With thousands of individually owned, stand-alone outlets, the local pharmacy industry seems ripe for consolidation and service improvement. A look at how Goodlife is doing both. For many years, the trend in the drugs retail market has been to focus on one or two outlets. It is only in the last decade that a few pharmacists have started attempting to build a network of outlets and even then, only a few have gone beyond opening five locations.
“Most pharmacies are individually owned and often lack the resources needed to take them to the next level,”
Tony McNally, the Chief Executive Office of Goodlife Pharmacies, a three year old firm that plans to build a regional pharmacy brand.
Backed by a private equity firm and the International Finance Corporation (IFC), the private sector arm of the World Bank, Goodlife could transform the local pharmacy business. In the region, Kenya’s pharmacy industry is the most advanced in terms of private sector participation and retail network. It is worth an estimated KSh39.4b (US$440m) and is growing at an average annual rate of 22%. The growth is largely driven by increased consumer spending in medical care, beauty and cosmetic products. Despite its size, the industry is fragmented and regulation is weak. There are an estimated 6,000 pharmacies in Kenya but about 4,000 are unregistered
The fragmentation creates an opportunity to build a structured, branded network of outlets that can differentiate itself by offering a professional, uniform level of service. Besides, Kenya has a fast growing population and a middle class that demands high levels of retail service. “The middle class has aspirations not just in terms of physical products but also healthcare,” observes Mr McNally. Demand for a professional retail pharmacy network exists. Many Kenyans have travelled and lived overseas exposing them to the high standards of pharmacy healthcare.
“When we looked at the local setup of pharmacies and the people working in them, we realized we had a strategic window of entry.”
Few local pharmacies have invested in retail networks. Like many small businesses, pharmacies start with one unit and as the business grows they expand to more locations. But because they are often owned by individual entrepreneurs, with limited financial and management resources, they struggle to grow beyond three or more outlets. “Many local pharmacies are mom-and-pop enterprises without capacity and ambition to grow beyond their locations.”
Strong Start Goodlife plans to achieve scale through organic growth and acquisitions. Last year, it acquired Mimosa, a local pharmacy chain with five outlets, including one at Westgate Mall, which closed down after the 2013 terror attack. Started by Chris Gitonga, Mimosa was an attractive target because of the diversity of its locations—it had a presence in the major malls— as well as its pipeline of new locations. And in terms of infrastructure, it was also more advanced than its peers: it had a head office as well as a back office system to support the business.
In the last one year, Goodlife has also bought Dove Pharmacy, with four outlets, and two of Eldochem’s four stores. The acquisitions, which have been financed by Catalyst, Goodlife’s private equity partners and a loan from IFC, have given the firm instant presence in the market. “The acquisitions have given us a platform for growth and expansion,” observes Mr McNally. In addition to the acquired outlets, it has opened two units under the Goodlife brand at Lunga Lunga Mall in Industrial Area and in Buffalo Mall in Naivasha. In the next five months, it is set to open five new pharmacies including Thika, Kisumu and Two Rivers in Runda.
Next month, it plans to reopen the Westgate unit. In the next five years, reveals Mr McNally, Goodlife will add more than 50 stores across the region. Its target is one of the rapidly growing pharmaceutical markets. According to an April 2015 report by McKinsey, the global consultancy firm, the value of Africa’s pharma
ceutical industry jumped to US$20.8b in 2013 from just US$4.7b a decade earlier. That growth is continuing at a rapid pace and is predicted to be worth US$40b to US$65b by 2020. The report also notes that ten countries represent 70% of Africa’s pharma market.
Behind Goodlife The idea of Goodlife started taking shape in 2012 when Joshua Ruxin, a public health specialist who runs a network of 86 pharmacies and health centers in Rwanda, and Jeffrey McCormick, a US-based investment banker, started looking for opportunities in Africa’s health sector. The idea of a regional drug retail chain was particularly appealing and they brought in David Zapol, a strategy advisor, to help make it a reality. Goodlife Pharmacy is today wholly owned by Africa Chemist & Beauty Care Inc, a Mauritius registered joint venture company between Catalyst Principal Partners, Goodlife Inventor’s Limited (GIL) and Chris Gitonga. Catalyst Principal Partners is a private equity fund with US$125m in capitalization that is exclusively dedicated to the Eastern Africa region. Its typical investment range between KSh444m (US$5m) and KSh1.78b (US$20m).
GIL is owned by the three founders and also some members of Goodlife’s senior management team including Mr McNally and Peter Barker, the Chief Operating Officer. Mr McNally was tapped for his expertise in setting up pharmaceutical businesses and industry knowledge. A lawyer by training, he previously worked for Alliance Boots as managing director of Boots Retail Holland. He also worked for the retailer in the UK and Thailand. “My background is developing multinational retail firms and businesses,” he says. Arriving in the country in early September 2013, the timing of his visit could not have been more unnerving. A week after his arrival, terrorists attacked Westgate, one of the retail malls in his radar. That did not deter his team and they went ahead to lay the ground for the launch of the company.
One of his early top hires was Karen Gikunda, who was brought in as director of marketing from Distell Ltd. “We have come quite a long way,” she says.
“Our initial plan was to open 10 units in one year, a target that we surpassed as a result of the acquisitions.”
The emergence of Goodlife and its bold acquisitions have drawn attention to the pharmacy business. Of equal note has been the two year old firm’s runaway success in attracting critical funding from private equity and the IFC, which in November 2014, reported it would lend the firm KSh405m (US$4.5m), or a quarter of the KSh1.64b it needs to expand the business over the next five years.
