. “Consumer is nucleus of our module and in order to make him notice us we will try to fill the lacuna which might be present in our fragmented business,” he states. Like other organised players, the organisation is ready to adopt new and innovative marketing techniques and offer value added services like health awareness and special camps for senior citizens. “We may start different marketing techniques wherein people will get medicines at much cheaper rate for the diseases like diabetes, cardiac problems and other chronic diseases. In addition to this, we might help patients to get good treatment and hospitalisation,” explains Shinde.
Also, given the fact that people in India are less health and medicine conscious, the AIOCD plans to install in each of the outlets, a qualified pharmacist to guide the patient about expiry date of medicine, its benefits, storage and merits and demerits. However, this is no easy move since it puts forth many requirements, some of them being, data management, imple-mentation of IT and more. They are also looking at a way to avoid cost issues. “We may tie up with insurance companies and whatever benefits we’ll get will be passed on to customers and retailers,” Shinde adds.
The reconstruction of AIOCD completes the revamp of pharma distribution. The organisation in currently caught in a culture change to begin with. “AIOCD is now in the process of converting themselves from an association into a corporate and that is perhaps according to me one of the most significant changes happening in the entire market structure,” expresses Nair.
United we stand
The real strength of AIOCD lies in its ability to negotiate because it has the collective strength of sheer numbers. But as AIOCD has itself realised, this power of negotiation will be diluted in the years to come, with the emergence of bigger players. Some of the bigger players have the financial muscle to fight a prolonged battle and could threaten the clout that the AIOCD wields today.
However, India being a big country with many states and huge population, there will naturally be a certain evolution of a different market structure, over a period of time. And having realised this, AIOCD’s transition from unorganised to organised will be smooth and risk free. AIOCD and its members understand the pharma retail space. Most of the organised players are only looking at the business merit before entering the segment. On the other hand, AIOCD is armed with the wisdom of years of understanding the pharmaceutical trade; against those who are just entering the segment. The organisation is also armed with the capability of servicing over 5,00,000 outlets in the short term.
But as the competition builds up on their strengths and capabilities, AIOCD will be forced to spruce up its operations, which may result in rationalisation. And that is one serious challenge that will stand in front of the AIOCD. For instance, an organised player can decide to have one warehouse in Maharashtra and serve the retailers directly, but AIOCD cannot do this as they already have the stockists as a part of the association. So they will have the challenge of rationalising at a gradual pace. Though the term does not mean people losing jobs, it is more of rationalisation of operations and cost structures that is necessary. “So clearly there will be warehouses that will be logistically driven rather than anything else. The number of stock points or partners will not be driven by any other parameter but by the logistical requirements of the business. What are the service level that I need to provide and for that what is the number of partners that I need to keep and what are the number of points that I need to operate. These questions will need to be answered,” explains Nair.
Reaching a win-win
The stakeholders in the pharma retail industry (players themselves, consumers, manufacturers, etc) as well as the industry analysts; every one seems to be bullish about the growth of this industry and the changes that will take place.
The players (organised and unorganised) have made their first moves. The wait is for resulting pay-offs and the final win-win situation. An interesting game has already begun. It’s time to sit back and get ready for a slightly rocky ride.