The pressures of drug reforms that are pinching Shoppers Drug Mart Corp. bottom line will persist for another two years as provinces continue to look at scaling back payments to pharmacies.
Along with regulatory changes, Shoppers grapples with other sweeping market shifts, including emerging mail order services, automatic drug dispensing machines, the digital revolution and the arrival of U.S. discount titan Target Corp. in early 2013.
Taken together, the shifting retail tides pose challenges for Shoppers and Domenic Pilla, its new chief executive officer.
"This industry is under tremendous pressure," he said at a CIBC World Markets retail and consumer conference on Wednesday in Toronto. "We are facing the single worst commercial environment that the drug sector has ever faced … But who is in the absolute best position in Canada to weather that – in some cases to take advantage of that? It's Shoppers Drug Mart."
Mr. Pilla arrived at Shoppers' corner office after his predecessor fought a losing battle with the Ontario government over reforms that slashed the amount it paid pharmacies for dispensing generic drugs to help cut government spending on health care.
Now other provinces, including British Columbia and Alberta, are borrowing a page from the Ontario model, studying generic-drug financing cutbacks. The changes are forcing Mr. Pilla to find new streams of revenues to minimize Shoppers' drug reform pain.
Aside from an array of initiatives in the non-prescription aisles, he's preparing to snatch up rivals or their prescription files, offer more services to seniors and even push to allow pharmacists to perform more duties, such as administer vaccinations.
"The next two years may not be too exciting for [Shoppers]shareholders," Perry Caicco, retail analyst at CIBC who hosted the conference, said earlier this week. "In the hands of the capable new CEO, the company should be able to at least preserve earnings during a troubled time period and set the stage for higher earnings growth in 2014 or 2015."
Mr. Pilla said Shoppers faces the "known events" of generic-drug reforms over the next two years, as well as "unknown events" as governments come up with new ways to ease their deficit problems.
At the same time, consumer attitudes are changing as value-conscious customers doggedly look for good deals, a trend that is "not going backward," he said. "Disposable income in Canada is fragile … We have to adapt."
He said that as the country's largest drugstore chain, Shoppers is best positioned to navigate the road ahead, with economies of scale to help it lower its costs.
Pharmacies, including Shoppers, were "doomed to fail" in their previous strategy of fighting governments that want to reduce costs, Mr. Pilla said. Instead, Shoppers must find its own ways to bolster its business by expanding services and offerings.
He's also focused on aggressively stepping up offerings of non-prescription products, including high-end, high-margin beauty merchandise, while looking to replace the shrinking photo department with mobile phone sections and other more popular products – and shrinking the size of Shoppers' stores.
And he wants to buy competitors as reduced government reimbursements start to squeeze smaller rivals, he said. "That's a freight train accident waiting to happen. How it will happen and how quickly it will happen ... is something that is still to be told."
His estimated that Shoppers pharmacies probably could add another 30 per cent more prescription files without having to invest in fixed costs. "That would make acquisitions for us very accretive."