Chemist Warehouse uses a dazzling array of garish signage and a cluttered store to make you feel like it’s cheap.
Chemist Warehouse uses a dazzling array of garish signage and a cluttered store to make you feel like it’s cheap.

Secret to Chemist Warehouse’s win

CHEMIST Warehouse has spread across this country like a hot rash.

They have 300 stores and counting. Nothing seems to soothe our burning need for more. But how have they stolen the affections of so many of us?

Despite its estimated billions in revenue, Chemist Warehouse is quite the mystery. It is privately held, not a publicly listed company. They don't have to publish their secrets and they have come to dominate pharmacy retailing with very little public scrutiny. At time of deadline Chemist Warehouse had not responded to my requests for comment, delivered via phone and email.

But if you look closely at their business, some of the secrets of success become apparent.

THE BUNNINGS TRICK

If one business in Australia rewrote the rule book, it is Bunnings Warehouse. The hardware giant rolled across our great nation with the efficiency of an invincible cane toad, while generating the kind of melting affection we usually reserve for cuddly Koalas.

Bunnings' business model taps into the deepest emotional parts of our hearts - the ones that activate when we get a bargain.

Bunnings is known for supporting community efforts (in this case the RFS Get Ready Weekend at Penrith) but the real drawcard is low prices, something Chemist Warehouse has learned from.
Bunnings is known for supporting community efforts (in this case the RFS Get Ready Weekend at Penrith) but the real drawcard is low prices, something Chemist Warehouse has learned from.

Chemist Warehouse knows how to make those same juices flow. Its biggest trick is a simple one - being big makes it cheaper than its rivals. Both Bunnings and Chemist Warehouse do huge volumes of trade, which lets them sell stuff at prices their rivals often can't match.

But Bunnings laughs at simply being cheaper. It knows that is not enough. You have to show it: over and over and over. Bunnings mastered this, and Chemist Warehouse has obviously watched very closely.

WHAT WOULD A CHEAP STORE DO?

A lot of small retailers can find enough budget to make their stores pretty. Why not Chemist Warehouse? Because that would ruin everything.

Here's a great quote from the head of Costco, another discount retailer with huge stores and massive profits.

"We try to create an image of a warehouse type of an environment … I once joked it costs a lot of money to make these places look cheap. But we spend a lot of time and energy in trying to create that image."

Much like Bunnings Warehouse, almost everything Chemist Warehouse does is about looking inexpensive. For example, the name Warehouse is a deliberate choice. It implies you, the savvy customer, are cleverly choosing to shop at a wholesaler.

The Chemist Warehouse logo - with the font that looks like a stencil - contributes to a cheap vibe. Then there are the exteriors of violent yellow and the interiors with their towering shelves and forest of price tags.

 

Jo Silvagni loves a discount.
Jo Silvagni loves a discount.

All those yellow tags everywhere in Chemist Warehouse might remind you of another profitable retailer with a reputation for cheap prices: JB Hi-Fi. The brains at Chemist Warehouse are obviously smart enough to take ideas from more than just Bunnings. (And what is up with the ugly font on those price tags? Is it meant to make us think they haven't updated their computers since Windows 95?)

BOLD CLAIMS

Some Chemist warehouses proudly display the following text: Is this? Australia's Cheapest Chemist. Now, my beliefs about English-language grammar tell me a question mark should go at the end of a sentence. But Chemist Warehouse has no time for such old-fashioned modes of thinking. They've got an impression to create.

 

So, um, is it?
So, um, is it?

 

THE MATCH THAT LIGHTS THE FIRE

Chemist Warehouse is also a leading proponent of that peculiar retail phenomenon: the price match.

"If you find a cheaper price on the same item … we will match it and give you 10 per cent off the difference," they say.

Price matching provides us, the consumer, with great confidence. We get the impression this is a brave promise to make; this store really must be the cheapest.

In reality, a price match allows a store to do price discrimination. If 5 per cent of customers are bargain hounds who do price comparisons, Chemist Warehouse can offer them the discount price. The rest of us pay a higher price. So the store can charge different prices to different people depending on how price sensitive they are. That, by the way, is every business owner's dream - there is no surer way to maximise profits.

Some experts suggest price matching ends badly for us: "Price guarantees can stifle competition either by removing the incentives for rivals to compete on prices," argue one group of researchers.

BIGGER AND BIGGER

Chemist Warehouse began in 2000, started by a pharmacist named Jack Gance, and his business associate Mario Verrocchi.

Mr Gance was already a successful businessman - he invented the Le Tan brand of sunscreen that's been around for decades, as this delightful ad showing a very young Dave Hughes shows.

Chemist Warehouse is now run by Mr Gance's nephew Damien Gance. He has helped it grow in a difficult business environment - there are a lot of rules about how many pharmacies can be in one geographic area and how many pharmacies a single company can own.

Chemist Warehouse have manoeuvred around these rules, including by registering their business as a "friendly society" - a kind of old-fashioned business entity that was permitted to own multiple pharmacies.

After that loophole was shut down the began running as a franchise.

They also lobby the government for more deregulation of pharmacies. Damien Gance was recently quoted as telling a government inquiry that people don't care who owns their pharmacies, and accusing other pharmacy owners of self-interest.

He has a point - the rules about limiting pharmacy competition are very convenient for the many very wealthy owners of local pharmacies. And if Chemist Warehouse has shown us anything it's that local places are charging a hefty margin.

Look at us!! We’re CHEAP.
Look at us!! We’re CHEAP.

I expect that if the rules were loosened, far more Chemist Warehouses would spring up and we would go shop in them with glee.

Would that be good? It depends on who you are. For 99 per cent of us cheaper is better. But there is a small sliver of the community who really need a pharmacist who knows them well. I'm not suggesting Chemist Warehouse pharmacists are not good - indeed I expect their qualifications are more likely to be up-to-date. But a small local pharmacy with one pharmacist behind the counter might just be able to deliver more personalised care.

Will low prices squeeze out good care? I really hope not. Maybe Chemist Warehouse should offer a care match guarantee.

- Jason Murphy is an economist. Follow him on Twitter @jasemurphy



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