Opening your first pharmacy can be an exciting, scary, and beyond stressful endeavor. Naturally, fear of failure, which means potentially losing hundreds of thousands of dollars, would give anyone pause. No big deal, right? It’s only money. [Insert sarcastic laugh here.] Seriously though, where do you begin when you are just starting to plan for your dream of owning a pharmacy? Location, of course.
Let’s say you have already found the “perfect location.” You are convinced it will be very successful, and your friends and family agree. It’s easy to become caught up in the moment, throw caution to the wind and just do it. But, is your decision based on real facts or have you let the emotion and excitement of opening a new pharmacy take over? If so, stop, take a breath and get the facts you need to make an informed and intelligent decision.
The only way to ensure you are making a smart business choice to open a new pharmacy in a specific location is to have a pharmacy feasibility study conducted by a professional. They will collect and utilize the right data to determine the probable success of a new pharmacy in that specific location. Once you have their feasibility study report, you have credible information to make a rational financial decision as to whether opening your dream pharmacy in that location makes sense. Plus, you will need a feasibility study to acquire any financing anyway so you’re killing two birds with one stone so to speak.
Naturally, pharmacy feasibility studies come in all shapes and sizes using various types of data and formulas. Some of this data can be more relevant than others, depending on the type of location you have chosen for your pharmacy. The end goal is the same, an accurate financial projection and predicting the probability of success in your chosen location.
Using the pie analogy… the pharmacy feasibility study will look at the size of the pharmacy revenue pie available in the market area for that location and then determine whether a new pharmacy can get a big enough slice of the pie to be successful. It’s simple to understand but getting there is not.
There are many factors to consider when preparing a pharmacy feasibility study; including ones that you would not find in any available census data. Things like current traffic patterns, knowledge of where the surrounding population currently shops, where the proposed location would pull customers from, granular marketing trends in that particular location and so on. The detailed information a professional pharmacy feasibility study will give you is not anything that you would want to try to compile on your own. More detail on that in a bit.
Let’s do a quick overview of the basics you need to know when having a pharmacy feasibility study conducted. There are two primary types of pharmacy feasibility studies. The first is for a pharmacy that may be opening inside of another existing business such as a grocery store or express clinic. The second would be for a stand-alone space that you plan to build, buy or lease.
The location inside another retail space will utilize store data such as transactions per day, foot traffic, square footage, amount of Medicaid business in the area, amount of repeat customers per week and any other tangible data that can be provided. This will give a more accurate picture of how successful a new pharmacy opening in this location would be. If the space is a grocery store for instance, their existing store data can be used to calculate and produce accurate financial projections for the first two years in business. Of course there are a few other factors that could impact success in that space such as the number of competitors in the area and the potential growth of that location, but the data provided by the grocery store owner along with prescription data from the area will allow for an accurate projection.
A feasibility study for a stand-alone location will be a bit more complicated and subjective. Here, you need to look closely at a variety of factors such as trade area population, demographics of that population, competition in the area, major employers, ease of access, etc. Sometimes the trade area is rather obvious, and sometimes not so much. Thus, the first step in this type of pharmacy feasibility study is to define the trade area, which will be unique to the geographic area being analyzed. For instance, the trade area in an urban setting may be only a few blocks. Whereas in a suburban or rural area, it could be several miles.
After determining the trade area, you can then determine the population of that area, including the demographics. The pharmacy feasibility professional conducting the study will use the relevant prescription data for the area by age, demographics and region. Using this information they will be able to calculate the total dollars spent on prescription drugs within the defined trade area per year.
Once they have that number, they can then determine what is considered a break-even point in terms of revenue. Industry data suggests that the break-even point for most independent pharmacies in the U.S. is $2Million in sales annually. To calculate properly you would take the breakeven number and divide it into the total dollars spent on prescription drugs within the defined trade area per year. This will approximate the maximum number of pharmacies that could operate within the defined trade area at a breakeven point. Compare that number to the actual number of pharmacies open in the trade area and then add your new pharmacy to the actual number of pharmacies in the area. If the total number is over what the area can support, there may not be enough of the pie to go around and you will need some major competitive advantages to make this location work. If it is under the total number the area can support, then that is one major factor in your favor. For example, if there is $20Million spent on prescription drugs in a particular trade area, assuming the $2Million break-even point, 10 pharmacies could operate at break-even (assuming an even spread in customer spending at each location). If your new pharmacy is only the 8th pharmacy in that area, then you have a better opportunity of capturing enough revenue to sustain the business and give you a healthy income. If however, you would be the 11th pharmacy going into that area, it is going to be harder to get enough residents to change their buying habits and spend that money at your pharmacy and actually make a profit. Your best bet maybe to either find another location in a different area or buy an existing pharmacy that may be for sale in that area. Obviously, there are many other factors than just the number of pharmacies in an area, but it is a good starting point.
The final and best advice we can give would be to hire an experienced professional pharmacy feasibility company to do a proper evaluation on your location. Spending money up front to do a pharmacy feasibility study is like an insurance policy that can save you not only lots of sleepless nights and stressful days but also hundreds of thousands of dollars (maybe millions).
Why you should consider hiring PRS to assist with your venture.
If you want to own an independent pharmacy and think you have the perfect location, consider working with an expert in Pharmacy Brokerage, Valuations and Feasibility Studies…PRS Pharmacy Services. PRS is the ONLY pharmacy ownership and brokerage consultant endorsed by NCPA, the Federation of Pharmacy Networks and over twenty Buying Groups representing more than 15,000 independent pharmacies. Why? Unlike some companies that claim to be the experts, we actually are, and our vast experience in a variety of unique situations make us the BRAND name in Pharmacy Consulting, Compliance and Brokerage. To date, PRS has sold, transferred, or opened over 500 independent pharmacies and has worked in all 50 states. We are fully insured, licensed and accredited. We invite you to compare us to our competition and see for yourself.
Contact PRS today if you want to realize your dream of opening or buying a pharmacy. We would love the opportunity to help you!
Written by Scott Weaver, R.Ph.
Scott is a registered pharmacist and an Accredited Business Intermediary. His education and decades of experience working in and helping independent pharmacies would be invaluable to any new or existing pharmacy owner and a must have for any non-pharmacist business owner looking to buy a pharmacy. He is the current VP of Pharmacy at PRS and conducts seminars on various pharmacy ownership topics for numerous trade organizations and groups every year.