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When the Ontario government hands them lemons, Loblaw will make lemonade.

Loblaw has crunched the numbers and anticipates that they can still come out on top despite the low margins on generic prescription sales resulting from government reforms.

A new strategy

Loblaw announced on May 4^th that they will extending their hours and services at most of their 500 in-store pharmacies, and more than double the number of onsite medical clinics to capture customers who are shopping around for a provider that offers the service they seek.

This is thanks to the droves of customers they predict will come their way from smaller non-diversified pharmacies who can no longer make a go of it, and larger players such as Shoppers Drug Mart, who have driven their customers away by cutting their hours and service.

Their strategy assumes that the customer will drop off their prescription at the Loblaw pharmacy and then browse the rest of the store, picking up higher margin items such as health and beauty products, or other grocery items.  They are betting that these sales will more than make up for any losses on the prescription side.  To minimize costs, Loblaw will be instituting automatic pill counting machines.

At what cost?

This development raises broader questions. If Loblaw is correct it points to a fundamental change in how we as consumers will be able to purchase prescription drugs.  We are shifting from a market of many players of different sizes with varying levels of service to a few large players who control the dispensing of drugs in Ontario. 

Will oligopolistic behaviour ensue?  Will these larger players raise their dispensing fees to increase their margins, and if so will private insurance companies react?  Or will they exercise their market power towards the generic drug manufacturers, to get a better price in return for exclusivity?

Health Minister Deb Matthews is reportedly pleased with Loblaw’s plans, but is the Ontario government sacrificing service in the name of cost? What will become of small pharmacies?  Or underserviced areas where there is no Shoppers or Loblaw?

Pharmacies of all sizes are fighting back with an aggressive campaign against Liberal MPPs including radio ads, mailings and a website portraying the elimination of professional allowances as “cuts to frontline healthcare”.   It will be interesting to see what the public and government response is to such an overtly negative campaign.

One thing is for sure, we will see some innovative pricing strategies resulting from the reforms.

For more background on this issue, see my post “Generic drug manufacturers are the key to solving pharmacy woes”.

Someone’s ears must be burning!  Since my last post (Consider exchange rate risk when contemplating foreign investments), RBC announced that it is now offering a US dollar-denominated RRSP account through its online brokerage, RBC Direct Investing, with several other banks looking to do the same.  (See the last page of their Spring 2010 Newsletter)

The advantage of these new accounts is that you only need to do the conversion from Canadian to US funds once.  Then you can buy and sell US dollar denominated stocks, bonds, etc. without worrying about exchange rate fluctuations, because your US dollars will remain US dollars until you decide to convert them back to Canadian. 

RBC will also be offering such opportunities in its Registered Retirement Income Funds (RRIF) and Tax Free Savings Accounts (TSFA) as well.

No word on other currencies being considered for this type of account, but given our proximity and knowledge of the US economy the US is a logical first choice.

For more information on these developments see Rob Carrick’s article “Online brokers lower cost of U.S. stocks in RRSPs.”

Opportunities abound to use international investments when saving for retirement.  But even the most successful investment can be impacted by currency fluctuations.

The foreign content limit for RRSPs was eliminated in the 2005 Federal Budget, allowing Canadians further diversification in their retirement portfolio.  With this opportunity however came additional risk.

A simple example

The impact of currency fluctuations can be seen in the following example. Our fictitious friend Jane decides to purchase shares in Coach Inc., because she loves Coach purses and believes that the company’s stock will increase dramatically.  She buys 100 shares at $11.80US on March 6, 2009. 

The exchange rate on that day is $1.2863, so the stocks cost her $1,517.83CDN.  For simplicity we will ignore dividends and brokerage fees.

On January 9^th 2010 Jane decides to sell her Coach shares which have risen to $37.27US per share yielding $3,727US, a $2,547US or 216% gain. The exchange rate on that day is $1.0344 meaning the value of the Canadian dollar vs. the US dollar has risen since she purchased her shares, making her US dollar denominated stocks worth less Canadian dollars.  Therefore in Canadian dollars her stocks on sale were worth $3,855.21CDN, a $2,337.37CDN or 154% gain.

Without exchange rate fluctuations, her gain would have been $3,276.20CDN, which means she lost $938.84CDN due purely to changes in the relative value of the Canadian dollar vis a vis the US dollar.

Mitigating exchange rate risk

The risk isn’t always downside risk – one can gain on the exchange rate as well when the foreign currency appreciates relative to the Canadian dollar.  However, when thinking about investments denominated in foreign currencies, one should include exchange risk when assessing their overall relative risk tolerance.

