Restoring health

Partnering with pharmacies to survive and thriveMiranda Adams Eddie Robinson Madison Ure Katharine Ward

Three changes in the convenience industry create new opportunities

1

Channel blurring between supermarkets and convenience stores

2 3

Increasing regulation around tobacco sales

Increasing labour costs

Industry revenue growth indicates a need for change

Source: IBISWorld, 2014

Change in industry revenue (%)

Population increasingly health conscious

As consumer preferences change, health and wellness have taken on increased importance

Increasing engagement with digital advertising

Expectation for 24/7 availability

Increasing OTC medicine consumption

Source: Australian Institute of Health and Welfare, 2013

Consumer Trends

Value ($ mil) Growth (%)

Medicinal 26 7.3

Beverages 235 6.2

Grocery 74 2.1

Personal Care 36 0.1

Confectionery 396 -1.0

Retail Growth

Source: Aztec & Retailer Contribution, 2013

Strategy Overview: Repositioning convenience stores and redefine convenience

1

$

New revenue stream

Expand Over-the-Counter (OTC) pharmaceutical

range

2

Alliance with the Pharmacy Guild

3

The convenience store industry requires a long term and far reaching solution

What does a solution require?

Source: Aztec & Retailer Contribution, 2013

Scalable

Innovative, to gain a first mover advantage

Capitalise on key consumer trends

Short and long term sustainable benefits

Convenience stores can advertise through LED screens on street front

Coca Cola used biometrics and facial recognition technology via a clear LED digital screen on fridges.

The screen serves ad campaigns, collects sales data and can detect customer interaction.

This has boosted sales by 12% compared to standard fridges.

Source: Coca-Cola Is Using Facial Recognition Technology On Fridges In Australia To Sell More Drinks, May 2014, Business Insider

Benefit for convenience stores

Maximise street frontage

Supplement POS advertising

Generate new revenue

How will it work?

1. Convenience stores install LED screens

2. Digital advertising space available to sell

Will it work?

Interactive capabilities provide new content experiences that can boost a product’s sales and brand loyalty

$A quick win for convenience stores

Expanding pharmaceutical offerings will provide additional convenience for consumers

Currently

Some OTC products sold

Limited knowledge and awareness of pharmaceutical offerings

Limited association of ‘health and wellness’ with convenience stores

Opportunity for convenience stores

Increase and market OTC product range

Opening hours and locations provide an opportunity to meet consumer demand

Pain relief, in your hour of need

Community Pharmacy Agreement - Up for review 2015

Positioning now to benefit from growth and anticipated demand for pharmaceutical products and services

Proven success from the hybridised value of pharmaceutical and convenience stores

Positioning now to improve the accessibility of health services in urban and regional settings

Meet consumer health and wellness needs

The pharmaceutical and convenience industries share characteristics, making it an ideal partnership

Benefits for convenience

stores Access a wider range of

consumers

Legitimise health and

wellness focus

Point of differentiation

Motivations for

pharmacies New growth opportunity Cost reductions

Increased presence

An alliance between AACS and Pharmacy Guild will provide consolidated strength against supermarkets

1: Woolworths in new bid for pharmacy, October 2013, AFR; Small grocers shocked at proposed increase in hours of trade, May 2014, Dynamic Business.

Why will this deliver value? How will value be realised?

Face a shared market pressure

Collaborative efforts will provide new value

Stronger voice

Increased Lobbying power

Access to a shared consumer base

Shared resources

Combined marketing efforts

Legitimising existing healthy offerings

Gain strength through collaboration

The Restoring Health strategy will generate a net present value of $259,000 over three years per store

Components $259,000by 2017 (Net-Present-Value for 3 years)

