Roger Corbett (Woolworths CEO) has consistently argued that he can reduce the cost of the Pharmaceutical Benefits Scheme (PBS) to the Federal Government and the ultimate taxpayers.
Where is it possible in this highly regulated industry of ours, to find the operational cost savings or the ability to reduce drug purchase costs?
The government already has highly regarded contracting systems in place for the listing of drugs and their sale through the PBS system, and this has been proven effective in keeping drug costs down.
The PBS is a planned system and regulated to a high degree.
If Woolworths are to have any effect on influencing government decisions, they will have to demonstrate how they can reduce the cost of the PBS, and what the ultimate effect will be on consumers.
If Woolworths are successful in achieving a position of influence, some of the restrictive regulations would disappear quite rapidly.

Community pharmacists would find it difficult to cope, because they have spent years building up a protectionist umbrella, with all defensive strategies geared to this end.
To have to suddenly defend yourself by going on the offensive may prove impossible, given the individual scale and structure of each pharmacy business, and the lack of lead-time to prepare for such an eventuality.
Government is becoming increasingly desperate in its attempts to shore up an ailing health system and unless pharmacists become more creative in cost savings, they will lose the major control of their traditional activities, and will be banished to isolated pockets more suited to small scale operations.
Should this happen, the entire profession will lose momentum and go into a deep decline (including the new cognitive services).
The following may represent some of the arguments or proposals that Woolworths may present to a cash-strapped Federal Government health system.

Rents too high for dispensing government scripts

The Pharmacy Guild in opposing Woolworth's having pharmacies says that 85% of a pharmacy turnover comes from Government prescriptions or restricted products. (Article SMH 27 August)
If this is true the money that pays high rents in regional shopping centers must be from consumers paying exorbitant prices for the other shop items sold by pharmacies from plush surroundings.
Or maybe the Government is paying too much for the dispensing of Pharmaceutical Benefits Scheme prescriptions.
And really why does it need prime space in a regional shopping centre to have a business with 70% of turnover coming from dispensing Government prescriptions.
Careful Mr Pharmacy Guild - make sure you tell the facts or it might come back to bite you.
The stage is being set (by the Pharmacy Guild) to have:

* Government contracted dispensaries to save money in the costly PBS; and
* The 15% "other shop" sold by supermarkets.

It only remains who will sell the 15% of "restricted items"?
Maybe have a close look at what these are and they could be divided up between Government prescriptions and Woolworth's.
The list is probably already protectionist to the "chemists Guild club" beneficiaries!

Prescription prices too high so reduce impost charge

Well, of course we can't do this!
There is protection under legislation, and competing in this area is taboo.
But what if Woolworths succeed in changing the mind of the government?
Would the government care that patients might get a cheaper deal?
And what if you had a business that could absorb this cost by being competitive and efficient?
Woolworths might have!
How could this be achieved by community pharmacies?
Well instead of having every man and his dog arrive simultaneously to have prescriptions dispensed at peak trading times, why not have them orchestrated over an extended day, offering reductions on prescription charges for prescriptions presented in normal "down time" or times extended to the normal trading day.
With a more even workflow there could economies of scale due to more effective use of staff (not as many required in peak times) and the sales base would increase over extended hours.
Consumers may get a better service.

Woolworths already have extended shopping hours-do you?

Increase profit by better purchasing arrangements

What, you can't purchase better than you are already able to through your wholesaler?
Buy direct!
What, you can't justify the large purchase volumes required by manufacturers to generate extra discounts?
Woolworths can!
And they have been through this cycle before.
Manufacturers include their selling costs in the actual price of their products, and these costs are known up front.
If a manufacturer is forced to really dig deep to secure an order to a major customer (say Woolworths) that extra dollar value is distributed towards the product wholesale cost of all other customers (say, average community pharmacies).
In other words the Woolworths cost price drops while simultaneously all community pharmacy wholesale prices rise.
Oh well, just elevate the retail price.
But hang on, the government here is the paying agency and they will not increase their payments just because apparent product costs have risen.
Oh well, let's increase the patient impost.
But wait on, Woolworths are not charging a patient impost.
Help!

The fact is that in supply chain reforms, Woolworths is about ten years ahead of pharmacy and is able to generate nearly 3 percent cost savings through the use of EAN product codes and automating the entire purchase, delivery and payments cycle. Further, the system is so refined, the cost of holding reserve stock is now eliminated, with the capital released being reinvested in market expansion, such as adding pharmacy to the consumer offering.

Increase prescription profit through private label

How come?
I already have a good supply of generics, so why should I bother?

Woolworths can and probably will, because private label manufacture is already a feature of their retailing mix.
I am unable to compete because I don't have the capacity to purchase the equipment to manufacture drugs to the standards required by law, or support the quantities required to contract out to another manufacturer.
Well, a higher price must be paid, because the real problem is that there is no organisational structure to absorb, even manage, the costs of trying to compete with Woolworths in this activity.
Woolworths would probably argue that not only should their private label generics be listed, but that they can produce them cheaper than other manufacturers.
Do you want to bet on this?

So when Roger Corbett says that he can reduce the costs of dispensing to the Australian public, does he really mean it?

Well you judge for yourself.
It is agreed generally that he has exceptional ability, and Woolworths pay him well to keep their organisation running smoothly and effectively.
Consider the news item in the Daily Telegraph for September 11 2003, which reports that "Roger Corbett has picked up more than $8 million worth of shares without opening his wallett."
This as a result of a salary package which gave hime 1,048 million Woolworths share options.
Exercising his share options takes his total shareholding in the company to 3,341 million shares which represents a value of $40 million.
Roger Corbett has a financial incentive to maintain the value of Woolworths shares, and to do this he must continually expand business and profits.
He has successfully transferred large market shares to Woolworths from the liquor industry and the petrolem industry, and now has his sights set on pharmacy and newsagents.
There is no doubt that he has the resources on his side.
Can you think of one pharmacy executive who might be worth paying $40 million dollars, and who could successfully joust with Mr Corbett?
We had better find him/her very quickly!

Next article in Woolworths series------->