Community Pharmacy Business Model

Introduction

The business model of the modern community pharmacy is far more complex and dynamic than it appears.

• Contrary to the common perception that pharmacies earn profits solely by applying a markup to the wholesale cost of products, their revenue streams are multifaceted and strategically engineered to maximize profitability in a competitive retail environment.

The Hidden Economics of Shelf Space

A significant portion of a pharmacy's income, particularly for large chains and franchises, is derived from fees charged directly to suppliers. This practice, common throughout the retail sector, involves several key charges:

• Listing Fees
• Before a new product is even considered for placement, suppliers are often required to pay a listing fee.
• This charge covers the administrative costs of entering the product's data into the pharmacy's inventory, logistics and point-of-sale systems.
• Slotting Fees
• Shelf space is a finite and valuable asset, and retailers aim to maximize their return on investment per square foot.
• To secure prominent placement on shelves, such as at eye-level, at the end of aisles or in high-traffic promotional areas, suppliers must pay slotting fees. This ensures their products are visible to consumers, directly influencing sales volume.
• Promotional Fees
• Beyond permanent placement, suppliers pay promotional fees for temporary, heightened visibility.
• This is a specific charge for featuring a product in targeted marketing campaigns designed to create a surge in sales.
• These promotions can include inclusion in printed catalogues or digital flyers, prominent placement in special displays (like gondola ends or dump bins) or participation in price-based offers, such as "Buy Three Free One".

The negotiating power is not always one-sided.

• For new or emerging brands, these fees can be a significant barrier to entry.
• They may negotiate for reduced or waived fees in exchange for other concessions, such as providing marketing support, offering deeper introductory discounts or agreeing to favorable terms for exchanging expired stock.

Conversely, for established, high-demand products - often called "traffic-driving" brands - such as Panadol or Strepsils, the negotiating power shifts dramatically.

• In these cases, pharmacies may waive fees, offer promotional support, guarantee premium shelf space or even accept lower profit margins to ensure they stock these essential products that draw customers into the store.

The Strategic Shift to Proprietary Brands

In recent years, community pharmacies have increasingly shifted towards developing and promoting their own proprietary or "in-house" brands. This strategic move offers several distinct advantages:

• Enhanced Profit Margins
• By controlling the entire value chain (from sourcing and manufacturing to pricing and distribution), pharmacies can eliminate intermediary costs.
• This vertical integration allows them to offer lower prices to consumers while still securing significantly higher profit margins than they would on third-party products.
• Customer Loyalty and Lock-In
• Since these products are exclusive to a specific pharmacy chain, a satisfied customer must return to that store for repurchases.
• If the products are of high quality, this exclusivity fosters strong brand loyalty and a "customer lock-in" effect.
• Competitive Leverage
• To compete effectively with established third-party brands, pharmacy chains often invest in ensuring their in-house products are of high quality, competitively priced and prominently displayed.
• A successful proprietary brand portfolio also gives the pharmacy chain greater leverage when negotiating terms with external brand suppliers.

Regulatory Gaps and Consumer Safety Concerns

While commercially astute, the proliferation of in-house brands raises significant concerns regarding quality, safety and the scientific evidence backing their efficacy, particularly within certain regulatory frameworks.

In jurisdictions like Malaysia, the regulatory framework can present loopholes. For instance:

• Cosmetics Regulation
• Cosmetics may only require notification to the regulatory authority rather than pre-market approval, provided the company self-declares that its ingredients comply with safety standards.
• This process may not involve rigorous, independent testing for efficacy or long-term safety.
• Dietary Supplement Misclassification
• A more pressing issue is the misclassification of dietary supplements. Some products are marketed as "food", thereby bypassing the more stringent regulatory pathway for health supplements, which require a MAL registration number from the National Pharmaceutical Regulatory Agency (NPRA). This circumvents essential checks on product quality, safety and the accuracy of its contents.
• Moreover, this can lead to "ingredient list marketing", where a product boasts of a beneficial ingredient that is present in such minuscule quantities that it offers no real therapeutic effect, yet serves as a powerful marketing claim.

NOTE: Compounding these issues is the rise of marketing by influencers, many of whom lack medical or scientific training. Paid endorsements often rely on personal testimonials, rather than evidence-based clinical data, which can mislead consumers about their true benefits and safety.

The Emergence of Telehealth and E-Prescriptions

While product-related concerns dominate one aspect of pharmacy evolution, technological shifts are reshaping how care is delivered, especially with the rise of telehealth.

• Improved internet access has enabled seamless integration of e-prescriptions with community pharmacies.
• This advancement allows prescriptions issued by doctors during virtual consultations to be sent directly to pharmacies, offering greater convenience for patients and enhancing the efficiency of service delivery.
• As a result, pharmacies can now extend their reach beyond traditional walk-in customers to serve patients who may require prescription medications from remote locations.

However, this development brings its own challenges.

• E-prescriptions must strictly comply with existing laws, such as the Poisons Act 1952 in Malaysia.
• Moreover, prescribing doctors must be fully aware of the limitations of telehealth, particularly in situations where a physical examination or laboratory test is necessary.
• In such cases, patients should be appropriately referred for in-person consultations to ensure safe, accurate and ethical medical care.

Extemporaneous Compounding Service

Another emerging niche within community pharmacy is the provision of extemporaneous compounding.

• These preparations are custom-made to meet specific patient needs, allowing pharmacies to maintain control over profit margins.

In response to the growing interest in this service, pharmacy enforcement authorities have established guidelines to ensure product safety and quality.

• Pharmacies offering compounded preparations must comply with the Good Compounding Practice 2018 guideline.
• They are also required to submit a detailed floor plan of the compounding area, a comprehensive list of apparatus used and documented references for all preparations.
• This ensures that compounding is conducted in a standardized, safe and professional environment.

Summary

To safeguard public health, a collaborative and multi-pronged approach is necessary.

• A key area for improvement is the misclassification of health supplements as food products, which allows some items to bypass the more rigorous regulatory pathway that requires a MAL registration number. Strengthening oversight in this area would ensure that all products making health-related claims undergo appropriate review for efficacy, safety and accurate labeling.
• Furthermore, implementing more stringent efficacy testing and robust post-market surveillance for both cosmetics and supplements, regardless of brand origin, is crucial.
• The NPRA’s current post-market surveillance mechanisms, including product recalls and warnings, serve as important tools, but their effectiveness can be amplified with faster enforcement cycles and greater integration with digital reporting systems. Encouraging public reporting of adverse effects and enhancing retailer accountability would also strengthen market discipline.
• Ultimately, consumers deserve assurance that the products on pharmacy shelves are not just commercially strategic, but are fundamentally safe, effective and accurately represented.