Relatively small holdings such as an individual’s RRSPs cannot support hedging operations akin to those that large institutions and multinationals undertake, so what’s a little guy to do?   Educate yourself about currencies – read the forecasts and consider them in whether it makes sense to purchase the stock, and when it makes sense to sell.  Then keep an eye on the exchange rate and time your sale to optimize a) the price of the stock, and b) the currency to maximize your overall return.  Build this “cost” into your equation, much like you would your brokerage fees, or capital gains…it’s just a little harder to estimate.

Yes, foreign investments offer a wealth of opportunity for Canadians.  With the proper consideration of all of the risks, we can make better informed choices.

By now we’ve all heard about the Ontario Government’s plan to lower prescription drug prices by banning professional allowances paid by generic drug manufacturers to pharmacies.

Drug companies provide these allowances or discounts to pharmacies in return for exclusively stocking their brand of generic drugs.  It is subsequently built into the price that is passed on to the consumer.

A significant portion of a pharmacy’s revenue comes from these allowances. This is particularly so for smaller independents then larger corporate chains who depend less on their prescription related revenue.

What is not being said however is that the generic drug companies also stand to lose as a result of the reforms.  Without the professional allowance arrangement they will lose their exclusivity with pharmacies.  Therefore the drug companies have a strong incentive to find a solution to the pharmacies’ perceived loss as a result of the Ontario Government’s reforms.

How will the generic drug manufacturers address this issue?  They might consider borrowing a trick or two from their name-brand cousins.

Brand name drug companies already deal with a similar situation vis a vis physicians, who are subject to OHIP regulations and the Canada Health Act.  In return for prescribing their name-brand drugs, physicians receive incentives including free samples, conferences and trips, and research funding.

I think in the months to come we will see the generic drug companies using some innovative pricing strategies to once again secure pharmacies’ allegiance.

One final though.  What is the Ontario Government doing to lower the price of name-brand drugs?

Recently I picked up a small box of Godiva truffles to share with my spouse.  What a disappointment.  They were hard and the flavour was inferior.  At a price of $3.33 per truffle I felt I had been ripped off.  You see, truffles from Eitelbach at $1.50 per truffle are heaven in a box.  Their truffles are fresh and they offer a nice variety of flavours.  Soma offers its truffles at $2.00 per and are also excellent.

With other better quality truffles available, how can Godiva sell theirs at premium prices?

Godiva is held by a Turkish confectioner Ülker Bisküvi Sanayi, who purchased the company in 2008 from Campbell Soup which previously held it for 40 years.  Eitelbach Baumkuchen Pastries Ltd. is a small Toronto based privately held company opened in 1989 and has two retail locations and an on-line store shipping to Canada and the US.  Soma Chocolatemaker is owned by David Castellan, a former executive pastry chef at Oliver Bonacini restaurants. It opened in 2003 and has one retail location in Toronto’s Distillery District and online ordering shipping in Canada only.

How does Godiva do it?

The majority of chocolate consumers do not eat fine chocolate on a regular basis, if at all. So when it comes to special occasions or communicating thoughts of affection, Godiva is seen as a safe bet.

So why did I purchase the Godiva truffles?  This was a spur of the moment purchase, with no Soma or an Eitelbach in the vicinity and no time to order from their websites.   I relied on my perception of Godiva chocolates, the perceived perception my spouse would have, and the reassurance that the higher price provided that I was buying quality chocolate.

But because I have tasted quality chocolate, I knew instantly on tasting the Godiva truffles that I had been had.

That is the key to successful marketing – having customers believe a desired attribute about your product.  We believe that Godiva, Soma, and Eitelbach offer quality truffles.  In the latter two cases I believe it to be true because I’ve tasted them and know they are good quality chocolate.  In the case of Godiva, I was relying on truth in marketing and appropriate pricing. 

I would liken Godiva’s strategy to Starbucks’ (see post “The Starbucks Strategy”) in that 15-20 years ago before relatively good 70% dark chocolate graced the shelves of every grocery and drug store in the land, Godiva was relatively speaking, fine chocolate.  However as the years passed and demand for good chocolate increased, Godiva opted to pursue a volume strategy, while getting by on status quo quality.  

This brings me to my last point – making the customer believe something that you can’t or won’t deliver on leaves a lasting negative impression.  The worst kind of PR a company can have.  And while an entity as large as Godiva may be able to withstand a some disappointed customers, many small businesses whose reach is a great deal smaller and depend on repeat business, can’t. 

The moral of this tale?  Tell an honest story, deliver on your promises, and price appropriately.

