Delayed malls weaken pharmacies” expansion plans

Pharmacy operators are as affected as any other retailers by the delay in opening shopping centers and by canceled retail projects. Just like other retailers, the promise of high traffic sends pharmacy units to shopping centers – but there is another reason why pharmacies prefer shopping malls instead of street retail. While opening a pharmacy elsewhere in the city requires the operator to buy an existing pharmacy license, which has slowed down the expansion of pharmacy chains, shopping malls are exempt from the rule.
The new pharmacy law establishes that operators can open new pharmacies in shopping centers which cover more than 3,000 sqm, irrespective of this licensing rule. The limited number of licenses, based on the one unit per 3,000 inhabitants rule, was forcing pharmacy chain operators to expand only after buying a license from a pharmacy going out of business.
The prospect of tens of shopping malls which were supposed to be built throughout the country was good news for pharmacy chains, but the real estate downturn has shaped the future differently for them.
“We are currently re-thinking our expansion plans for next year. Initially, we wanted to open 25 to 30 new pharmacies, but we will probably revise our plans. Some of the projects where we were supposed to open units will probably be delayed,” says Dorin Catana, general manager of Centrofarm pharmacy chain.
The company will probably now open just 20 new units next year, he says. At an investment of up to EUR 150,000 a unit, the company could invest up to EUR 3 million in its expansion.
Centrofarm started to feel the pressure on its expansion plan this year, when it had 30 units lined up for opening, but opened just 25, and delayed the remaining five openings for next year. If the worst comes to the worst, Catana says the firm will open just 15 units in 2009.
The squeezed margins have also made the company take a careful look at what projects it will pursue. However, financing the expansion isn't a problem for the firm, which relies on its own funds for investments, rather than taking out bank loans. “This was always our policy and it has proved to be a good policy,” says Catana.
Tighter margins, legislative instability and lack of transparency on state regulated pricing are the main problems facing pharmacy chains, says Claudiu Opran, chief operating officer of retail with A&D Pharma, which runs the Sensiblu pharmacies. “The major challenge for pharmacies during this period is the ability to financially sustain their activities,” says Opran.

Pharmacy licenses, cheaper but less traded
Centrofarm, a company majority-owned by businessman Alain Bonte through Generalcom, runs 55 pharmacies, and has located 25 of them in shopping malls. Despite higher rents in commercial centers compared to street retail, these locations also bring higher traffic, and subsequently higher sales. The scarcity of pharmacy licenses is no longer a problem, nor is their price. “We're currently seeing a drop in price for pharmacy licenses and a higher offer on the market, as many pharmacies are shutting down,” says Catana of Centrofarm.
A pharmacy license in a city like Cluj or Constanta used to cost around EUR 200,000, but recently deals have been closed at big discounts, for a selling price of EUR 60,000.
“There have been fewer deals with pharmacy licenses in the last period. The buyers have either stalled expansion plans or stopped them entirely, so demand and supply are imbalanced,” explains Catana.
Centrofarm has budgeted an increase of 80 percent on its turnover for this year, but is revising next year's figures, when it was initially planning to grow its turnover by 60 percent. Last year, the company posted some EUR 18.7 million in turnover, which was 80 percent higher than in the previous year. In the first nine months of this year Centrofarm made a loss of EUR 1.5 million, which was triggered by opening new stores, although the older stores are profitable, says Catana.
“Each opened unit means loss, and each Centrofarm unit reaches break-even in two years, so the more pharmacies we open in a certain year, the more loss we accumulate,” he explains.
Romanian pharmacies still have some catching up to do on increasing the amounts spent by customers, compared to the value of a pharmacy bill at EU level.
Local businesses have started to offer other services and products in addition to medicines, like cosmetics, medical advice and various medical measurements.
“We hope this diverse offer will attract new customers, and make them spend more. We at Centrofarm hope to grow at a higher pace than the market does,” says Dorin Catana.
Products which can't be found elsewhere on the market, co-branded medicine products in partnership with producers, partnerships with hospitals and clinics, good pricing and customer retention methods – all of these form part of Centrofarm's recipe for winning new customers and convincing existing ones to spend more.

Rural expansion, not second best
Expansion in large Romanian cities is a priority for Centrofarm, but its eyes are also turned to rural areas as well. “We are considering it, but haven't taken a decision yet,” says Catana. It is not the first pharmacy operator interested in the segment. Its competitors at Sensiblu tried it, but the outcome was not pleasing.
“Sensiblu tested a pilot by opening a unit in Crasna, Gorj county, two years ago. But unfortunately, a pharmacy cannot operate in a rural area unless there are enough doctors to prescribe medicines,” says Claudiu Opran.
Catana agrees it's not an easy market. It is harder to open pharmacies in rural areas, because the number of potential clients is considerably smaller, their purchasing power is also lower, there are areas without enough doctors, and it is hard to find specialized workforce, he says.
The legal limitation is of one unit for 4,000 inhabitants, and there are villages which are already covered. In order to open a pharmacy, the same system as for the cities applies, and the company needs to buy a license. “For us it is more important now to cover large cities in Romania to become a pharmacy chain with national coverage, rather than entering rural areas. This is the best strategy, to be in larger cities, and then go for the next step,” says Catana.
Pharmacies in rural areas are not helped by the medical systems in those areas, patients continue to go to cities to see doctors and buy medicine, explains Claudiu Opran.

Old Plafar brand changes clothes and goes to the mall
The pharmacy operator had an increasing segment of buyers of natural products in mind in 2006, when it bought the 60-year-old Romanian brand Plafar. It entered a market where competition comes mainly from small, independent bio-products stores. After having bought the rights to use the Plafar brand and opened the first new Plafar stores, the company decided to buy the brand entirely, which offered exclusivity.
Now, it runs 18 Plafar stores, and most of them are housed in shopping centers. The company's plans to increase the Plafar network initially included 10 to 15 new openings for next year, and Catana hopes they will be able to open at least 10 of them.
The investment in opening a Plafar unit, up to EUR 70,000, is smaller than for a Centrofarm one due to the difference in size, from 80 to 100 sqm for a Plafar unit and 200 to 300 sqm for Centrofarm. Plafar is only working with local suppliers for the moment, but is talking to foreign producers to bring new bio-products into its stores.

By Corina Saceanu

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