Ms Dunlevy's article, “Hard Pill to Swallow”

Copyright ? 2015 by Donald Evan Gilbert, Managing Director, Australian Lease & Property Consultants Pty Ltd and 3D Economics Pty Ltd.

Critique, article Sue Dunlevy, “Hard Pill to Swallow”, Sunday Mail, Brisbane, 15th March 2015, by Don E Gilbert

Don Gilbert is a Specialist Retail Valuer (“SRV”), a 3D Economist and an Arbitrator.
He provides independent, impartial advice to tenants, landlords and prospective investors. He is also the inventor of the GEM Method of evaluating current market rent.

Target Audience
All stakeholders: Owners of Retail Property Capital; Business (Pharmacy) Capital; Franchise Sector or a Prospective Tenant of a Retail Property, Business Brokers, Banking and Finance Sector.

Summary

The FACTS:
Sue Dunlevy, a News Ltd journalist for the Sunday Mail has written an article “HARD PILL TO SWALLOW” which appeared on pages 16 and 17 of the Sunday Mail.

The article goes to the heart of why Free Enterprise and particularly why the SME Sector (400,000 SME businesses who employ 1.0 million Queenslanders; 2.0 million employ 5.0 million across the country) is failing in Australia. It explains why under the surface there is an enormous amount of social unrest in the community.

Many many enterprising and hardworking people; in fact the CORE of the Free Enterprise system including migrants from many countries buy or start a business, employ people and seek to make a reasonable living, only to get crushed with stupid ideas that get thrust upon them as a consequence of an ill-conceived article like this.

Together with our basic Feudal Economy it adds weight to the forced closure of Business Capital across our State and probably explains why the Newman Government got tossed out following their previous record majority! Rest assured they are not the only reasons why our SME Sector is so dysfunctional in Queensland. And I have identified many many more that needs fixing. And I have a 10.0 plan to do just that.

Newman failed to understand or comprehend where their votes were coming from; the SME Sector!

Unfortunately Dunlevy advocates more of the same, except the article suggests there should be an even greater concentration of market share in an industry, probably because they dare stand up for their cause. It is very Australian to keep putting down; and this is no exception.

Ms Dunlevy, I am informed that you may have a “boyfriend” who is tied up in the mix, hence a series of articles you have written in our Brisbane new papers. I read very few local papers in favour of several other business and economics news sources.

Why then was this NOT a Paid Advertisement? And can your bosses allow you to publish this drivel?

Ms Dunlevy. I intend to destroy your article.

Background
Queensland readers are forced to swallow the claptrap that gets dished out to us. That is if one chooses to buy a local newspaper and rely on it. Ms Dunlevy’s article “Hard Pill to Swallow” puts forward a case, effectively to systematically destroy a reasonable to good example of what is now fairly rare in Australia; a Free Enterprise segment that is working. And that is the pharmacy sector.

Dunlevy’s Headline Grab states:
“WHAT NEEDS TO CHANGE
? Lets supermarkets own pharmacies
? Abolish location rules
? Put out to tender professional programs
? Audit chemists to crack down on fraud or abuse
? Give consumers and health professionals a say on agreement details before it is signed”

In regard to policing and policy, and who has a right to having input into the audit into out next Community Pharmacy Agreement (‘CPA’), Ms Dunlevy makes a few useful but obvious points. However, in regard to dot points 1 & 2, and the general thrust of her article, I suggest that she throws the baby out with the bathwater.

Firstly the article is full of misinformation, half-truths and it fails to comprehend or understand the consequences of exactly what she has written.

In effect Ms Dunlevy fails to comprehend or understand that as a “retail sector”, pharmacy per se (and one of the few that has not yet been butchered) is exposed to the full ranges of competition that a business sector can be exposed to.

Dunlevy has selectively used statistics and examples, interchanging terminology and facts without apparently understanding what she has written.

Why the pharmacy sector is competitive?

As a sector of the economy per se, Ms Dunlevy supports her case by using statistics that 4,000 pharmacy owners own 5,371 registered pharmacies, and that there are 25,000 registered graduates.

