Pearls and Irritations

With its in-your-face presence with garishly liveried stores across Australia, extensive all-media advertising, and a volume-driven, one-stop health and beauty care business model, Chemist Warehouse looks a supermarket duck. But according to the Pharmacy Guild of Australia, successive governments over many decades, and federal and state regulators, Chemist Warehouse is a cassowary: a colourful but protected species that survives solely because of government protection. For that is the way retail pharmacies are treated, backed by the political clout of the Guild’s political brawn.

The Chemist Warehouse network, with its nearly 400 wholly owned and franchised stores plus an extensive online operation, includes nearly 10 per cent of Australia’s retail pharmacies. While its financials are hard to penetrate, the group itself told the 2016 Harper review of competition policy that Chemist Warehouse it is Australia’s 13th largest retailer by turnover, with then sales of $2.7 billion and more than 10,000 staff, and those sales make up 20 per cent of total retail pharmacy sales, including 15 per cent of all medicines dispensed under the Pharmaceutical Benefits Scheme.

Such dominance gives huge market power to Chemist Warehouse and its secretive owners, the Gance and Verrocchi pharmacist families. This week’s announcement that it will shift its pharmaceutical wholesale and distribution relationship from Sigma to the EBOS group was a spectacular coup for new EBOS CEO John Cullity and gutted not only Sigma’s share price, but the long-term future of the business itself.

Unreasonable demands

Whether EBOS benefits in the long run remains to be seen. Pharmacists already bleed wholesalers dry in terms of unreasonable demands for medicine stocking and timely delivery, and by extracting generous terms of trade, as well as financial and logistical support, with no obligation to give purchasing loyalty in return. When the EBOS lamb lies down with the Chemist Warehouse lion next year, it therefore risks ending up as lunch.

Chemist Warehouse has achieved its massive growth, market dominance and public profile in one of the most anti-competitive, over-subsidised and hyper-regulated sectors of the Australian economy, retail pharmacy. With limited grandfathered exceptions, retail pharmacies can only be owned by registered pharmacists, up to six in any one state. Starting with its founding Gance and Verrocchi pharmacists, each affiliated pharmacist in the Chemist Warehouse group can bring to the brand not only the maximum allowable pharmacy holdings in their own state but, thanks to national pharmacist registration, in any other state as well.

Similarly, the group isn’t much bothered by draconian pharmacy location rules, designed decades ago to ensure a rational distribution network for PBS-subsidised medicines. It simply can recruit more affiliates in territories it covets. And as for the complex remuneration regime negotiated by the federal government and Pharmacy Guild in Stalinist five-year plans also known as Australian Community Pharmacy Agreements, Chemist Warehouse’s high-volume, low-cost business model enables it to thrive in low-margin dispensing and wholesale markets.

For too long the Pharmacy Guild has got away with its mantra that medicines are not, as it cutely claims, “an ordinary item of commerce”. The Chemist Warehouse scale-driven business model, with its controlling pharmacist families as entrepreneurial as any other self-made AFR Rich Listers, makes a mockery of that and the other principle the Guild has spent millions over the years to defend: that only pharmacists can be trusted to own pharmacies and supervise medicine dispensing directly.

Advocated deregulation

The Abbott government commissioned Reserve Bank board member Ian Harper’s review of competition policy, and the Turnbull government had Productivity Commissioner Stephen King look specifically at the regulation and remuneration of retail and wholesale pharmacy.

King, especially, advocated extensive industry deregulation, above all of pharmacy ownership and location rules. In his formal response in May, however, Health Minister Greg Hunt accepted just a handful of King’s 45 recommendations, rejected a handful more but “noted” the rest: in other words, dodging making hard decisions that, thanks to the Guild’s fearsome but overblown political reputation, would be defined by Sir Humphrey Appleby as “courageous”.

A Labor minister would have done no differently. Chemist Warehouse may not be a duck, but successive federal governments are ostriches.

When the Pharmacy Guild’s ownership claims are exposed as hollow by its own Chemist Warehouse members, outdated ownership and location rules that can lawfully be got around so easily are pointless. Provided operators are accountable for the quality and safety of medicines, pharmacies should be owned by anybody, and located anywhere. So what if Woolworths, Coles and Aldi, let alone allied businesses like hospital operator Ramsay, host medicine shops? So be it.

The days of independent high street pharmacy businesses are gone: turn the Chemist Warehouse cassowary into a genuine supermarket duck and allow other supermarkets to compete on equal terms with it.

Terry Barnes is principal of Cormorant Policy Advice and formerly advised Howard government health ministers