Finance Finance News New kingpin will deal cheaper drugs

New kingpin will deal cheaper drugs

Australia's pharmacies sector is in a state of flux. Getty
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Australian consumers can expect cheaper prescription medicines, vitamins, cosmetics and personal hygiene products as a result of a $2 billion merger between pharmacy chains Terry White and Chemmart.

The two announced their intended tie-up on Thursday, which will create one of the country’s largest retail pharmacy groups with some 500 outlets operating under its network.

The latest deal follows Terry White’s acquisition of the 60-store Chemplus chain last year, and could spark a new round of acquisitions and product price cutting across Australia’s highly competitive pharmacies sector.

Together, the Terry White-Chemmart group will control roughly 15 per cent of Australia’s $16 billion per annum pharmacies sector.

As such, the combined group will go head-to-head with other major players including price discounters Chemist Warehouse, the Australian Pharmaceutical Industries-owned Priceline and Soul Pattinson chains, the My Chemist network, and the Sigma Pharmaceuticals-controlled Amcal, Guardian, Chemist King and Discount Drug Stores operations.

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More mergers on the cards

Under federal and state government laws, all chemist stores must be individually owned and a maximum of only five can be controlled by one person or entity.

But the laws do not prevent large buying groups, such as Terry White, from effectively establishing franchise operations under one or more banner brands.

Terry White chief executive Anthony White told The New Daily that consumers will be the biggest winners out of the Chemmart merger, with the stronger buying power of the combined group translating into lower prices.

“The scale of the whole deal will make it possible to provide a much more competitive offering to consumers,” Mr White said, who added that consumers will soon see “a substantial dialling up of our investment in advertising”.

“Once the integration of the two groups has settled down we would like to do more mergers and acquisitions. We would love to be talking to other like-minded organisations.

“We’ve got to keep building on the organisation so that it’s better than all of those other guys.”

A spokesman for the Australian Competition and Consumer Commission said the latest deal had not been put forward for approval, but would probably be lodged for consideration under its normal merger review processes.

“The ACCC is aware of the proposed transaction. The ACCC reviews mergers and acquisitions which have the potential to raise concerns under the Competition and Consumer Act 2010. The CCA prohibits acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition in a market.”

Why the industry is consolidating

In a detailed report on Australia’s pharmacies sector released last month, research group IBISWorld pointed to further consolidation ahead.

It said industry revenue growth is expected to stall, with average revenue per pharmacy trending downwards as a result of downward price pressures.

“Over the next five years, the wider pharmacy sector will continue to face challenging conditions,” IBISWorld said. “The industry’s competitive landscape will become increasingly polarised between small, high-service pharmacies that offer allied preventative and primary health care services, and large, high-volume, lower margin discount pharmacies that compete on the basis of price.”

Regulatory changes, rising labour and occupancy costs, and pricing wars initiated by discount pharmacies will continue to exert downward pressure on industry margins over the next five years.

In response, industry operators are likely to move away from traditional business models and diversify their revenue streams.

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Is there room for growth?

More competition could be on the way too, with global operator Walgreens Boots Alliance registering its trademark with IP Australia in late 2015.

Mr White said this was more likely to do with the international group protecting its Boots product lines already in Australia.

Pharmacies Guild of Australia spokesman Greg Turnbull said that intense pricing competition, including from major retailers Coles and Woolworths, meant buying well was imperative for pharmacy chains.

“This merger should enable them to buy very well and to sell at very competitive prices,” he said. “For consumers, there should be good benefits.”

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