Money-Growing: Money Can’t Buy You Health

Russia’s commercial pharmaceuticals market grew 15.5% in 1Q of 2006, the marketing research center Farmekspert reports. The drugstore chains are the key driving force for progress in the sector.

Moscow’s pharmaceutical industry these days is comprised of traditional municipally-run (state-run) drugstores, operating since the Soviet era, privately-owned pharmaceutical firms and chain operators who have entered the market comparatively recently. In 2002 there were 300 drugstores in the capital and 150 in the Moscow Region, Farmekspert reports. This year the total number of drugstores, including chain outlets, has reached 2,500 units in Moscow alone, according to Farmekspert.

Andrei Zhamkin, senior commercial real estate consultant at Blackwood, says that chain operators have been actively promoting a new format known as a pharma market - i.e. a self-service drugstore. That concept was originally launched in Great Britain in 1956. Today, chains operating in Moscow and in other parts of the country have recognized its advantages.

All drugstores operating in the capital fall under uniform regulations, adopted by the Health Ministry of the Russian Federation. But in addition to general provisions conventional municipally-owned or privately operated pharmacies are guided by, pharmaceutical chains develop their own growth and marketing strategies.

“A classic drugstore chain is a [an umbrella] company with centralized supervision, a uniform system of standards governing everything -- from corporate identity and opening hours to uniform approach towards customer service,” says Timofei Fomin, head of marketing and public relations at Aga Management. “Such chains are run by a single head office and exercise a uniform approach towards marketing, a range of merchandise and pricing.”

These days, over 41% of drugstores are part of chain companies, Farmekspert reports.

Russia’s ten leading pharmaceutical chains in Russia are the Moscow-based company 36.6, Farmakor (St. Petersburg), Imploziya (Samara), Vita (Samara), Rigla (Moscow), Natur Produkt (St. Petersburg), Pervaya Pomoshch (St. Petersburg), Doktor Stoletov (Moscow), Soyuzfarma (Moscow) and InterKer (Moscow).

Irina Zharova-Right, managing partner at Nordblom Group, says that in terms of growth rates drugstore chains are comparable, perhaps, only to the chains of mobile phone shops. For example, the area around Belorusskaya metro station alone has about a dozen drugstores. Next to Alekseyevskaya metro station a 36.6 drugstore and a Stary Lekar outlet are situated opposite one another.

Antonina Lairova, senior analyst at Prime City Properties, explains that smaller drugstores (measuring 100 to 150sqm) fit excellently in the convenience store format and may be situated quite close to one another. Operating in a competitive environment, the chains offer their terms of operation and sale. For example, while the 36.6 drugstore near Alekseyevskaya is open till 22-00, Stary Lekar works twenty-four hours a day. Buyers holding Stary Lekar’s loyalty cards receive a 50 percent discount.

The companies Aptechnaya Set (Chain of Drugstores) 36.6, Rigla, Stary Lekar, Chudo-doktor, O3 and others have been especially active on the market lately, analysts report. Olga Begamolova, executive director at the Moscow business unit of the 36.6 chain, has reported that by the end of the first half of 2006 the unit, which oversees operations in Moscow, Moscow Region and several central Russian provinces bordering on the Moscow Region, operated 182 stores.

“The chain is growing rapidly across the city. Since the beginning of 2006 we opened over 40 new stores. Moreover, in September 2006 we acquired the drugstore chain POS-kholding, and thus added 79 stores, situated in supermarkets and large shopping centers of the city, to our network,” Bogomolova says.

Rigla’s general director, Olga Sheludchenko, has reported that these days the chain runs 86 stores in Moscow and the Moscow Region. By the end of this year, the number of shops will near 100, she says.

Sergei Tylsa, head of development and investment at Erkafarm company, Moscow has 64 drugstores operating under the Doktor Stoletov brand. Those units are to be found in prime locations, for example, on Ostozhenka Street, and on the outskirts (Volgogradsky Prospekt, etc.)

Seeking to adjust to the market economy conditions, a group of municipally-owned stores operating in Moscow have established a chain of their own, GUP Stolichnyye Apteki. At the moment the chain was launched it comprised 280 stores out of 500 state-owned shops, which operated earlier in the capital.