How to compete
But despite the strong financial backing, can Goodlife compete with the thousands of low cost “kiosk” pharmacies? For Mr McNally, it is a no brainer. “What is the key factor in a pharmacy business?” he poses rhetorically. “It is building relationships and trust by offering a professional service.” A drug retailer like Goodlife is well placed to build a reputation with its customers and also, importantly, with its suppliers. “A mom-and-pop pharmacy can provide a professional service but their main disadvantage is lack of scale in terms of buying power. They can’t get the best prices from the pharma and non-pharma companies.” It is also much more difficult for a single outlet to emerge as a centre of excellence— an important competitive advantage. In the Nairobi CBD, for instance, many outlets compete on price. The low margins make it difficult to invest in new locations and upgrade existing ones. “If you look at many pharmacies
today, there is a lot of room for improvement.” According to industry estimates, 40% of the drugs in the market are counterfeit.
Thescale of counterfeit drugs is worrying but the structure of the supply side of the market is also a source of concern. There are about five or six large drug wholesalers in the country. Apart from importing their own consignments, they also buy from each other. There are also “shortliners” who bring in small stocks of medicines. “The best way to cut counterfeits is to keep the supply chain from the manufacturer to the retailer as short as possible,” says Mr McNally. “GoodLife uses two primary wholesalers who buy directly from drug manufacturers like Pfizer and Merc. These provide 95% of our products on the pharmacy side.” For Goodlife, ensuring counterfeits drugs do not enter its stocks is a matter of policy and principle. Non-genuine drugs undermine its relationship with clients as well as its business model.
“We want to be sure of the origin of medicines we are putting in the market,” he explains. “Yes, we are a commercial entity but at the same time we want to contribute to the healthcare of the nation by ensuring clients get the right medicine at a good price.”
Goodlife has a three-pronged location strategy. First, it will continue developing outlets in shopping malls due to their potential for high traffic as well as popularity with the middle class. “It is not just high end malls that we are looking at. Through Eldochem, for instance, we have an outlet at Greenspan Mall in Eastlands.” Secondly, it is targeting healthcare driven locations. These are sites with major hospitals or several health facilities within vicinity of each other and therefore high demand for drugs. Mr McNally points out that as private health providers expand their networks of clinics, there will be potential for partnering with them to establish on-site pharmacies. “We are looking for such opportunities throughout the country.” Thirdly, it is focusing on petrol stations. These locations are attractive because of their accessibility, convenience and security. Petrol stations operate around the clock making them ideal locations for late night and 24-hour outlets.
Goodlife has four petrol station-based outlets acquired through Dove. “There are over 600 branded stations in the country and we are targeting about 10% of these.” Petrol stations are also important to Mr McNally’s strategy as they give the retail chain access to customers of various income levels. “More people have access to petrol stations than malls,” he explains. “The business in these locations is also predominantly pharmacy accounting for about 90% with the rest being non-pharmacy.”
Goodlife has big ambitions. It for instance wants to create the equivalent of Alliance Boots or Clicks in East Africa. From the layout of its outlets to strong focus on branding, it is keen to replicate the success of Europe’s iconic drug retailers. “We aim to bring pharmaceutical best practices to East Africa, providing a range of products that will address the needs of different consumers and revolutionize the way of doing business in this market.” While markets in developed countries are tightly regulated and characterized by thin margins, Africa remains a largely free market. Goodlife offers no pretensions that it will try to compete on price. “We don’t have to be price competitive as our focus is on offering a professional service
QUALITY Goodlife wants to do what many competitors can’t: lock out counterfeit and substandard medicines out of its stores and build a reputation for quality drugs and service.
Goodlife’s business model is anchored on “two big pillars”— healthcare and beauty. A good pharmacy, he says, should have expertise in both areas. “Beauty starts with dermatology and goes on to medicated skin care and normal skin care,” he explains. For many people, however, a pharmacy is a place you go to buy medicines. This is reflected in the sales volumes with pharmaceutical products on average accounting for 60% of sales and non-pharma products for 40%, according to Mr McNally.
It is only in high end malls that pharmacies are able to reach a 50/50 balance. Goodlife’s outlets such as Lunga Lunga, where non-pharma products occupy over 70% of the shop space give an idea of the importance attached to the segment that includes nutrition, beauty and personal care products. The company has exclusive and non-exclusive agreements with beauty products giants like L’Oreal that enable it bring into the country products that are not available in the mass market. “These are products that make us different.”
On the pharma-front, Goodlife has deepened the service offering beyond dispensing drugs. It is installing software that will enable it build a database of clients’ medical records. “Keeping customers’ medical history and information such as known allergies and purchased medicines will improve the service we offer to our client,” says Mr McNally. For example, if a doctor prescribes to a patient a drug that they are allergic to, phar
macy personnel will be able to pick it up. A defining feature of Goodlife’s outlets is a “consultation room” where customers can consult a pharmacist. In a country where 40% of the population self-medicate, offering such a service is critical to people who may not afford the KSh3,000 doctor’s consultation fee.
“Pharmacists are limited in what they can prescribe but they offer trustworthy guidance and consultation,” he observes. Besides, the consultation rooms provide pharmacy services such as checking blood sugar and pressure. The firm is investing in building the capacity of its pharmacists and staff to deliver the services. They are for instance being taken through the company’s in-house training program to upgrade their skills. “A Goodlife pharmacy is not just about pill pushing but also offers a much wider range of products and professional services.”