The first quarter of 2022 was a challenging one to say the least in particular for Pharmacy’s based in greater Sydney and the Hunter region who have spent much of the first quarter under lockdown orders.
While the impacts associated with the lockdown have varied depending on the location of the pharmacy; CBD and large shopping centre pharmacy’s have been the highest impacted with turnover reducing by up to 80% in some cases. Conversely, pharmacy located in smaller community centres, high street locations, suburban areas and many regional towns have seen strong growth mainly driven by:
- More people working from home and not having to commute as a result of the lockdown; and
- Customers avoiding larger shopping centres and choosing to shop at locations whereby access to the pharmacy is quick and easy.
Challenges faced by community pharmacy
The key challenges faced by NSW pharmacies during the first quarter of 2022 have been:
- Managing close contact exposure in particular where a positive case enters the pharmacy requiring all staff that were exposed to self-isolate and for the pharmacy to undergo a deep clean before reopening. Each exposure event caused a significant disruption to the pharmacy and placed a high amount of pressure on the remaining pool of staff to continue operating the pharmacy while those that have been exposed self-isolate for 14 days.
- Workflow changes caused by customers in some parts being unable to enter the pharmacy as a means of limiting contact between customers and staff together with the impact this has had on front of shop sales due to customers unable to enter the pharmacy and browse for the items they wish to purchase. These changes have also required many pharmacies to increase the number of staff they have rostered on each day to service customers and adhere to health regulations and requirements at the same time.
- Staff shortages have been heightened throughout the pandemic with some pharmacists choosing to leave the industry all together while many others have taken on roles within the various vaccination hubs across the state therefore reducing the number of available pharmacists to fill roles within pharmacies.
Pharmacy valuations and pharmacy sales
Despite the effects of the lockdown across the state, community pharmacy valuations have remained strong particularly for those pharmacies that are not located within high impact locations such as CBD, large shopping centre or medical centre pharmacies.
Capitalisation rates have continued to trend down (noting that a lower capitalisation rate results in a higher valuation) as strong demand for community pharmacies outweighs the number of pharmacies available for sale within the market whilst also fuelled by record low interest rates.
Market sales data over the past 12 months shows pharmacies have been selling at capitalisation rates as low as 12% - 14% with the annual average being closer to 15% - 16%.
The below table shows the average capitalisation rate used for security lending purposes compared to the average capitalisation rate on associated with pharmacy sales.
While there will always be a disparity between the capitalisation rate achieved on pharmacy sale compared to the capitalisation rate used for security lending purposes, our data shows that cap rates on valuations for the purpose of security lending have followed a similar trend and now sit within the range of 17% - 19% depending on the specifics circumstances of each pharmacy including location, competition, product mix, customer profile and the local shopping environment.
As to the market outlook for community pharmacy, many pharmacy owners appear optimistic about the next 12 months now that the vaccination rate for those over the age of 16 years has surpassed the 80% double vaccination target and as the state moves closer to 95% double vaccination status. As consumer confidence continues to lift and much of the population begin returning to their normal way of life under the current health restrictions the question remains as how long it will take for market conditions and customer habits to return to pre-pandemic levels particularly for the highly impacted locations (CBD and large shopping centres).
When considering the value of your pharmacy it is important to remember that the value is directly linked to the performance of the underlying business – Now ask yourself, what are you doing to drive the performance of your pharmacy so as to maximise its value?