Dunlevy then proffers or suggests that there ought to be a concentration of market share; that more of the 4,000 pharmacy groups should be or ought to be swallowed up into the most concentrated ownership supermarket segment in the world!

What? That an already competitive sector where there are 5,371 competing competitors should be further concentrated into the grocery sector, where two supermarket groups control some 80.0% of the market share.

I wish to state a personal position. I am not against Coles or Woolworths. I compliment them; they are maximising the opportunities afforded to them because of extremely poor Federal Government policies and a failure of implementing and forming policies, 30.0 or 40.0 years ago, to prevent this concentration of market share.

Sue Dunlevy proffers to:

1. Concentrate our 4,000 pharmacy ownerships further (5,371 pharmacies) into effectively 2.0 or by around 200,000%. How have their numbers effectively fallen from say 10 to 15,000 over the years? A freely competitive market operating, buying and selling interests, franchising, seeing “gaps” in the market to form discounting buying groups, etc. Free Enterprise at work; a dynamic SME Sector doing what we know best. Making business fun, enjoying risk reward opportunities and working for one’s self – see below; and
2. By adding more to the conglomerate effect which is destroying “Middle Australia” eg. fuel, stationery, corner stores, hardware, local discounts shops, much fresh food eg. butchers, fresh fish, bakeries, fruit and veg, delicatessens, liquor, pubs and clubs, newsagency, soft gambling, etc.

Albeit that the sector has imperfections, as she points out pharmacy businesses are being bought and sold, pharmacists are getting paid, they emply people, they are competing with General Practitioners to provide health care (which is healthy in itself), within the rules which they operate under, many pharmacists offer their customers (patients) a personalised service, their services transcend into the possible early detection of health problems, not only do they dispense pharmaceutical product, highly trained pharmacists who study pharmacology (the interaction of prescribed drugs) keep medical GPs honest, who often do not understand what a chemical cocktail of the drugs they prescribe can do to one!

Many who intimately know their customers, also know their allergies, their other symptoms. I had a Great Uncle who said: “Forget all those laxatives on the shelf (of his pharmacy); eat prunes”.

He also said to a patient “Your doctor is treating the symptom; the cause of your problems I believe is nervous tension from XYZ. I suggest you go back to him, etc. etc.” The problem was solved.

That is the a healthy interchange between the more practical pharmacist, who often also has to decipher illegible writing of our GPs.

Pharmacies/the pharmacy sector are also/is also:

1. Leasing and buying retail space;
2. Leasing and buying warehouses;
3. They have significant compliance requirements under State and Federal Laws;
4. They serve and interact in their communities eg. sponsor golf and other events;
5. Invest in physical assets eg. shopfits, stock, staff, business systems;
6. Invest in intangible assets eg. train staff, they buy and build brands, they build Intellectual Capital (knowledge and experience; 25,000 have at least 4.0 years of tertiary study behind them), it takes years and years of hard work and time to build up the “Intangible Value” of these assets, including investing in viable flexible self-adjusting leases (tenure and security of tenure);
7. Business models serve their local communities. Locally owned caring astute on-the-ground pharmacists will Taylor-Make their businesses to suit a local market eg. young, middle-aged, lower, middle or higher socio-economic community; and
8. Support the banking finance supermarket sector.

These business models will retain cash-flow and capital in a regional economy which often will have a 5X multiplier in that local economy.

So while newsagents were a thriving sub-sector of the retail economy, and pubs and clubs and fresh food etc. were also important parts of the SME Sector, what Dunlevy effectively is saying is let us give up all these benefits for pharmacy as well! For what? Until Australia is brain dead.

Until there is no innovation.

Like the USA, UK, Germany, Australia should have prevented the concentration of market share into our grocery sector in favour of the USA model who did so in around 1908. The UK's top four grocers may not have more than 75.0% of the market share (no single group may exceed 25.0%) and Germany I understand have at least 6.0 major competitors competing.

But in Australia our retail dollars are siphoned out of local communities due to the market share aspect and the conglomerate aspect of the movement of our retail dollars by our two major supermarket groups.

