Business Health Check
[Insert Date]
Introduction
Happyville Pharmacy is a family owned business located in Brisbane. Husband and Wife pharmacist Joe and Betty Blow are the owners of the store and it is run independently without any banner group. Although the main products sold are related to pharmaceuticals but the store also sales other products such as baby products, confectionary, cosmetics, small gifts, household and domestics products and perfumes. It also sales non-medical skincare products and oral hygiene products.
As per the 2014 guild report which reported data for the years, 2012 and 2031 in Australia, community pharmacy industry has an overall size of $15.38 billion with an estimated sales of $10.27 billion in prescription drugs per year. However, due to increased competition from non-community based pharmacy players the year on year turnover declined 1.65% in 2012-13. However, gross profit margin has increased from 34.98% to 36.65%. However, due to an increase of 3.99% in total expense mainly due to increase in overhead cost such as salary the total income dropped by 5.48%. As per the 2013 data, 5350 pharmacies were serving across the country with an average community size of 4305 people.
The owners have tried to increase the revenue by diversifying and introducing many products apart from the pharmacy products, For example, Betty added gifts, homewares and clothing items in the product portfolio. However, owners are not sure how these additions are impacting the overall growth and profitability of the pharmacy. This report will analyse the financial and operational performance and propose marketing and business strategies to the owners to improve profitability and category management strategies.
Operational Areas
Calculations and financial performance analysis are presented in the excel file attached in Appendix 1.
Profitability
The gross profit margin (GP) for Happyville has decreased fr0m 35% in 2014 to 30% in 2015. GP was higher than industry benchmark (33.14%) in 2014 but now (2015) GP is significantly lower the industry benchmark.
EBIT margin has decreased from 9.57% to 4.36%. Happyville was operating at a very healthy EBIT margin in 2014 but now it has plummeted to 4.36% which is below industry benchmark. Increased COGS is the main component for this decline in profit.
As there is no information for effective income tax for Happyville and interest expense available we can assume that EBIT and Net Profit Margin have a similar pattern and a decreasing EBIT results in decreasing net profit margin.
Profitability ratios indicate that gross profit margin and the EBIT margin is high compared to the industry benchmark. Three components that are significantly higher than industry benchmark are COGS, salary and wages and superannuation.
Financial Performance
Asset turnover ratio for the company is 2.27. There is no specific industry data available for this ratio but looking at general data from pharmaceutical stores in Australia it seems that the asset turnover ratio is lower than the industry benchmark. It shows that the company is not utilizing its assets fully and probably it has lots of slow moving inventory. If LM is increased for these products then there is a chance the sales and profitability will increase.
Overall, GMROI of Happyville is 3.0 which is around average for the pharmacy industry. Analgesics, Sinus and Allergy, Eye and Lens Care and Weight Management all has GMROI higher than 5.0 which shows that those products have a high inventory turnover as well as higher profitability. On the other hand products such as baby products, confectionary, cosmetics- prestige, home healthcare, household & domestic, perfumes-prestige and skin care products, all have GMROI less than 2.0 which is indicative of the fact that they are slow moving with a low profitability. Most of these products can be discontinued as they are available in grocery stores and those are also not adding any good value to the product portfolio.
Operating Efficiency
The overall inventory turnover ratio for the company is 3.68. However, individual inventory turnover varies considerably from category to category. For example, Cosmetics-Prestige, Baby, Confectionary, Home Healthcare, Household and Domestics, Perfumes-Prestige, Skincare and Drinks all have Stock Turn less than 2.5. These products sell slowly and therefore the inventory holding costs for these products could be high. Inventory for these products should be kept at a minimum if at all these categories are continued.
As data for credit sales is unavailable the assets receivable turnover could not be calculated.
Financial Stability
Current assets ratio for Happyville is 1.12 and Quick assets ratio is 0.86. This shows that the company has enough liquid assets to cover the short term liabilities but cash in hand is not enough to cover the current liabilities. Happyville should try to reduce the overall liability in comparison to liquid assets.
Debt to assets ratio for the company is 85%. This means that the company has already drawn a significant amount of debt (leveraged) from the market and should not take any more debt for future expansions and working capital requirements.
Breakeven point for Happyville is $3.89 million dollar sales revenue. If the pharmacy posts revenue below that then it will not be able to cover its fixed costs. The margin of safety is only 12% and sales to the breakeven point is 1.13. Therefore, Happyville does not have a very healthy margin over its breakeven point. It should try to increase the revenue or try to reduce the fixed costs by aggressively reducing salary and superannuation costs.
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Appendix 1: Calculation Worksheet
