Cutting costs and improving backend effi ciency is always a work in progress... We are today one of the few retail stores that is able to make a profit: Madhukar Gangadi, Founder, MedPlus Photo: A . Prabhakar Rao
Every day, it sells around 600,000 units of medicine - tablet strips, syrups, injections, etc. - across its 1,070 stores spanning seven states. Popular brands, such as the vitamin capsule Becosules, or the ulcer antidote Rantac, sell close to a million units a month from its counters. Indeed, Hyderabad-based drug retailer MedPlus has swiftly emerged the second-biggest pharmacy chain in the country after the Apollo Hospitals-backed Apollo Pharmacy, with daily drug sales of about Rs 3 crore.
Apollo runs 1,500 stores countrywide, while other chains such as the Guardian Pharmacy from Gurgaon or the Hyderabad-based Hetero Pharmacy have 200 and 285 outlets respectively.
It all began in 2006 when Madhukar Gangadi - a medical doctor by training and an MBA in healthcare management from Wharton School - set up his first medical store in Hyderabad after returning from the US. He focused on generating volumes, backend efficiency and inventory management. The resultant cost savings were partly passed on to the customer. Gangadi continues to do so, currently offering 10 per cent discount on the maximum retail price to all buyers.
"Cutting costs and improving backend efficiency is always a work in progress," says Gangadi. He believes in closely monitoring costs. For instance, he deliberately chose not to have 24-hour pharmacy stores - unlike many of his rivals - as these add a lot to manpower costs. "We found that typically people buy medicines till 11 p.m. Thereafter they buy only if there is a medical emergency. But in such cases, people would generally go to a hospital. So we opted to keep our stores open from 8 a.m. to 11 p.m.," he adds. To further trim costs and improve efficiencies, Gangadi is now focusing on the automation of his warehouses in several cities.
The locations of MedPlus stores is also carefully chosen by Gangadi's team. It maps regions and pinpoints places which have a high population of the educated middle class. If a store does not achieve operational break-even in six months, it is shut down. Thus, in the last five years, Gangadi has shut down 100 stores, which were not working, but added many more. This year, he plans to add another 100 to 150 stores.
MedPlus has already begun making a pre-tax profit, even though it reports a post tax loss because of some accumulated losses it is trying to wipe out. "We are one of the few retail stores in the country that is able to make a profit," says Gangadi.
How does Apollo Pharmacy compare?
"We get a three per cent EBITDA (earnings before interest, taxes, depreciation and amortisation) margin. In 300 stores, we have been able to hit six per cent margin," says Krishnan Akhileswaran, Apollo Hospitals' Chief Financial Officer, noting that though pharmacy retail is a low margin business, it is not capital intensive.
MedPlus also plans to boost margins by increasing private label product sales. It currently sells around 140 such drugs. They are outsourced from third-party manufacturers and sold under the MedPlus brand called MHS Pharma. "Today, the share of private labels is around 4.5 per cent of total sales. We hope to double it in two years and move beyond just medicines to offer a range of personal care products," says Gangadi. Why are private labels important? "They can typically give double the margins, as there is no marketing cost involved and one can get both the manufacturer's and distributor margins," says Gangadi.
Investors in MedPlus, such as TVS Capital Funds and India Venture Trust Fund (part of the Piramal group), like its business model. "Med Plus's supply chain management is world-class and there is tight control on costs with a focus on creating a world-class IT system," says Arun K. Purwar, ex-chairman of State Bank of India and current Chairman of Ajay Piramal Group-backed India Venture Advisors, which manages the India Venture Trust Fund.
The government's new price control regime for 348 essential drugs, however, is proving a major challenge for pharmacy chains. Indeed, Gangadi is considering scaling down the quantum of discounts offered or giving them only to bulk buyers.
Gangadi has also dabbled in other businesses with mixed results. In 2008, he set up a company focused on semi-customised menswear through a central inventory model. That folded up after its investors faced financial difficulties. But he is now re-modelling the business providing both online and off-line versions focused on menswear and furniture.
He is also raising funds for MedPlus' expansion plans. "We have so far invested over Rs 150 crore. For our new investments we are in the process of raising another Rs 60 crore from existing investors through a rights issue," he says. There is plenty of room to grow as organised pharmacy chains make up just one per cent of the mammoth Rs 60,000 crore drug retail market, in terms of number of stores. Their market share is slightly higher at five per cent.
"There is room for all to grow as this is a huge market," says Ashutosh Garg, Chairman and Managing Director of Guardian Pharmacy.