Dunlevy’s interchanging between “value”, “market value”, turnover, wages, etc.

Hopefully the case to seek to merge in and marry pharmacy into the supermarket industry has been flattened above.

But Ms Dunlevy’s case to merge and interchange terminology between value, turnover, wages (whose wages), Government subsidies (Pharmacy Benefits Scheme ‘PBS’) to concentrate market share and secondly abolish location rules beggars belief.

Take the eight points raised above; Landlords and real estate agents who fail to negotiate flexible lease terms, and meet the market from time to time take note; before you close a business down.

There is one heck of a lot more knowledge, experience, IP in most Business Models than any Real Estate Agency or most large A-REIT owned shopping centres. Even the most sophisticated ones!

Essentially Ms Dunlevy’s case stating that the $15.4 billion pharmacy agreement “stifles competition” suggests and says the following (I comment in [ ] briefly):

1. 1/6 pharmacies are million dollar businesses [given the average Gross Profit is $320,000 to cover all operating expenses, pay rent, wages, risk-reward the sales are very low in my opinion and mean nothing; many are failing have failed. Why? leases, lack of tenure, squeezed out by discounters (cannibalized), on-line pharmacy sales; previous changes filtering to PBS; penalty wages; Sunday Trading, etc. a competitive market in operation];
2. That a General Practitioner ('GPs') earns $195,000 on average and a General Practice earns $1.4 million with six GPs. [Relying on GP wages alone forgetting practice managers, nurses, typists, an equivalent pharmacy, an equivalent pharmacy "model" would need to turnover say $4.0 to $6.0 million assuming a 12.0% wage cost. But, what is the relevance of this? GP wages are driven by supply and demand of General Practitioners, and the same in regard to pharmacy wages. Both are qualified professionals; both should be rewarded for their investment in IP, investment in licenses (a cab drivers license trades for around $500,000 without the car), and tangible and intangibles];
3. 5,371 businesses earn $650,000 per annum dispensing medicines under PBS [this cannot be net revenue; it has to be gross. On a 15.0% average margin this is not a lot of money to cover operating expenses including graduate pharmacist wages; and some pharmacy occupancy costs are 10.0% of turnover (even as suggested by a large firm of Chartered Accountants who deal in this sector); so one might not even be covering costs];
4. 941 pharmacy businesses received over a $1.0 in remuneration; [what does that mean? Is there a partnership, two or three partners, is that staff remuneration?]
5. Chemist Warehouse’s 320 pharmacies have a turnover of in excess of $2.7 billion [$8.4 million each; their margins will be a lot lower; they are fulfilling an important function to provide lower priced medicine to the community in a competitive market];
6. Terry White’s group of 176 shops have a revenue of $55.0 million. He lives on “millionaires’ row” Gold Coast [implies $312,500 per shop];
7. Three shops, one in NSW, another in N Queensland and a third in Melbourne are for sale and have turnovers respectively of: for sale $4.7 million turnover $5.7 [implies a reasonable net profit of $940.0 K]; N. Qld shop sold for $6.9 million [say net profit of $1.4 mill; how big is the business?]; Melbourne shop for sale $8.0 million, turnover same [the first is “asking price”; it is not price achieved; how many partners involved; how much debt is associated with each business and it has to be deducted; and consider time energy effort capital to start and grow such an operation. Are these not signs of a reasonably robust Profession working; why criticise it? Consider 100’s of 1,000 of SME Business Owners, vacant shops, unemployed staff because their capital has gone up in smoke including franchisees for reasons mentioned];
8. 70.0% of income from prescriptions [they are not a lolly shop];
9. Pharmacists can become millionaires because CPA gives pharmacy owners “monopoly status” (sic) [how many pharmacies/pharmacists have gone broke in the last few years; are all pharmacists millionaires; other people in Free Enterprise can also become millionaires; is it a sin to become a millionaire? It is called "risk-reward" it is one of the basic edicts in regard to Free Enterprise];
10. Location rules curtail ownership within 1.5 km radius and new graduates can rarely afford to afford to own shop [should this industry Profession become another bazaar ‘industry’ (sic) like restaurants who burn capital; but again it contradicts the notion of consolidation into fewer supermarkets and or having more shops where the critical mass for another entrant cannot be supported and or they cannibalise each other?];
11. There are 25,000 registered pharmacists but less than 4,000 owners [seems reasonably healthy; but why does Dunlevy proffer a further consolidation of pharmacies into the supermarket industry into the highest concentration of market share in the world?];
12. In the last 10.0 years the number of prescriptions dispensed had increased from 3.6% per annum to 7.9% per annum [so what. It is obviously an area that might warrant policing];
13. That incentives to prescribe generic drugs ($1.50 per script) is being abused [needs fine-tuning; policing];
14. Premium fee dispensing initiative had a cost blow out of $300.0 million (up to $912 million from $620.0 million) for prescribing generic alternatives [this represents a “blow-out” of just 8.5% on turnover of $3.491 billion. This is relatively minor; how much did pharmacies/pharmacists save the taxpayer; the Public Purse?];
15. Pharmacists paid $42.0 million under Medicheck program for multi-prescription user [it is not the pharmacist prescribing drugs; probably the incentivised GP – sorry doctors];
16. Incentivised clinical interventions [sorry that happens to be Free Enterprise; fine-tune the CPA];
17. Repeat scripts [see above].

