Sigma and CWG Merger Risks and Management Overview
-
Risks that are Common to Both Sigma and CWG
NOT FOR DISTRIBUTION OR RELEASE IN THE UNITED STATES
Key Risks
Key Risk
Changes to competitive
landscape and operating
performance of retail
pharmacies
Summary
The Merger Parties operate in highly competitive environments and which could become more competitive in the future including from actions from both new and existing competitors. Competition which
may impact the Merger Parties includes, in relation to Sigma, the wholesaling of pharmaceuticals (prescription, pharmacist only and pharmacy-only) and consumer products and in relation to Chemist
Warehouse, as a distributor of consumer products to its franchisees and as an online retailer of consumer goods to end customers. The Merger Parties, as franchisors, will also be impacted by
competition from other franchisors and pharmacy buying groups as well as a range of other providers offering services to community pharmacies. In addition, competition at the retail level which impacts
the Merger Parties' franchisees or, in the case of Sigma, its wholesale pharmacy customers, indirectly impacts the Merger Parties. Competition at the retail level includes other pharmacy franchisees,
supermarkets and other health and beauty retailers, including online and bricks and mortar suppliers.
The risks posed to the Merger Parties' businesses include:
in relation to Sigma the development of platforms linking pharmacists directly to pharmaceutical and other suppliers (and the corresponding de-linking of Sigma's wholesale business from the supply
chain);
in relation to Sigma customers bypassing wholesalers like Sigma for their fast-moving consumer goods (FMCG) product distribution and instead adopting "direct to store" models or investing in
warehouse infrastructure; and
competitors pursuing a strategy of further vertical integration with suppliers.
Increased competition in the retail space may make it harder for the Merger Parties to compete and win new franchisees for its banner group, as well as retain existing franchisees. This could impact on
the Merger Parties' ability to generate sales, lead to a loss of market share and cause a decline in profitability. This could also affect the Merger Parties' ability to negotiate favourable contract terms with
customers and existing franchisees.
Franchisees of the Merger Parties (as well as other community pharmacies) compete at a retail level based on a number of factors, including price, location, the quality and variety of their products and
services, reputation, in-store experience and brand recognition. The desirability of the IP, goods and services supplied by the Merger Parties to their respective franchisees is impacted by the
effectiveness of this offering in the view of those customers both generally and compared to competitors of each Merger Party, including other wholesalers and franchisors (or the option of operating as
an unbranded community pharmacy). Additionally, the market for non-pharmacy only products such as vitamins, personal care, beauty and wellness products is highly price competitive at all levels of the
supply chain and at the retail level. If the Merger Parties are not able to wholesale or distribute consumer goods to community pharmacy customers at competitive prices, or if community pharmacy
customers do not offer such goods to end customers at competitive prices, demand for such goods supplied by the Merger Parties will reduce. Any deterioration in a Merger Party's or its associated
community pharmacy franchisees or wholesale customers' competitive position and operating performance, or increased competition from new and existing competitors, could affect the relevant Merger
Party's ability to generate sales, lead to a loss of market share, and cause a decline in profitability.
Any future deregulation of pharmacy in Australia, so that non-pharmacists are permitted to own pharmacy businesses, would have a significant impact on the competitive dynamics in the pharmacy
sector, most likely resulting in the vertical integration of wholesaler/franchisors with retail pharmacy businesses. Deregulation could also see the current prohibition on supermarket chains or other large
retailers (including online retailers) from owning pharmacies removed. If this were to occur, supermarket chains and other large retailers would be able to compete directly with the Merger Parties' retail
pharmacy franchisees for the sale of prescription, pharmacy-only or pharmacist-only medicines, including online, which could have consequential negative impacts on either Merger Party's wholesale
sales and profitability as well as impacting demand for services from their franchisor businesses. Although both of the Merger Parties consider that they are well-positioned to respond to such a change,
the impact is unpredictable for both Merger Parties and their community pharmacy customers.
57
557View entire presentation