January 25, 2023
How much should a pharmacy spend on wages? And how does a pharmacist-owner know if his pharmacy’s departments – front-of-store and dispensary – are paying their way? In this, the last in our series of blogs about benchmarking, we’ll discuss the best ways to answer these questions, based on our decades of experience as business transaction advisors. If you are thinking of selling a pharmacy business, establishing benchmarks in these areas can pay big dividends down the road.
You can’t make your pharmacy more profitable – or more valuable in the eyes of a potential buyer – if you don’t have a starting point or an end point. Measuring the right performance metrics gives you Point A; benchmarking performance gives you Point B. And then it’s up to you to figure out how to get your pharmacy from one to the other. In previous blogs, we’ve looked at metrics and benchmarks for inventory management, professional services and dispensary operations. Now, we turn to wages – an expense that we have found pharmacist-owners generally keep track of, but perhaps not in the right way – and department contributions, which many pharmacist-owners only get half-right.
First, wages: Many if not most pharmacies have long measured their wage spend as a percentage of overall revenue, and back in the days of high margins and dispensing uniformity, that used to be OK. But those days are gone. Today, with the advent of high-priced/high-cost specialty drugs, among other factors, pharmacies’ revenues can vary wildly from store to store. For high-specialty-business dispensaries, calculating wages as a percentage of revenue produces a misleadingly low number; for those with very little specialty business, it produces a misleadingly high number. That makes it practically useless for benchmarking, and it matters a lot when you want to sell a pharmacy.
If you really want to benchmark effectively, then the new and better metric is Wages as a Percentage of Gross Margin (WPGM). Gross margin is the money your business has left over after subtracting the direct costs of producing or buying the goods or services it sells – basically, revenue (including professional services and commercial terms) minus cost of goods sold, or COGS. Because it accounts for the wholesale cost of drugs, the metric is not impacted by the kind of revenue inflation that can occur if a pharmacy does a lot of specialty business, which means it is a better way of making sure you are comparing apples to apples and not to oranges or pomegranates.
In Canada, the industry average for WPGM is 45%. For most pharmacies, that is pretty good number to shoot for, but like other averages it might not be an appropriate benchmark for every pharmacy. Low-volume pharmacies will probably find it unattainable and should consider setting a lower bar (that is, a higher WPGM number). On the other hand, very high-volume stores should perhaps aim higher (that is, a lower WPGM number).
If you’re not meeting your benchmark, then WPGM can point you in the right direction for rightsizing your staff or identifying training opportunities. Especially when combined with other benchmarking metrics for staff efficiency (like scripts filled per hour and professional services revenue), it can also suggest whether you might be able to boost the return on your labour expenses by switching up the allocation of resources among dispensary, services and front-of-store. In other words, if you find you are spending “too much” on wages, it doesn’t necessarily mean you are spending “too much” on staff – you may simply be using them not in the most profitable way.
This last point speaks to the final note we have about measuring and benchmarking: department contribution. In our experience, most pharmacist-owners have a good handle on the profitability of their dispensaries, but it’s a different story when it comes to front-of-store. For too many owners, whether all that stuff sitting out front is contributing to profitability is an afterthought. Yet, particularly in a niche urban setting or rural market, front store sales volumes of $250,000 to $750,000 are commonplace, and we have seen some larger-format independents exceed $2 million in front-of-store sales. That’s a big chunk of change, but what really matters when it comes to selling a pharmacy business is whether your departments are contributing commensurately with their share of wages, rent and other expenses.
In short, how profitable are they? One quick way to figure this out is to take the gross margin for the department and subtract its proportionate share of fixed expenses. You should do it at least once a year. (Sometimes, you can calculate the proportionate share simply by using the department’s share of the pharmacy’s total square footage.) If, say, front-of-store takes up 70% of your pharmacy’s fixed costs but is contributing 25% of gross margin, then you know you might have some work to do. Again, you can look at staffing, but also at inventory and marketing. One of the benefits of joining a buying group or banner program is the way it can enhance your store’s buying power and profit margins through private-label goods, plan-o-grams and other methodologies.
So, with that thought, we will conclude our series on benchmarking pharmacy performance. We have covered a lot of detail, but if you remember only one thing, remember this: If it’s worth doing, it’s worth measuring – and benchmarking. At the end of the day, it is one of pharmacist-owner’s most effective tools for maximizing the value of their business. Contact us for more information on it.
Read our entire Benchmarking Series: