WHEN beauty and pharmacy chain Priceline launched Olay's new anti-ageing regenerative cream four months ago, there was a sudden spike in sales.
Female customers trading down from established beauty brands had been snapping up cheaper alternative anti-ageing creams offered at pharmacies, says Stephen Roche, managing director of Australian Pharmaceutical Industries (API), which owns the Priceline brand.
Because of growing concerns about job insecurity and economic uncertainty, women shoppers started to trade down to buy more "value" beauty products, Mr Roche said.
"There is no let-up in lipstick sales, whatever the economic conditions, but there were certainly more women shoppers looking to buy value-priced beauty creams and make-up."
Lipstick sales are doing well across all Priceline stores, in line with the conventional cosmetic wisdom.
"Lipstick purchase is a given," he said. "Women will always spend on lipstick."
Priceline has bucked the economic malaise and retail downturn in more ways than one, with customer numbers rising, helped its loyalty program and the Rudd government's economic stimulus package.
Mr Roche said shampoos, toothpaste, body lotion and medicine were staple buys, and typically more recession-proof than discretionary spending on a new dress or a pair of high heels.
"Whatever the economic conditions, you still have to wash your hair," he said.
Priceline has 320 stores but Mr Roche plans to expand to 400 across the country by next year.
He has also spent some time redesigning Priceline stores so female customers have a better experience playing with beauty products at cosmetic stands, when they shop or fill medicine scrips.
"At the end of the day, I have little choice but to be a retailer, and more than 75 per cent of my customers who shop at Priceline are women."
Mr Roche will mark his third year as boss of API in August.
An embarrassing accounting blunder, which caused $17 million to disappear, happened before he took the helm.
He has been working overtime to repair some of the public relations damage caused by the debacle.
He has streamlined the business, making API essentially a drug distributor and retailer.
Several analysts are not very excited about the company because of supposedly poor disclosure standards.
"The company has always been cagey about disclosing details on how it is travelling, and you cannot really tell how the business is faring," said one analyst, who declined to be identified.
"While the company is well positioned for growth, the jury is still out regarding the company's ability to build shareholder value."
In a note to clients, Wise-owl.com analyst Tim Morris says healthcare is one of the few sectors with resilient earnings in the current economic downturn, but API's stock has lost more than half its value in the past 12 months.
Mr Roche responded that the company was well into a five-year turnaround, and by next year it hoped to expand its mid-mass market Priceline franchise. About 50 of the 400 stores would be company-owned.
However, the expansion program is going slower than originally planned, because of the economic downturn.
The Priceline business operates on margins of about 5-6 per cent and contributes 40 per cent to company profits.
The pharmacy distribution division has a much lower margin of about 2 per cent of revenue in an industry that is highly regulated by government.
Mr Roche said the company was investing $60m to improve its supply chain, with new warehouses for Brisbane, Melbourne and Sydney, which would cut the transportation time for restocking shelves at pharmacies and Priceline shops.
"We expect a 30 per cent return on this investment, and it will save a million kilometres in trucking products across the country," Mr Roche said.
The new warehouses are scheduled to be completed by July next year. Mr Roche said API's focus for the next three years was to reposition itself as the leading drug distributor, and that had been helped by its alliance with Alpha Pharm, the leading marketer of generic drugs.
He said API's share price had shown some improvement since the company delivered an 8.7 per cent lift in interim net profit to $6.7m, despite tough retail conditions.
"There are distinct signs of emerging confidence, but the real litmus test is unemployment.
"I'm not sure whether we have seen the full flow of unemployment figures.
"API has 12 months of solid, hard work to do before we know what the market will do.
"Our New Zealand business is embryonic. We have installed new management to lift performance, but it's never going to be a superstar -- just a solid performer."
Date: 2009-07-28
Source: http://www.theaustralian.news.com.au/business/story/0,28124,25736691-36418,00.html
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