Priceline and Priceline Pharmacy

“Priceline has a dominant position in the health,
beauty and lifestyle markets.”

Priceline – Financial highlights and statistics         2003  2002  Sales A$’000  310 290   283 788    R’000  1 587 711   1 574 694  Sales growth % (A$)  9.3   13.4    % (R)  0.8   52.8  Comparable stores sales growth % (A$)  4.6   6.4  Operating profit before interest and       before allocation of net costs of support A$’000  24 424   21 943  structures R’000  124 974   121 758  Number of stores             Company owned   133   125  Number of full-time permanent employees   767   732  Weighted trading area m2  62 761   59 356  Net increase in trading area for the period %  5.7   6.3  Weighted annual sales per m2 A$  4 944  4 781    R  25 298   26 529          Priceline Pharmacy – Financial highlights and statistics         2003   2002  Operating loss before interest and before       allocation of net costs of support A$’000  (397)  –  structures R’000  (2 029)  –  Number of stores             Franchised   7  –  Weighted trading area m2  2 999   –  Franchisee sales A$’000  5 329   –    R’000  27 263   –  Franchisee fees A$’000  381   –    R’000  1 949   –

Positioning
Priceline is a national retailer with 133 stores and has a dominant position in the health, beauty and lifestyle markets. Its market focus is on the middle to upper income segments.

The group’s pharmacy strategy was implemented during the year under the Priceline Pharmacy banner, and a franchise model was developed to manage the operational requirements of the new business. The first seven pharmacies were opened.

Review of the year
The retail trading environment has been particularly tough and competition has been intense. Priceline has performed well in this climate and recorded sales growth of 9.3% in Australian dollar (A$) terms, with comparable store growth at 4.6%.

Operating profit increased by 34.8% to A$29.6 million. Retail sales grew at 11.3% and accounted for A$24.4 million profit. An amount of A$5.2 million reflects the profit from the sale of two Priceline stores during the year. This forms part of a strategy developed by New Clicks Australia (NCA) to convert selected stores to pharmacy and sell the businesses to franchise holders. The stores will in future generate franchise fees for NCA.

The fledgling Priceline Pharmacy operation generated franchise sales of A$5.3 million and posted a loss of A$397 000 for its first few months of trading.

Priceline opened 15 stores, including the seven pharmacies.

The brand team was restructured to meet the needs of the pharmacy implementation strategy. Phillip Smith was appointed as brand leader of Priceline and Priceline Pharmacy, which enabled Amanda Brook to assume the position of pharmacy retail services leader. John Stapleton was recruited to head the merchandise team and this has resulted in an increased focus and energy around buying.

The pharmacy project has presented several challenges, including the higher than anticipated expenses to establish the dedicated pharmacy team. The plan to leverage off the operational structure of Priceline did not materialise as the service delivery to franchisees proved more complex.

Systems have now been adapted to manage the franchise network, while the supply chain for the middle and back shop product continues to pose a challenge. Most of the pharmacies are operating at a discount to normal franchisee fees in order to establish the Priceline Pharmacy brand.

The Priceline Pharmacy growth strategy is built around a three-tiered approach:

• Converting existing pharmacies to the Priceline banner;
   
• Selling Priceline stores to pharmacists under a franchise agreement and adding dispensaries; and
   
• Developing stand alone greenfield locations, again through a franchise construct.

Regardless of the format, the following results have been achieved:

• A shift in the back of store/front of store sales ratios (the average Priceline store operating on a 50/50 basis, compared to an industry standard of 70/30);
   
• Sales increase of on average 40% for pharmacies converted to the Priceline format; and
   
• In all cases, a net dollar margin growth through improved gross profit from front of store products.

The Priceline ClubCard membership base has increased to 1.2 million in just over two years.

A new point of sale solution has been aggressively rolled-out to all stores and staff have been trained, resulting in higher productivity levels in stores.

Strategy
The pharmacy implementation strategy will continue apace. The majority of pharmacies were opened in the last quarter of the financial year and the costs have therefore been incurred, while the income stream will only start to be realised in the new year.

Four pharmacies are scheduled to be opened by December, and a further 16 by the end of 2004.

The growth in shrinkage levels has continued to plague the retail industry, and Priceline has not been immune to this trend. The operations team is actively addressing this issue through the implementation of security pedestals into further high risk stores, while camera surveillance systems are also being trialled. Undercover operatives are also proving successful and this will be expanded to other regions.