Range (accounting for uncertainty)Variable Min Max

Initial market share 10% 25%

Market share growth 2% 10%

Advertising Revenue $10,000 $12,000

Fixture Costs $30,000 $80,000

Store Closing Cost $5,000 $20,000

Pharmacist Cost $45,000 $67,000

Advertising Cost $500 $2,000

Source: IBISWorld, 2014

Break even in 18 months

87% ROI

Net Present Value of $259,000 per store

Restoring Health can be implemented over three years

6 months Year 1 Year 2 Year 3

Pharmaceutical expansion

LED screen

CommunicationPlanning

Restoring Health can be implemented over three years

Commence talks with pharmacy

guild

Planning

6 months Year 1 Year 2 Year 3

Pharmaceutical expansion

LED screen

Implement OTC range

Establish and begin the alliance

Expand OTC range

Move towards hybridised stores

Communication

Restoring Health can be implemented over three years

Procure and install LED

screens

Commence talks with pharmacy

guild

Planning

6 months Year 1 Year 2 Year 3

Pharmaceutical expansion

LED screen

Sell advertising space

Communication

Implement OTC range

Establish and begin the alliance

Expand OTC range

Move towards hybridised stores

Expand LED functionality

Understand and adapt

Restoring health

Partnering with pharmacies to survive and thrive

$0.00 $200,000.00 $400,000.00 $600,000.000.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Probability distribution for strategy net present value

DCF Industry Initiative per StoreYears Passed 0 1 2 3Year 2014 2015 2016 2017Tax Effect Revenue from pharmacy sales $269,273.09 $280,779.87 $292,778.36Advertising $13,482.67 $14,024.02 $14,587.09Less cost of goods sold -$188,491.16 -$196,545.91 -$204,944.85Less pharmacist wages -$60,443.23 -$62,237.97 -$64,086.00Less maintenance -$840.51 -$874.26 -$909.36Taxable Income $32,980.86 $35,145.75 $37,425.24Tax Payable $13,192.34 $14,058.30 $14,970.09Net Cash FlowRevenue from pharmacy sales $269,273.09 $280,779.87 $292,778.36Advertising $13,482.67 $14,024.02 $14,587.09Less COGS -$188,491.16 -$196,545.91 -$204,944.85Less pharmacist wages -$60,443.23 -$62,237.97 -$64,086.00Less fixtures costs $50,552.48Less costs of closing for installation $10,610.33Less advertising maintenance -$840.51 -$874.26 -$909.36Net Cash Flow $61,162.81 $32,980.86 $35,145.75 $37,425.24Discounted Cash FlowDiscount Factor 1 0.940500582 0.831911648 0.692076991Discounted Cash Flow $61,162.81 $31,018.52 $29,238.16 $25,901.15NPV $147,320.63

Discounted cash flow analysis of strategy

Variables used in DCF of strategy

Variables Min Max Mean Deviation NorminvarRevenue from Pharmacy ProductsRevenue from a pharmacy $2,000,000.00 $2,500,000.00 $2,250,000.00 $375,000.00 $2,342,769.55Market share taken in 1st year 10% 25% 18% 3% 16%Growth in product sales 2% 10% 6% 1% 5%

Costs from Pharmacy ProductsCOGS $1,400,000.00 $1,750,000.00 $1,575,000.00 $262,500.00 $1,469,789.72New fixtures in store $30,000.00 $80,000.00 $55,000.00 $9,166.67 $46,695.48Cost of closing store for installation $5,000.00 $20,000.00 $12,500.00 $2,083.33 $12,172.87Cost of pharmacist $45,000.00 $67,000.00 $56,000.00 $9,333.33 $51,657.69Wage increase for pharmacist 2% 4% 3% 1% 2%

Revenue from AdvertisingPer week revenue $100.00 $400.00 $250.00 $41.67 $289.13Revenue growth 2% 5% 4% 1% 4%Number of weeks 52

Costs from AdvertisingInstallation $5,000.00 $20,000.00 $12,500.00 $2,083.33 $12,518.43Maintenance (yearly) $500.00 $2,000.00 $1,250.00 $208.33 $1,446.83

Tax Rate 40%Discount Rate 6% 8% 7% 1% 9%