Others were either taken over by rapidly growing drugstore chains or chose to work independently.

David Melik-Guseinov, head of marketing research department at Farmekspert, says that today GUP Stolichnyye Apteki is the largest chain of drugstores in town. The advantages are obvious. Stolichnyye Apteki is the leading retail operator in the sector, therefore the chain may demand special preferences from suppliers, and in doing so keep in check prices for vitally important medicines, he notes.

GUP Mosoblfarmatsiya, launched in the Moscow Region, comprises 312 municipally-owned drugstores, 176 chemist’s booths, three kiosks and five optical stores. Farmekspert’s analysts register the tendency towards unification of municipally-run drugstores practically in all major cities of Russia. The main challenge those projects have to deal with is the lack of an established marketing policy on sales, marketing campaigns, etc.

Unlike their rivals, classic drugstore chains, operating under well-known brands, stores that are part of GUP Stolichnyye Apteki, have not yet developed their uniform corporate identity. Each outlet is run independently while GUP takes care of strategic decision making for the entire chain.

In the future, the chain plans to select common suppliers on tender basis and refurbish drug store properties. The majority of outlets also plan to preserve their departments for manufacturing of prescription medicines, which privately operated chains do not have.

Elvira Antonova, leading retail real estate consultant at the company Novoye Kachestvo, says that in addition to well-known chains, which have already built up a good reputation and pursue long-term development plans, the market constantly witnesses emergence of new networks of chemist’s shops. One of those is Snadobitsa. Established comparatively recently, the chain already operates three stores that target medium-income customers, Antonova says.

“Muscovites unwilling to pay extra are familiar with the units of the chain Samson-Farma, which runs four stores and three booths in central, southern, southwestern and eastern parts of Moscow,” she adds.

Undeterred by tense competition in the sector, provincial operators, too, seek to gain a foothold on the Moscow market. A Chelyabinsk-based chain running drugstores ICN Apteka, has already launched over 30 units across the city, both in the city center, on Zemlyanoi Val and Novoslobodskaya Street, and in the suburbs, on Michurinsky Prospekt, Volokolamskoye Shosse, Zhivopisnaya Street and in other locations.

Rosta (formerly Rossibfarmatsiya) owns 40 drugstores Raduga in St. Petersburg and 10 outlets in Moscow. The St. Petersburg-based Pervaya Pomoshch company runs a network of 11 units in Moscow, working in the format of a pharma market. The chain’s projects are operating in seven administrative districts of Moscow, including three stores in Central District. Today, the company comprises a total 100 stores, 89 of which are in St. Petersburg.

“Today, Moscow holds the lead in terms of the number of drugstore chains,” says David Melik-Guseinov. “Moscow chains have established control over 90% of the market. What we witness today is the consolidation of retail enterprises, with larger chains actively acquiring medium-size and smaller stores, thus creating incentives for more rapid development and emergence of new units within the chains. All companies seek to establish their presence nationwide. The 36.6 chain has already achieved that status. The emergence of several other nationwide operators is in the offing.”

Choice of Location

To open a drugstore it is necessary to find a convenient property that would meet effective legal requirements. In line with the sanitary regulations adopted by the Health Ministry of Russia, drugstores may be situated in freestanding buildings, administrative institutions, production enterprises or residential estates, in annexes to residential buildings, on first floors of multistoried community buildings and apartment houses, where they are to be provided with a separate entrance. The territory in front of a property housing a drugstore must have a loading/unloading facility, which cannot be situated beneath apartment windows.

Drugstores operating in freestanding capital buildings raised especially for the purpose are rare, Dmitry Kotlyarenko, vice-president at RIGroup, admits. Such offers may appeal only to pharmaceutical giants seeking to maintain and enhance their corporate image by opening large stores in buildings of their own. The majority of freestanding developments raised in recent years are prefabricated structures (pavilions), similar to those, which have replaced vending booths and stalls across the city. An example is a drugstore pavilion near Proletarskaya metro station.

