“Hybrid” is an adjective hijacked by the motor industry to promote its new greener cars. But Andrew Willetts, finance director of retail giant Lloydspharmacy, seems intent on clawing the word back – albeit just to describe his business rather than for more general use.
It’s not just the 1,700 retail pharmacy outlets, you know. A “large proportion” of its business revolves around the NHS. So managing the vagaries of retail while dealing with the UK’s health behemoth keeps Willetts very busy. “You have retail pressures such as our competitors; rent, then you have our NHS relationship, which has changed dramatically over the past five years.”
The £1.7bn turnover business has faced a squeeze on its profits from selling prescriptions – along with the whole dispensing industry. Four years ago a new pharmacy contract was set up that introduced a drugs tariff.
The tariff has been reduced annually, as regular as clockwork on 1 October. “We calculate that £800m has been taken out of reimbursement to [all] pharmacies in the last few years,” says Willetts.
The calculation is made on a sample basis, and there has been much debate between the industry and government about this method, let alone the yearly wrangling.
“It’s fair to say that sometimes it’s reasonable and other times less reasonable – it’s seen that a significant amount is taken out of supply chain profits.”
Where your common or garden retailer would be affected by the vagaries of customer choice and attrition from competitors, pharmacies see their profits eaten into, suddenly, over the course of one day. “It makes it difficult to forecast and budget with a December year end, this change in our funding.”
This creates unpredictability, says Willetts, but “ironically the reason for having a contract was to create predictability”.
The advantage for the bigger chains is the potential for economies of scale, “if you’re running a tight ship”.
So does a big and clever business like Lloydspharmacy press a red button and the new tariff is implemented into its systems?
It’s not quite as easy as that, says Willetts.
The business uses modelling tools, plus its links to the negotiating committee, to gauge where the tariff is likely to move to.
“Everything in this business tends to be quite complex,” he muses. “Even retail, which is relatively straight forward, deals with the impact of this size of estate, rent reviews, labour costs, over the counter retail offer, discounting, new lines, competition – something we deal with and budget and forecast for – which has its own set of pressures and challenges.”
Negotiating skills add another string to Willetts’ bow but, despite a traditional chartered accountancy background at PwC, his retail experience gave him a leg up in terms of healthcare.
“In terms of the modelling, negotiations and assessing the impact of government action, it’s not something I was prepared for early on in my career, but FDs should be able to deal with that,” Willetts says.
Public sector efficiency drives are here for the long term, and the NHS’s budgetary squeeze is a continual focus for Lloydspharmacy. “We’re used to the government and NHS taking action that impacts on us – we try to estimate that in terms of pressure on supply chain and other areas of working in the NHS.”
The “other areas” Willetts refers to are pretty widespread.
Working with primary care trusts has seen Lloyds expand its service range. It has introduced consultation rooms in many of its sites and offers blood pressure checks. Diabetes checks and smoking cessation schemes have also been employed.
It even branched into medical electrical products – including TENS pain relief machines and blood pressure monitors.
Health services to business, hospitals, prisons and private hospitals are also part of the plan. “With pressure on funding for traditional dispensing, we’re looking at other income streams, which includes making sure the retail offer is as good as it can be, and medical electrical [has been] big for us the last couple of years. We’ve been actively repositioning ourselves to make sure we’re not victims of that [dispensing tariff], so we’re moving into new business streams, we are diversifying.”
The move of GPs into new super centres, or polyclinics, can yield opportunities, but there are also risks. Incumbent local pharmacies may have the right to move into a pharmacy ahead of other suitors, for example.
There might also be a detrimental impact on nearby pharmacies that don’t make it into the new clinic. There are also “quite large premiums” to be paid to move in.
“We’ve seen some good things come out of them, and we’ve lost out as well. Polyclinics are essentially bigger versions of health centres, which brings us closer to the GPs, gives us the ability to offer other services and fits with our moving to a healthcare company rather than a pharmacy retailer.”
With such a wide-ranging set of issues for Lloyds to deal with, it’s unsurprising that Willetts’ role mirrors that expansiveness.
Lloyds is run by an operating board, as a subsidiary of German pharma giant Celesio. Willetts heads the operating performance monthly board meeting.
The other monthly meeting, on statutory issues and governance, effectively fills the hole that non-executives would normally take.
“Commercial aspects and business partnering is what I particularly enjoy. While I do the reporting and statutory controls side of things… my interest is very much in supporting the business commercially and strategically.”
It has traditionally acquired around 100 pharmacies a year, but that process has slowed down while it focuses on areas of new growth, another part of Willetts’ responsibility. “If we can open a pharmacy, with lower profitability early on, we’d rather do that than buy a mature business,” explains Willetts.
With profits squeezed, the business is constantly restructuring and analysing its cost base. “It’s an iterative process, whether NHS or retail. The pressure on NHS funding means that, while the number of drugs we dispense goes up and up, we’re not being reimbursed on a corresponding basis, so we’re working harder to get to the same level of funding… We can’t do that and show growing profit without restructuring the cost base, so we look at new ways of doing things, whether its dispensing prescriptions from centralised locations, the head office, or our field structure – that’s my role.”
Willetts adds: “For me it’s about balance. We have the unpredictability [of the tariff] and I need to make sure we have a consistent process to reduce costs but also not to disrupt the business… and invest in the future.”
Reporting into the parent company always presents its own issues. For Lloydspharmacy, reporting to Celesio sees it use IFRS for management reporting and UK GAAP for statutory filings.
Filing under IFRS will happen within the next two years, says Willetts, but a complicating factor is the acquisitive nature of the business – which sees it own a staggering 400 dormant or non-trading companies.
“It takes a lot more time and cost and effort, plus there are often tax and property reasons for treading cautiously [in removing them from the Companies House database].
“It’s time consuming and I’ve signed hundreds of sets of accounts – and returns rationalisation is on the agenda, it’s not very glamorous.”
A key part of this move will be shifting onto an SAP finance system, “not necessarily completely integrated but for key modules where it’s right”.
There’s no I in team
FD Andrew Willetts oversees a team of more than 100 people, the majority of whom are based in its Coventry head office. Around 20 are based out in the field, acting as a “loss prevention” team. “They are in the pharmacy network doing proactive and reactive work – internal audit; controls compliance.”
Five regional financial controllers oversee the day-to-day running of the finance teams.
A small team of finance staff supports the rest of the company’s departments, including buyers, marketing and its property team.
“We’re not an ivory tower function,” says Willetts.
“Finance is a partnership function. If you’re remote from other parts of the business that won’t work very well. If you’ve got that closeness with the people you’re supporting, you get finance working as part of the teams rather than being remote and having a silo mentality. Again it’s a balance – loyalty to finance first and their teams second. Work closely with the teams, but also challenge them and make sure you get efficiencies, driving sales, etc…”
There is tension with this model, Willetts admits, but that’s a small price to pay for the benefits. Other issues that can arise from such arrangements are also well understood and dealt with.
“It generally works pretty well, but occasionally needs some iteration.
Finance, for instance, when it comes to our regional controllers, they are seen as part of those teams. Those FCs are part of regional meetings, but it’s about making sure the contact between them and key relevant people in the core finance function remains strong, so they don’t go native – that they understand the overall targets of the finance department.”
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