Woolworths’ audacious battle to take over Priceline could change Australia’s pharmacy market
It’s an audacious move by Woolworths to shake up a $22 billion industry it’s basically been barred from - and many are doubtful of its intentions.
Across the world, from the UK to the US and New Zealand to Ireland, it’s as familiar a sight in supermarkets as fruit and veg or laundry liquid
Yet in Australia, alongside a lack of liquor on shelves, it’s one of the most obvious absences from our supermarkets – the ability to pop prescription medicines into your trolley.
But that could be set to change in the wake of almost $1 billion move by Woolworths; a move that could radically alter Australia’s retail market.
Last week, Woolworths bid to take over Australian Pharmaceutical Industries (API) – better known to consumers by its Priceline and Soul Pattison brands.
Woolies is now in a battle with Bunnings and Kmart owner Wesfarmers to snap up the pharmacy chains.
The supermarket firm has insisted it has no plans to open in-store pharmacies and instead will operate Priceline and API’s other stores just as they are now. Indeed, no supermarket chain in Australia is currently allowed to open an instore pharmacy.
But a retail expert has said Woolies’ Priceline play could be a “pre-emptive strike” with rules barring competition from supermarkets up for review.
In July, Wesfarmers bid $1.55 per share for API. But on December 2, Woolworths swept in with a far juicier offer of $1.75 a share which would value the firm at $872 million.
“Health and wellness is a large, fast-growing category and API would be a fantastic addition to our food and everyday needs ecosystem,” Woolworths CEO Brad Banducci said.
The jostling by Woolworths and Wesfarmers to get a toe hold in pharmacies could also smoke out Coles who might be encouraged to attempt to snap up its own chemist chain.
But the big grocery players will have a fight on their hands, with the powerful Pharmacy Guild sceptical of the supermarkets’ intrusion into the industry.
It has said there are “questions” around Woolworths’ bid and has questioned how a company that sells cigarettes on the one hand can also dole out prescriptions on the other.
Strict rules about pharmacy retailing in Australia
Australia’s pharmacy industry is lucrative and incredibly tightly regulated – more so than almost any other retail segment, including liquor.
These regulations include limits on how many pharmacies can open in any one area, which is why you rarely see two prescription-dispensing chemists on the same street or even in the same suburb.
Critics say it stifles completion but the industry counters that it ensures all communities have access to a vital service. What’s for sure is that with no nearby competition, local pharmacies have become valuable businesses for their owners.
According to the Community Pharmacy Agreement (CPA), which is renegotiated every five years between pharmacists and the governments, chemists are also strictly forbidden from being within supermarkets.
The rules are incredibly specific and state that while a pharmacy can be right next door to a supermarket, they cannot operate if there is a door from them directly into the supermarket.
Pharmacy market worth $22bn
Research firm IBISWorld states the pharmacy industry is worth $22bn annually and employs more than 75,000 people.
The biggest player in the market is Chemist Warehouse, followed by Amcal owner Sigma Healthcare, EBOS Group which includes Terry White, and then API.
In the most recent CPA, which came into force in July 2020, the government agreed to subsidise medicines worth $16 billion distributed through pharmacies and provide another $1.1bn for other services and diabetes support. Since then a whole lot more cash has gone through pharmacies to help with the Covid-19 vaccine rollout.
Another quirk of the Australian system is restriction on how many pharmacies any one company can own. As such, most of Priceline’s pharmacies and Chemist Warehouses are effectively franchisees, which partner with the larger firm to access the familiar brand and back end systems.
Priceline ‘rubbing hands in glee’
Dr Bruce Baer Arnold, an associate professor of law at the University of Canberra with an interest in health sector regulation, said Christmas had come early for shareholders in Priceline’s parent company.
“API are probably rubbing their hands in glee about competing bids and maybe even hoping that one of the big private equity funds will step in with a better offer,” he told news.com.au.
University of Queensland Professor of Marketing Gary Mortimer said pharmacies were an increasingly attractive retail segment.
“Pharmacy is now more than just simply a dispensary. It’s becoming the hub of community health care. You can go and get a booster shot, a travel vaccination, get your blood pressure and diabetes checked and seek weight loss advice.
“There’s a strong reason to buy into that category.”
Prof Mortimer added the huge distribution systems of the supermarkets could bring about cost savings that might be passed onto the consumer. And pharmacies in supermarkets would be more convenient for some.
‘Questions’ around Woolies’ proposal
But the Pharmacy Guild of Australia, which represents many pharmacists, is far from happy about Woolies’ newfound interest in chemists. And it has deep relationships in Canberra with many MPs loathe to do anything that might upset local businesses.
“The Guild has a number of questions surrounding this bid,” a spokesman said of the Woolies bid last week.
“Why is a company with interests in the alcohol, tobacco, gambling and nightclub industries wanting to move into health care?
“How does it hope to convince Australians that it is serious about their health and welfare?”
Woolworths does indeed sell a lot of tobacco. However its pubs and liquor division is now a separate company – albeit one that it continues to have a minority stake in.
Woolworths promises no pharmacies in supermarkets
Perhaps to head off the Guild, Woolworths head Mr Banducci has said pharmacies and supermarkets won’t mix and Priceline and Soul Pattinson will continue to be run with their current model.
“The rules are very clear: you can’t move a pharmacy into a supermarket. We have no plans to do that, and we don’t think it would be the right thing from a customer perspective anyway,” he told Nine newspapers.
But the fact remains that Woolworths has been murmuring about putting pharmacies in supermarkets for two decades. It went so far as to trademark the phrase “Pharmacy-in-Supermarket”.
In New Zealand, where it operates under the Countdown brand, it has 38 pharmacies.
This doesn’t mean cashiers dole out scripts at the checkout. Rather, Countdown pharmacies have a dedicated area in the store, which feature private consultation rooms and employ dedicated pharmacists.
‘Pre-emptive strike’
The next CPA, which will be negotiated in the run up to 2025, could conceivably see some restriction on the location of pharmacies lifted.
“It does look like maybe it’s a pre-emptive strike from Woolies and Wesfarmers thinking, well, this might be the time that there’ll be some relaxation, maybe now’s the time to sort of make some noise in the market,” Prof Mortimer said.
While Coles has made no noises that it wishes to join the pharmacy scrum, Prof Mortimer said if Woolies succeeded in buying Priceline its rival would surely take note.
“Coles might look at pharmacy more urgently if a major competitor was looking to add that to their suite of businesses.”
Canberra Uni’s Dr Arnold wasn’t convinced that Woolies’ promise to keep pharmacies away from the aisles would last.
“The ‘we’re not interested in in-store’ (message) might be genuine or might just be what you expect them to say to keep the Australian Consumer and Competition Commission (ACCC) away,” said Dr Arnold.
“If the rules did change it would make sense to emphasise in-store, irrespective of current intentions.”
Dr Arnold also added that he was “not persuaded” takeovers of chemists would significantly reduce costs or see prices come down.
“Will independent community pharmacies be a dying breed, especially in areas where there’s a lot of disadvantage and no big supermarkets?”
And while Woolies doesn’t sell prescription medicines, it does sell huge amounts of shampoo, moisturiser, cosmetics and non-prescription drugs – all of which are sold by Priceline too.
“This is one of those deals where the ACCC should be asking some hard questions about public benefit,” Dr Arnold said.
Woolies’ battle for Priceline could be protracted. But if it succeeds it could be the biggest shake-up in retail Australia has seen for decades.
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