The operation of those projects is connected directly with further plans of municipal authorities for development of the area under their jurisdiction. Drugstores are actively establishing their presence in shopping centers. Antonina Lairova says that modern retail complexes, regardless of their size, welcome drugstores as tenants as their presence expands the range of fast-moving consumer goods available on the site. For example, 36.6 stores hold anchor tenancies in many shopping centers of Moscow, ranging from GUM on Red Square to Mega Mall in Khimki, just outside Moscow.

“Operating a spot in a retail center offers a number of undisputable advantages, including guaranteed buyer flow, high quality of decorations, remarkable engineering systems and acceptable rental charges,” Olga Bogomolova says. However, Andrei Zhamkin says, shopping centers of lower class take little interest in business profile of would-be tenants, attaching prior significance to solvent demand. Hypermarket developers plan drugstores on the premises of their future projects as early as at the stage of development of the concept. For example, a drugstore is a compulsory feature of Mega, Auchan, Mosmart and other projects operated by leading retail chains.

Dmitry Kotlyarenko believes that drugstores selling non-medical products are the ones to benefit especially from locations in shopping centers. Sometimes, visitors who do not plan to buy any medicines enter the store, taking interest, for instance, in a certain beauty care product and along with that item may purchase some pills, he says.

Behind the Scenes

By law, chemist’s shops are required to obtain a license to pursue pharmaceutical operations. In addition to general regulations governing organization of retail stores, drugstores are to meet a number of special requirements for drugstore properties, Antonina Lairov says.

Under the provisions set by the industry standard No. 91500.05.0007-2003 “The rules of sale (realization) of medical substances by pharmaceutical organizations” drugstore operators are required to have necessary properties, equipment and implements to ensure safe storage and quality of medications in accordance with government standards.

Building materials used for construction of drugstores must possess necessary properties to protect the store from rodents and insects. The document bans the use of hollow gypsum cardboard partitions in drugstores. All construction materials must bear hygienic certificates. Walls and ceiling surfaces must be smooth, without any cracks or holes, and washable with the use of disinfectants.

Places where walls adjoin ceilings and floors must have no cavities, protuberances or cornices. Coating materials (waterproof paint, enamel or light-colored glazed tiles) should have anti-static properties and bear hygienic certificates. Floors should be covered with easily washable materials, e.g. unglazed ceramic tiles or linoleum. Offices and common use areas may be fitted out with wallpaper, carpeting, wood flooring, oil paint, etc. A mandatory requirement is the first-floor location, which ensures easy access to the store for disabled visitors. The height of ceilings must be 2.7 meters and over. Preference is given to showcase windows.

A drug store project must have a separate entrance and a fire escape, centralized electricity, heat and water supply, combined extract and input ventilation and a sewage outlet, Sergei Lobkaryov, head of commercial real estate at MIAN realty, adds. But then, the industry standard allows for the access to the drugstore through the properties of other organizations. Drugstore properties operating in urban areas must be equipped with burglar alarm and round-the-clock surveillance systems and be guarded by a licensed security services organization.

Property analysts say that the size of property depends largely on the format of the project. The layout plan, measurements and equipment must correspond to the volume and nature of pharmaceutical activities carried out on the site. Self-service stores usually measure a total of 150 to 200sqm. For a mall drugstore a property of 70 to 80sqm is enough.

Finding a Site

“A drugstore, in fact, is similar to any other retail outlet,” says Sergei Khramov, development director at 4RentEstate. “Priority is given to locations accessible for pedestrians, in the zones of high customer flow.” Successful locations are central streets and squares of the city, Dmitry Kotlyarenko says. Those places abound with offices, shops, large department stores and supermarkets.

Buyers are local residents, people who work in the city center, shoppers who arrive from other parts of the city to the areas with high concentration of famous brand shops, and tourists. Most suitable locations are areas around metro stations, at intersection of city streets, next to public transport stations and shopping centers, and in transport hubs, in which case a convenient parking facility is mandatory. “We have to be situated within a walking distance from the buyer’s home,” Olga Bogomolova adds. “The location is one of the key factors of success for a drugstore.”

