How Much To Pay

Medici Capital recently developed a new measure for use in assessing fairness and equity of tenancy arrangements. Following publication of the approach in the PharmacyNews arising from my presentation at the 2007 APP, a major clothing manufacturer/retailer has adopted the Medici Capital measure for all its rent negotiations worldwide. The measure is a new approach to an age old problem.

Who takes the risk? Whose business is it?

Most pharmacy owners and managers know that pharmacy rents and occupancy costs are a significant and increasing cost. Generally occupancy costs are the third highest expense (after Cost of Goods & Salaries). In some locations, they may be the second highest expense.

Pharmacy often pays the highest rent in a centre!

Based on Medici Capital data the 2006 Australian Average Pharmacy Rent & Outgoings per square metre per annum was $522.54 (95% confidence interval ranges from $479 to $566) and the Average Rent % of Turnover 3.97% (95% confidence interval ranges from 3.61% to 4.33%).

Rent & Outgoings per square metre

The distribution of rents is highly skewed, with a few pharmacies paying well above the average rent and outgoings of $523. Any industry benchmark analysis is highly misleading, as the median (50% mark $406) is significantly lower than the average. Chart 1 illustrates the rent and outgoings per square metre. In simple terms, the vast majority of pharmacies pay less than the average, and the average is skewed by a number of pharmacists that pay extraordinarily high rates of occupancy costs - up to 6 times the average.

Any effort to bring pharmacy rents up to the average is misguided. Landlords should be examining industry median levels as well as averages to make a fairer assessment. Any alternative approach places enormous pressure on the viability of such businesses.