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Coles and Woolies take on pharmacies

The Australian Financial Review has reported on comments by the outgoing head of the Pharmacy Guild of Australia, Mr Kos Sclavos. Mr Sclavos singled out Coles, owned by diversified conglomerate Wesfarmers (ASX: WES), and Woolworths (ASX: WOW) for expanding their general medicines, vitamins and beauty product range which has put them into competition with pharmacies.

The majority of pharmacies in Australia use the buying power of distributors Australian Pharmaceutical Industries (ASX: API) and Sigma (ASX: SIP). API and Sigma own chemist banners including Priceline, Soul Pattison, Gaurdian and Amcal. The third and rising force in chemist retailing is the Chemist Warehouse chain.

As the article highlights, while each of these buying groups enjoy the regulated protection of providing prescription medicine, which the supermarkets are not allowed to sell, their buying power for much of the general medicines, vitamins and beauty product range is weaker than that of the supermarkets, a situation the Guild acknowledges is a problem for their members.

Foolish takeaway

Wholesale distribution businesses can be very tough given they are usually low margin. A low margin business model generally requires high volumes to be successful. The Pharmacy Guild is rightly concerned that its members’ volumes are under pressure; investors in these types of low margin businesses should be concerned too if they see volumes begin to fall.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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