The venerable $20 bill – probably the most popular bill these days thanks to ATMs.  But how do they impact small businesses?   My local dry cleaner and gelato place offer two good examples of the problems $20s cause.

Both of these companies do a lot of cash business, often with only 1 employee in the store at a time.  So if they have to give change for a twenty or larger denomination bill on a regular basis, they can be in a spot change-wise in pretty short order. 

I recall one morning walking into my drycleaner when another customer was giving the staff person an extremely hard time because she wouldn’t accept a $50 bill for what was a small order.   She explained that she simply couldn’t make change for such a large bill.  He finally coughed up something more appropriate, and left with some not so nice parting words.  I subsequently made her day by giving her exact change!  She said to me that if she was to accept such a large bill from the gentleman, she’d be out of change in no time with no one to mind the store while she went to the bank to replenish her float.

Then other day I visited a local gelato place that we like to celebrate the warm weather with our first taste of the season.  All I had was a $20.  Our order was just under $10 so I felt badly and mention the same to the woman who served me.  She thanked me for saying so and asked me to spread the sentiment.  Being Easter weekend, she felt it would be a challenge to make it through till the following Tuesday without feeling the pinch.

There are usually many opportunities to use big bills, at grocery stores and other large corporate stores that have plenty of float from which to draw on.  Not even considering the counterfeiting issue, using small bills when patronizing small businesses makes their lives a little easier, and isn’t that part of supporting our community?  I think so.

A few months ago we commented on Starbucks’ strategy, (see The Starbucks Strategy) and mentioned that it had introduced a new line of baked goods in the US.  On a recent trip south of the border I had the opportunity sample some of the new offerings.  I am pleased to report that of the items sampled - the new chocolate chunk cookie, double chocolate brownie and the iced lemon pound cake - all were a vast improvement over the offerings in Canada.  Sad to report however that I did not spy these offerings in the case at my local Starbucks on returing home.

Now to work on the coffee!

Here is an update to an earlier post “Real Estate Transactions: When price doesn’t equal perceived value”.

At their annual general meeting yesterday, Canadian Real Estate Association (CREA) members voted in favour of allowing agents to post listings on its MLS system on behalf of sellers for a flat fee. Melanie Aitken, Canada’s Competition Commissioner said it didn’t go far enough, as it keeps the power in CREA member’s hands, squelching innovation.

CREA has until March 25 to provide a response to the Competition Commissioner’s application to the Competition Tribunal.

See the Globe and Mail story: “No Sale: Realtors’ plan gets bad review” by Steve Ladurantaye.

What makes a customer shop at one hardware store vs. another? I have an example where price was not a deciding factor.

There are two hardware stores, Rona and Home Depot in close proximity to my home. Both stores offered the same or similar brands of toilets. So what if anything would determine where I made my purchase?

The deciding factor was service. A toilet is heavy and I was pretty sure that I wouldn’t be able to lift it, and even if I could I didn’t want to risk hurting my back.

The following table contains a comparison of the service I experienced at the two stores:

 I wonder if the two stores realize the vast difference in service they are offering.  The gradual move to the big box store format has brought the customer more selection and better prices for some items, but it seems to have come at a cost – a loss of knowledgeable service.

And why not? Labour is a very expensive input. So minimizing its cost by hiring the bare minimum on a part time basis makes economic sense, because the savings can then be passed on to the consumers as a means to draw them into the store.  This may work on some items and for some customers.  But for other customers, whose time is at a premium or knowledge of all things hardware is precious little, or physical strength lacking, the lowest price isn’t as important, because the customer is willing to pay a bit more for the service they need.

Rona has chosen customer service as its value proposition.  This is evident from the corporate values published on their website, which lists customer service as its top priority.  Home Depot lists excellent customer service at #4.  From my experience, both live up to their values.

The preceeding is but one example of a customer purchase – but it gives pause to consider the psychology behind customer purchase decisions. Cost is not always the deciding factor.

Companies in the midst of the transition to International Financial Reporting Standards (IFRS) from the current Canadian GAAP are required to make detailed disclosures throughout the process. The Ontario Securities Commission (OSC) is monitoring the transition, and has found that these disclosures are not always up to snuff.

The CICA had written a good summary of the issue and provides IFRS resources for firms. The OSC also offers resources which provide insights as to what is expected in terms of disclosure.  See the following links:

CICA Summary:

http://www.cica.ca/transition/intheloop/

OCS News Release:

http://www.osc.gov.on.ca/en/NewsEvents_nr_20100205_52-718_osc-ifrs-transition.htm