All in one

In 1918, Leon Koffler came to Canada from Romania. At 47, he left two pharmacies to his son, who then lost one of them due to bad investment advice. Now, after cashing out from the Shoppers Drug Mart chain in Canada, the Koffler family operates a fast-growing chain of “3-in-1” drug stores in Poland, Israel and China. In an exclusive interview with WBJ Observer, the grandson and namesake of Leon Koffler, talks about the story behind his family business and the obstacles to global expansion. He discusses what makes the pharmacy business so appealing and what the future holds for the drug store business Interview by Beata Socha WBJ Observer: Pharmacies and drug stores have been a part of your family business for generations. How did it all begin? Leon Koffler: My grandfather, also named Leon, was a pharmacist who originally came from Romania. He immigrated to Canada in 1918. He passed away very young, at 47. He had only one son, Murray Koffler. My grandfather left my father two pharmacies in Toronto, of which one was lost to a gambling debt. It’s the classic story, even in those days. A very good friend of his came and said “I’ve got a great deal for you.” And the great deal was that the friend moved to Monte Carlo and my dad lost a pharmacy. The classic pharmacy in those days in the US and Canada was a combination of a pharmacy and a soda fountain – a counter that served soda and sometimes ice cream. The nickname for the man who stood behind this counter was a “jerk.” It was a very menial job for someone with no education. My dad was a pharmacist by profession so there was no way he was going to be called one. He decided to throw out the counter with food and sodas and instead he decided to adopt a concept that he had seen in the US: self-service grocery stores. He went down to meet with a company in the United States and after seeing what they were doing, he came back and said: “If they can do it in a grocery, I’m going to do it in the pharmacy business.” And then he created what was called the drug store – a combination of a pharmacy, OTC, toiletries and some other cosmetic items, etc. Would you say that he was the creator of the drug store concept? In Canada, he definitely was. He developed the self-service concept which was very unique in Canada. If we fast-forward to what the company is today, there are 1,300 Shoppers Drug Mart stores in Canada, and it’s not a family company any more. It is a public company. It has just been sold to a leading supermarket chain in Canada, Shoppers Drug Mart, for $12.5 billion. So what’s the story behind Super-Pharm? Were you the one who created the brand? Before I seriously got into the business I’d taken a trip like all young people do. I traveled through Eastern Europe. I took a trip from Stockholm to the southernmost part of the Sinai desert called Sharm el-Sheikh. Poland was among my first visits. One of my grandfathers came from Poland. It was 1973 and I was traveling with a good friend of mine. We spent two weeks traveling through Poland after we first came on a ferry to Gdańsk. Poland was a much different country in 1973 to what it is today. I visited every country in the Eastern Bloc and Poland stood out in my mind. It was a very unique experience for me. I came from a very sheltered democratic country. And Poland was the exact opposite. Then, I started working with my father in Shoppers Drug Mart Canada. I made a decision with him to leave the company and start up an international division of Shoppers Drug Mart, which actually never panned out. We ended up opening Super-Pharm on our own. In 1997 we were looking where we could do business in the European area. Because of different European regulations, it was difficult to open up a chain of pharmacies as we were used to, with no barriers to entry. Europe had all kinds of obstacles. In some countries, you can only open a pharmacy based on distance from other pharmacies. In others, either the owner has to be a pharmacist, or he could only open one pharmacy. Or, like in Paris, it’s done by population. For every 5,000 people you can have one pharmacy. In the former Eastern bloc there were no such barriers, so we started to study all the countries. I had a sort of favoritism towards Poland. And we dug into Poland very deeply. We said: This is going to be a great country. It was before the European Union accession. You already had a strong presence in Israel at the time, didn’t you? Yes, we already had a company in Israel which was pretty well-developed at the time. We had some 60 stores then, whereas we have 200 today. Then we made the strategic decision to come to Poland. We opened our first store in 2001, in Galeria Mokotów. We know that to develop a drug store you must invest a lot of money and it takes about seven years before you start making a profit. It takes a while to build a brand and for the consumer to learn the concept. The investment cost is high in terms of real estate and it’s also labor-intensive. Since the concept aims from the beginning to reach high sales, it starts with a high level of employment in order to provide high service at a professional level, which will be justified when the sales arrive. If you want to get to the top, you have to aim high. If you want to build a very productive short-term investment, with low salaries, you can, but eventually you stay at that level. Our partner at the time was looking for a much faster cash flow, while we were in it for the long haul. We wanted to accelerate investment, so we didn’t suit their strategy and we had to part ways. At the time, in the mid-2000s, hi-tech industries were booming and people were getting into much higher-return investments and our partner decided to go down that route. We had no problem with it. We were very confident about Poland’s future, and we continued on. The first year we had positive EBITDA was 2007. In 2008, we made profit for the first time, and since then it has gone up. Now, revenue is $270 million in Poland. It’s the highest revenue per sqm in the world. We have the highest revenue to sqm in all shopping malls in Poland. But it took time. And we know that each country will take time. Which brings more revenue: the pharmacy or the drug store? The