Informist, Tuesday, Dec 14, 2021
By Apoorva Choubey
MUMBAI – MedPlus Health Services Ltd, India's second-largest pharmacy chain, looks to accelerate the pace of store expansion to wrest market share from unorganised drug retailers in the country.
Aggressive discounts, guarantee of quality medicines and better fill rates that the company offers gives MedPlus Health an edge over rivals, Gangadi Madhukar Reddy, managing director and chief executive officer, told Informist in an interview.
MedPlus Health hopes to add 1,000 stores annually from the next financial year. "In October, we added 70 stores, which we hope to increase to 90 and then eventually 100," Reddy said.
The Hyderabad-headquartered company is on track to double its store addition to 700 in the current fiscal ending March from 350 in the previous year. In terms of the number of stores, the company commands 21% market share in India's organised retail pharmacy segment, after Apollo Hospitals' 41%.
MedPlus Health operates 2,326 stores across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal and Maharashtra. It earns 80% of revenues from sale of medicines, and the remainder through selling fast-moving consumer goods.
With an eye on market share, MedPlus Health will continue to offer the highest discounts in the industry, even if it means sacrificing margins for some time.
On sustaining its discount regime, Reddy said his company is extremely prudent.
"We are crazily frugal about costs plus we have the scale. We drive more sales per store and per foot than anyone else in most cases in Bengaluru, Hyderabad, and Chennai," Reddy said. "Our rent cost is one of the lowest in the industry. Manpower and rent come down when you run a small store..."
Here are the edited excerpts of Reddy's interview with Informist:
Q. What makes you bullish about expanding market share in the retail pharmaceutical space?
A. The Indian retail pharma market is quite fragmented. There are 500,000–800,000 retailers in the country, but organised retailers are few. The entire organised pharmacy retail segment is only about 10% of the market. The implicit guarantee of genuine medicines, the fact that we are able to offer bigger discounts than anyone else in the business, and give better fill rates than anyone else makes us confident.
As there is so much news about fake drugs in the world, people have started to prefer organised players like us or Apollo. Moreover, our scale and technologies help us mitigate stocking problems. We figure out which product gets sold in a particular region, and stock warehouses accordingly.
Our ability to give discounts is way higher than that of a normal distributor. Customers are typically quite sensitive to pricing, as 60% of the drug business is from patients of chronic illnesses in India. We will first gain share from unorganised guys and perhaps five years down the line, the fight for market share will begin among organised players. There is enough room for us and new entrants such as NetMeds, PharmEasy.
Q. How do your discounts stack up against your competitor Apollo Hospitals or even smaller stores?
A. We have an invoice-based discount system. For purchases of up to 200 rupees, we do not give any discount but in the range of 200-1,000 rupees, we offer 10% off on the maximum retail price. On purchases above that, the discount is 20%. Small retailers will have maximum of a 10% discount or nothing. Apollo will have 10-12%.
Q. What gives you the flexibility to keep offering such deep discounts?
A. We are crazily frugal about costs plus we have the scale. We drive more sales per store and per foot than anyone else in most cases in Bengaluru, Hyderabad, and Chennai. Our rent cost is one of the lowest in the industry. Manpower and rent come down when you run a small store, which is what we do.
Q. So will your focus remain on gaining customer share, even if it means keeping up aggressive discounts?
A. Absolutely. We want continued growth and expansion. All the new players out there will have only one thing to talk about: discounts. We already know how to make money with 20% discounts, which is the highest. That will hold us in good stead.
Q. What kind of expansion are you looking at?
A. Well, last year we added 350 stores despite losing six months due to COVID-19. This financial year, we have added 350 stores in the first two quarters, which means we are at a 700 addition rate for the whole year. We will continue to grow even faster, here on. In October, we added 70 stores which we hope to increase to 90 and 100. Then we can add over 1,000 stores from next year. We are building the capability to add more stores. In Karnataka, Andhra Pradesh and Telangana, the market is far from saturated.
Q. What is the capital expenditure planned for this aggressive store expansion?
A. One store costs 3 mln rupees to build, inclusive of inventory, rental advance and the overall build-out. We are raising 6 bln rupees in the initial public offer, and we do not have debt. We are also accruing cash. So if we garner 2-3 bln rupees through accruals and debt, we will have the capital to add at least 3,000 stores.
Q. How do you see profitability faring in coming quarters?
A. Margins will be where they are. While private label segment continues to grow and overall sales growth is healthy, we are in an expansion phase. The new stores could limit the overall expansion in profitability. We expect profitability growth to explode when we end the expansion phase.
Q. How does your private label business function?
A. A portion of the medicines that we sell are our own brands and these are made by some large contract manufacturers in the country. These are the same contract players who make the drug for all leading companies out there. Right now, around 12% of business comes from private labels, with 6.5-7.0% coming from medicines and the rest from consumer staples, surgical products, medical devices, such as home health monitoring devices, like thermometers, nebulisers, etc. In drugs, under the private label business, margins are almost three times that of sales of other brands.
Q. Your presence is limited to seven states currently. Where would you want to expand in next few years?
A. We have always grown through a cluster-based model. For this model to work, the base has to be a large urban agglomeration, with massive population as well as density. For us, Delhi would be the next place. We can get growth even in existing states as we go from tier-1 to tier-3 to tier-4 cities. From a city one can eventually go into a periphery of 200-300 km. Kerala is also a place where we would look to expand.
Q. What is the investment that you have planned for technological and digitisation purposes?
A. We develop our own technology with the help of an 80-90 member in-house team. We do not outsource anything when it comes to technology, so we will not need a lot of funds. The team may expand by about 20-30 people. We have a fully automatic system for pick-up and delivery of products in Hyderabad. This system picks out the strips for dropping into the store from warehouses. The goal is to get this automated system in all seven states. That will save us time and money as 250,000 products are picked, packed and sent to stores every day. This system could replace 900-1000 people and turn into savings of 50-100 basis points on profitability.
Q. How is the traction for the omnichannel?
A. Around 9% of sales come from the omnichannel, which involves pick-ups and deliveries through the website or application, etc. Till today, we have spent 150-160 mln rupees on that channel, but we do not want to spend more. We believe any customer who wants to come to us, will come physically to the store. End
Edited by Aditya Sakorkar
Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.
Informist Media Tel +91 (11) 4220-1000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2021. All rights reserved.
