The Grass family, founder of US drugstore chain Rite Aid, which is the largest chain on the East Coast of the US and the third largest in the country overall, invested $10 million in the new Israeli drugstore chain Good Pharm, which inaugurated its first branch on King George Street in Tel Aviv last week. The investors received 49% of the shares in the new chain, with control remaining with founders Adam Friedler and Ohad Sandler.
The Grass family no longer owns Rite Aid, but it is the financial power behind the new chain, which sells all its products for up to NIS 10 and threatens to break the hegemony of Super-Pharm and New Pharm in the Israeli toiletries market.
The Good Pharm chain seeks to ride the wave of success of fixed-price coffee chain Cofix, which sells coffee and snacks for a fixed price of NIS 5, and exploit the growing demand in Israel for cheaper shopping alternatives. In that respect it is entering a vacuum, since current price levels in Israeli drugstores allow it to offer many products at very substantial discounts by comparison with them. Good Pharm's strategic plan calls for opening 25 branches within a year in Petah Tikva, Holon, Rishon LeZion, Rehovot, and other Israeli towns.
A quick spin around the new store's shelves indeed reveals wide gaps in prices of brand products that are sold in Good Pharm for NIS 10 each. That price buys Oral B dental floss in Good Pharm, whereas in Super-Pharm the price is NIS 21. It will also get you L'Oreal Elvive shampoo, sold in other chains for NIS 11.60-21.60, according to the Pricez.co.il website. Similar price gaps, and even wider ones, apply to spectacles, Tampax and Always tampons, Gillette Mach razors, and other products on offer.
Friedler, an accountant by profession, says, "A concentrated market is an unhealthy market in many ways, because anyone can price their products as they wish without checking or having to fight the competition. It's not healthy for the consumer or for suppliers, who are dependent on a customer and a half. I get asked what will happen if Super-Pharm cuts the prices of all its products tomorrow to NIS 10. A premium business can't sell for NIS 10.
"If you analyze the price of a product, it has four components: gross profit, marketing cost, head office cost, and rent, and so a business can't change its DNA. We don't have a company headquarters in Herzliya Pituah, we don’t have branches in Ramat Aviv Mall, and we don’t have secretaries and secretaries' secretaries. We also don’t have marketing costs, unlike Super-Pharm, which is the biggest advertiser in the economy."
So there is some justification for the high prices in the drugstore chains?
"No. If I thought there was justification for them, we wouldn't be talking and I wouldn't have felt the pain that led to the idea to set up the chain. The trigger for founding Good Pharm was when I wanted to buy myself a pill splitter. They wanted NIS 50 from me at Super-Pharm. I found it on eBay for $1.50, and I realized that anyone who paid was a sucker. It's not that I couldn't afford it, but it annoyed me."
Why do you think you can succeed?
"Because it’s a market with very few competitors and thoroughly angry consumers. Today, when you travel overseas, you see the same product for a third of the price. It's impossible to keep telling consumers stories. We are in a new world in which price comparison is easy and so the story can't go on."
As someone who has become expert in selling prices, what margins do you see in the drugstore chains?
"Margins much higher than they should be, because when there's no competition, everyone does what they want. I'm prepared deal with any fair competition."
What's your potential?
"Super-Pharm has an annual turnover of NIS 5 billion and the market is nearly NIS 10 billion. If we have stores nationwide and reach all our targets, we can reach turnover in the hundreds of millions of shekels."
According to the plan, the chain's stores will be just 120-150 square meters in area and will be located in city centers and on busy streets. The company's goal is to reach monthly turnover of NIS 400,000 in each branch, or NIS 4.8 million annually. This gives a sales target of NIS 120 million for 25 branches. The gross profit margin will be 25%.
You don't have an in-store pharmacy. That's a disadvantage.
"In our strategy, we aim to open our branches in very close proximity to independent pharmacies, so that the consumer will be able to buy prescription drugs nearby. Besides that, we intend to introduce over-the-counter drugs."
What is your greatest advantage?
"The price gaps in feminine hygiene products and spectacles are huge - hundreds of percent in comparison with Super-Pharm."
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2016
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