Traditional pharmacies suffering

Australia’s traditional pharmacies are struggling to compete against the discount chemists stores sprouting up around the country.

Traditional pharmacies face a rocky road ahead, with discount pharmacies selling health and beauty products at prices that undercut traditional pharmacies. Traditional pharmacies have moved from supplying medication into other complementary products, such as make up, vitamins, sunglasses.

According to Sigma Pharmaceuticals (ASX:SIP) chief operating officer Gary Dunne, 30% of sales for the Amcal and Guardian chemist chains came from non-prescription products. But cosmetics sales were slow, due to the discount chains as well as supermarket retailers Woolworths (ASX:WOW) and Coles – owned by Wesfarmers Limited (ASX:WES).

The chief executive of Australian Pharmaceutical Industries (ASX:API) Stephen Roche, has told the Australian Financial Review (AFR) that the success of API’s Priceline was at the expense of traditional pharmacies.

In the past year alone, discount pharmacies have increased their share of the cosmetic market by more than 50%, to 9.4%, at the expense of traditional pharmacies, which have seen their market share fall from 14.5% to 12.4%. And a recent report by Beauty Update, which provides analysis of the cosmetics industry, has found that consumers prefer to buy low to medium-priced make-up, rather than the luxury brands.

To take advantage of the trend, API has introduced its own private label make up brands, including Models Prefer, which despite launching just two years ago, has annual sales of around $15 million, according to the AFR.

The chemist sector appears set to follow a similar path the supermarket sector has taken, with cut-throat competition forcing high-cost operators out of business, leaving a small number of dominant discount chains.

Foolish takeaway

For companies like Sigma, as well as the traditional pharmacist, times could get tougher, while companies like API may well become dominant retailers in the pharmacy/mass market health care/beauty space.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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