pharmacy brings people and the other department brings profit. We know that with an aging population and longer life expectancy, people will consume many more drugs. It’s a huge burden on the government budget. In all the countries we are dealing with – Canada, US, Israel, Poland and China – we find that the direction of the health ministries which represent the government is to reduce the cost of medical care to the consumer. And we are right in the middle of that. We understand these policies and we look for ways to support the pharmacy. For us the pharmacy is the anchor of the business. And the only way for it to continue to provide high-quality medicines is for all the participants in the process to minimize their margins: the manufacturer, the wholesaler and the retailer – they all have to earn less. This is the only way. In order to do it, the retailer has to find other areas that will subsidize the medicines and bring profit. We’d love to make more profit on drugs but we understand this is the direction and under these circumstances we look for our advantage in mixing the concepts together. Besides, our intensive professional service is our competitive advantage. You do not see that many people on the floor anywhere else. One other advantage the concept offers is smoothing of the business cycle: in the winter, pharmacy business brings in more money, while in the summer it is toiletries, and in the holiday season the perfumery boosts revenue. So overall it is a smooth line – there might be some storms, but overall the ocean remains calm. How did you fare during the downturn? Poland had a very unique situation. We didn’t feel the crisis in Poland, we only had a bit of a slowdown in growth. Some problems, caused by mortgages denominated in the Swiss franc, came after the crisis. This created pressure on the Polish community, but it wasn’t part of the crisis. Super-Pharm is now re-entering the Chinese market. You first ventured there in 2005, then sold your pharmacies and now you’re moving back in. Why? China was blocked to foreign investors until two years ago. We were looking at China before, but in the past we couldn’t get a control position and we were looking for a partner. Eventually we were approached by a company that was working in one of the poorest regions of China, a southern province called Guizhou. The company got special approval from the local government of the province to have a control position. And they were looking for foreign know-how. We bought a 51 percent stake in the Chinese business in 2005. I remember that when we first came to this poor province there were no sidewalks. Today it is amazing, with lots of high-rise buildings. We had 30 pharmacies there which we started to convert to our system. We put in cosmetics, but not fragrances. Fragrances make up a very small part of the business in China, as the Chinese use very little fragrance and very little make-up. China is a country of skin care. So we put in our skin care products, shampoos, bathing products, etc. and we saw that sales increased fourfold compared to what they were before. We grew our business there but during that time our vision was to move to Beijing and Shanghai. These are the rich markets. Unfortunately, we were blocked as we only had permission to operate in that province. Our partner wanted to take control of the business so they bought us out in 2010. But then the law was changed in 2012, so we bought another chain, this time in Beijing. We’ve just obtained our licenses and we hope to start converting the stores in August. We also bought back the Super-Pharm brand which we sold in 2010. You say that the Chinese don’t buy a lot of make-up or perfume. What about Poles? What do they like? They like fragrance. They like make-up, skin care, baby products – everything. Polish consumers are very western-oriented. How competitive is the Polish market? From a competitive point of view, the Polish market is quite saturated with five-star competition. Then you also have these home-grown pharmacy chains spread all over the country. So the competitive environment is very strong. We believe in “let the best man win.” For us competition is the name of the game. What is your market share in Poland? It depends on how you look at us. If you look at us as a 3-in-1, we are at the top of the class. We are building a segment that we are the best in. If you look at any of the sectors of our market, if you take either the pharmacy business or the toiletries business separately, then in each of these markets there are competitors ahead of us. Douglas and Sephora have a much larger market share in cosmetics. Hopefully, as we grow we will overtake the competition in each segment. In the toiletries business, it is impossible due to the sheer scale of the supermarket chains. While in the pharmacy sectors, it’s pure numbers. Today we have 55 drug stores open, while there are a total of 13,000 pharmacies in Poland. What are your plans for the nearest future? We’re continually looking for locations in Poland, both in shopping centers and on high streets. High streets are quite difficult because our minimum size is larger than a local Polish pharmacy. So we are looking at other chains to purchase. It could be, say, a chain of shoe shops, which has 300-600 sqm stores. It’s only a real estate play. We’re not looking to get into another business. We hope that in the next 3-5 years we will be able to double the size of the company. We plan to have 100 pharmacies in 2017. Poland is our hub for Europe, China is the hub for the Far East. From China, we will expand to neighboring countries and Poland – it’s big enough for us to grow in, and then we will expand to the countries around it. Which countries are you looking at? The clearest goal was Ukraine, at least until recently. We will have to wait until everything stabilizes. How often do you visit Poland? As much as I can, which would be at least every month officially, and sometimes I come unofficially, just quietly on my own. I like to come to our stores unannounced to see how things are going. It has a positive effect on the business. We have a great relationship with our management level but it’s obvious that when we’re coming, they prepare.