Drugstore chains are actively exploring the city market, analysts say. For example, the chain of pharmacies Pervaya Pomoshch monitors the market situation across Moscow with a view to detect areas offering good prospects for launching new projects. “We attach importance to creating convenient shopping conditions for our visitors, that is why we open Rigla stores along city residents’ traditional daily routes from home to work and back home,” Olga Sheludchenko says. “Taking our buyers’ interests into consideration we focus equally on central locations and bedroom suburbs. Although, of course, the center of Moscow is more attractive from the standpoint of customer flows.”

Scarce Supply

The demand for properties suitable for drugstore operations exceeds the supply considerably, Svetlana Panasenko, leading commercial real estate and development consultant at the Miel-Nedvizhimost realty, has reported. Retail real estate consultant at Jones Lang LaSalle, Yekaterina Zaichkina, believes that the demand has doubled over the past two to three years, as a result of rapid development of drugstore chains and arrival of new operators from the province.

The most sought-after are the properties with separate entrances. There have been practically no such offers left on the market of properties for rent. “Even if such offers appear the rates are so high that only major chains of drugstores are able to afford them,” Svetlana Panasenko says.

The demand for non-residential space in new housing projects remains stable. But in the opinion of property experts in that segment of the market tenants encounter a different problem. Apartment houses provide built-in shop spaces but annexes are few, whereas namely annexes are more suitable for organization of light and spacious shopping rooms.

Unlike built-in properties (first-floor properties) annexes do not repeat the general structure and layout of the house, are free from numerous walls and partitions, enabling operator to zone space in accordance with sanitary requirements.

Spaces in shopping centers appeal to pharmaceutical retailers. But, there is a risk that if a drugstore secures space somewhere on the outskirts of the complex, out of the way of customer flows, Svetlana Panasenko says, it may fail to recoup the costs. “The most optimal variant is where a drugstore operates near the entrance zone or has a separate entrance,” she says.

Finding a suitable property is not easy. Sergei Lobkaryov says that realty agencies receive applications from drugstore chains quite often. For instance, the Erkafarm company works together with some 20 real estate firms. 36.3, Natur Produkt and other chains, too, often seek realtors’ assistance. Elvira Antonova has reported that the most sought-after are properties measuring 70 to 200sqm. The optimal size is 110sqm. “But finding such properties is not an easy task,” she admits.

Sergei Tyls agrees. “Such state of affairs is brought about by rapid growth of pharmaceutical retail,” he says. As a result, the duration of tenancies has increased from 3 to 5 years, Elvira Antonova says. “This is a part of a general market tendency,” she says. Yekaterina Zaichkina says that her company has been working with several different pharmaceutical chains. Their requirements are more or less the same, but there are certain differences. One of the most flexible tenants is the St. Petersburg-based chain Natur Produkt, in her opinion.

Usually, clients do not indicate any specific location in their application. As a rule they seek a space of 70 to 150 square meters, on first floors of residential, office or retail building, providing a separate entrance, or properties on the premises of shopping centers, in which case a separate entrance is not necessary. The property must be equipped with centralized air conditioning and ventilation systems and meet sanitary standards.

The 36.6 chain places emphasis on units with open plan, measuring 90 to 200sqm and is ready to consider all offers, which meet those requirements, with the exception of spaces requiring urgent capital repairs. The shopping space must take up to 70% of the total area, to be situated on the first floor and have two entrances, telephone access, air conditioning and communication systems.

Bogomolova says the main requirement a property must meet is a location that would guarantee stable customer flow. “The Drugstore Chain 36.6 company has implemented a system of sales forecasting used to examine the situation in the area before a new unit opens for customers,” she says. Elvira Antonova notes that 36.6 stores sets priority on establishing presence in prime retail zones of Moscow. Novoyo Kachestvo has helped the chain to launch a new unit in an upscale residential estate near Tretiakovskaya metro station

According to Sergei Tylsa, the optimal size of a full-scale drugstore of the Doktor Stoletov chain is 100 to 200sqm. “We do not reject offers to open our units in shopping centers and thoroughly examine each proposal,” he adds.

Olga Sheludchenko notes that when selecting spaces for new outlets in shopping centers Rigla proceeds from a set of several criteria, with utmost importance being attached to location, the concept of the mall and the line-up of anchor tenants in place. “We examine properties only with a shopping area of 100 to 120sqm,” she says.