Conclusion
Sue Dunlevy’s article is an attack on Free Enterprise. It is an attack on the core of the SME Sector in Australia. It is disjointed. It is emotional and fails to understand and consider the massive massive damage that has befallen what were respectable SME business to own and operate.

Family hardware stores, the food sector, the newsagent, pubs, clubs, service stations and countless others. Her attack on Terry White is unfortunate. A man who picked himself up from his drawstrings, like a true Aussie he saw opportunities, took business risks and they have paid off.

But her suggestions to concentrate 5,371 retail pharmacies into the supermarket industry with the highest concentration of market share in the world is reckless and ill-conceived. When we have older less mobile communities this makes even less sense.

Is Ms Dunlevy advocating wholesale collectivisation of all our commercial interests into just two oligopolies? And what comes after that?

Why is Dunlevy proffering to further concentrate what effectively is one of the few remaining respectable business models to own and operate in effectively what is a competing competitive market?

If Dunlevy is proffering more competition, then force divestiture upon:

• News Limited, newspaper, TV, cable TV, etc.
• The grocery sector;
• Service stations; and
• Liquor, pubs, clubs, gambling, etc. etc. hardware, stationary, and so on.

If Dunlevy is suggesting more competition, there is the Feudal Economy that is alive and prospering across Australia; in effect every shopping centre is an alive cartel. This sector needs total reform. Even if one provides independent impartial expert advice to Landlords and Tenants, one is still described as an advocate!

Ms Dunlevy would do well to attack or Federal and State Governments, for hopelessly failing to level the playing in retail and commercial leases and leasing across Australia.

The Franchise Industry ought to be turned over inside out with “returns” being syphoned off to many Franchisors who more often than not were not the contributors of the capital. A rightful and reasonable return is appropriate for their Franchise Model; but hardly for the hard cash that has been put up by the Franchisee!

Ms Dunlevy could do herself a massive massive favour to expose the significant dissatisfaction in our migrant communities who know and who have experienced real Free Enterprise at work, and not a system and a “culture” that continually puts down, thwarts and destroys true Free Enterprise.

Ms Dunlevy, you pushed the wrong button. The Mining Boom is over; the Nation now resorts to Gambling with House Prices, the TAB, and strolling around shopping centres on a Sunday for its entertainment.

And not True Free Enterprise that we knew and grew up with! Your article was a Hard Pill to Swallow and I believe it would have hit a raw nerve across the community.

? Copyright Donald Evan Gilbert 2015
B Com/B Econ; Dip Prop Val; Cert Med & Arbit; CPV; MRICS; SRV & Arbitrator; Val Reg No 2652 Qld; VAL025994 NSW; 44582 WA
www.leaseconsultant.com.au and www.3DEconomics.com.au