Looking further into FRT's pharma business
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Source: FRT, chart by Vietecon.com
Yesterday we looked at FRT, the second largest consumer electronics chain. As a reminder, it has performed significantly worse than MWG with lower revenue growth and smaller margins. Tied to this, it has not opened as many stores as MWG, although it has opened a good number of stores in the past seven years. MWG had 1,240 stores in 2016 and 3,268 as of April, compared to almost 600 at FRT as of YE2019.
So it is expanding slower than MWG, but it is also expanding slower than it has planned to. At the end of 2017 it said it should have 673 stores by the end of 2019, but it ended with just 593.
Of FPT’s total store count, 100 are pharmacies, and it plans to open another 70 this year. It is a bit more on target for expansion on the pharmacy side, with a plan to have 120 stores at the end of 2019, but it had just 100.
MWG also has a pharmacy business: it owns 49% of An Khang, which has 20 branches in HCMC. There was a push to invest and expand it after it was bought by MWG back at the end of 2017 to invest in the chain, but it never happened.
One of the reasons that MWG has been cautious is that the business is tough. Both chains are losing money, and there are a number of reasons for this:
Source: Vietecon.com
Hospitals make up 70% of the market for pharmaceutical sales. .
Regulatory issues are weird. “Vietnamese regulations require individual licensed practitioners and not businesses to stand legally responsible for each outlet, which could give rise to a lot of legal risk, he said.” FRT has worked around this, but it has held back MWG.
Total pharma spend is projected to be $85 per person for 2020. That would equate to more than $8bn in total market size.
But the market is saturated. There were 57,000 community pharmacies in Vietnam. This is approximately the same amount as in the US, despite having just 1/3rd of the population and significantly lower income. On any metric, this is a large number of pharmacies. It works out to 60 pharmacies per 100,000, more than double the OECD average of 25.
With this many stores, pharma revenue per store is just $43,000 or so. Even with a high estimated gross margin of 30% (and that’s probably too high - the US is around 20-25%), gross profit per store is under $13k per year on the pharma side.
Of course pharmacies sell other stuff, and this can help cover the overhead.
Also, FRT will likely be able to steal share from the smaller pharmacies that don’t have a the corporate backing. It already has sales of $222k per store. [This figure is based on 2019 financials with total revenue of pharmacy of VND551bn, or $22m for 100 stores. It doesn’t really jive with some retail sales figures that FRT has provided previously - namely sales of $86k per store per month by YE2018.]
And ultimately, there might be a move out of hospitals to pharmacies, although it doesn’t seem to have happened yet.
Ultimately, this is going to be a tough business. I can see why MWG has become less interested in it, although it means that its original acquisition An Khang was a dud. FRT hopefully can steal share and reach scale on expenses as it ramps up stores.
Until then, it looks like it is going to continue to be a drag on the consumer electronics business, which is already lagging considerably behind MWG.