Cost of Prestige

Pharmacies prefer to rent properties. This is true even the leading major chains. For example, the chain 36.6, operating over 100 stores across the capital has acquired title only to 15 properties. Svetlana Panasenko says the company is more interested in tenancies as upon securing a lease a drugstore is able to move in and launch operations fairly quickly.

Products for sale at drugstores are in mass demand, Elvira Antonova adds, therefore drugstores seek to maintain presence in as many locations as possible, which is easier to achieve by renting properties. The Drugstore Chain 36.6 secures freeholds only to centrally located properties, with a view to secure presence in prime locations and most prestigious territories, Olga Bogomolova says.

According to Sergei Khramov, the size of rent depends solely on location. A property for a drugstore is chosen from a retail property database maintained by the agency or from general-purpose properties, that is why rental rates charged for drugstore outlets are the same as for other retail operators. The average rent charged for a property situated within 5-minute walking distance from a metro station in a commuter area stands at $600 to $1,000 per 1sqm per year, VAT incl., says Andrei Zhamkin.

Centrally located properties are rented at $900 to $2,000 per square meter, VAT incl., Antonova adds. Those rates are comparable to rates for boutiques, she says. But there are examples of tenancies signed on heavier financial terms. Jones Lang LaSalle analysts have reported that the chain Pervaya Pomoshch has rented 110 square meters of space on the Garden Ring, in the vicinity of the Mayakovskaya metro station for $26,000 per month.

The Drugstore Chain 36.6 has secured a lease to a 194-square-meter unit in an apartment house on Tverskaya Street. The store provides 158sqm on the first floor and 36sqm in the basement. The rental charge is astonishingly high, $75,000 per month, VAT incl. Drugstores occupying such properties bring no revenues, pursuing the sole goal of establishing their presence in upmarket retail areas, Yekaterina Zaichkina admits. “As a rule drugstore chains are ready to pay up to $15,000 per month for a property measuring some 150sqm,” she adds.

As to leases within shopping complexes, drugstores are interested mainly in first-floor properties there, which may run counter to the plans of management companies or mall developers, Yelena Dokukina, general manager at Mall Marketing & Management, explains. They are interested in letting first floor units, being the most sought-after, at maximum rates that may run as high as $2,000 to $2,500 or even $3,000 per 1sqm per year, VAT incl. Drugstores rarely agree to pay more than $1,500 per 1sqm per year. “Although, pharmaceutical retailers’ profits are high, they still cannot afford rates acceptable for mobile phone shops and jewelry stores, as drugstores require properties that are larger in size than mobile phone shops, for which a space of 40 to 50sqm is enough,” she says.

Timofei Fomin notes that high rents constitute a serious obstacle preventing mass arrival of drugstore chains in shopping centers. That is why experts from companies operating drugstore calculate customer floors, the range of goods and pricing policies with great care. “An erroneous approach towards any of the aforementioned components is fraught with losses and insolvency,” he says.

In the near future Moscow will see arrival of dozens of new drugstores. Practically all operators speak of their plans to enhance their presence in the capital. “We are set to expand operations in Moscow, as well as in the ten Russian regions where Doktor Stoletov stores have already established a foothold and to enter other markets across the country,” Sergei Tyls says. “The Moscow Region still has good prospects.”

Drugstore Chain 36.6, too, nourishes ambitious plans to expand its network, among other means by buying to new drugstores and chains. “Retail chains more and more often employ marketing analysis and marketing know-how,” Melik-Guseinov says. “I think the demand for pharmaceutical activities will grow even as the drugstore segment itself expands.

While by the end of the first half of 2006 the chains controlled approximately 40% of retail market, by 2008 that figure may reach the level of 80 percentage points. Yekaterina Zaichkina says a potential for further development of drugstore still exists, but anticipates competition in the sector. In the opinion of Yelena Dokukina, the Moscow market already has too many drugstores although it has not reached the point of saturation yet. “I don’t think we will witness saturation within the next three or four years,” Andrei Zhamkin agrees.