With the increased competitive pressure on pharmacies, it is more important than ever to ensure you are optimising your use of the capital invested in your business.
Most pharmacies have $50,000 to $100,000 invested in retail stock and the larger retail businesses have many times this amount. How do you know if you are getting a good return on this significant investment?
If you were investing in shares you would spread your investment based on the risk and return in each company in your portfolio. It makes sense to look at the stockholding in your shop in the same way. The best method is to calculate the relative GMROI (Gross Margin Return On Investment) for each stock category.
GMROI is a combined measure of how often your stock turns over in a year (Stock Turn) and how much profit margin you make on these sales (Gross Margin %).
Here’s a simple formula for comparing the GMROI of your retail stock categories.
GMROI = Gross Margin % x Stock Turn per year
See the below table for benchmark examples of this measurement for some of the main pharmacy retail categories:
A “rule of thumb” is to aim for a GMROI of 200 or more in your shop. This means you should be looking for a Gross Margin % of around 50% and a Stock Turn of four times per year as a guide.
Any categories with a GMROI of less than 100 need serious corrective action!
I get annoyed when I see accountants reporting that pharmacies have a Stock Turn of 10 or more times a year. This figure is meaningless because it includes dispensary stock which turns over more than 12 times a year because you hold less stock – but it has a very low profit margin.
Retail pharmacy stock typically has a Stock Turn of around four times a year - meaning you are holding around three months’ supply of stock on average.
There are several ways to improve the GMROI for a poor performing category:
1. Reduce the stock holding by getting rid of dead and slow-moving products
2. Increase the Stock Turn by selling more of what you’ve got
3. Increase the Gross Margin % by putting retail prices up or getting better cost prices.
If you can’t improve the GMROI of the worst performing categories, you must consider whether they are a worthwhile investment. If you are a small pharmacy with a large investment in slow-moving Cosmetics you are missing an opportunity to use that money for something with a better return.
Most pharmacies we work with have deleted one or more Cosmetic brands in the last two years. Before doing this I have advised them to make strategic investments in Health Supplements, specialist Home Healthcare ranges or additional health services instead.
Now is the time to adjust your stock “portfolio” by focusing more of your shop space and stock holding in the categories where the best returns can be made. By directing your investment into new or emerging areas, you can maintain or grow your sales and profits despite discounting by your competitors.