Portfolio: Mekong and Pharmacity

When Chris Blank is asked about his vision for Pharmacity, the drugstore chain he founded in Vietnam in 2011, he responds with three apparently unrelated questions of his own. The first is, "What's your favorite soft drink?" and the follow-ups simply ask for number two and three.

No matter how surprised they are by the sudden change of subject, most people can give the first two answers right away, often naming two universally known brands like Coca-Cola or Sprite. But the third choice reveals a universal truth about consumers' fickle tastes – not so much in what the answer is, but in how the seemingly obvious question always throws his respondents.

"Every person that I've ever asked this question to cannot name the third one off the top of their heads – they have to seriously consider it," says Blank. "I think that goes for drugstore chains too. It's very important for Pharmacity to remain top of mind to consumers, and to do that you've got to be the number one or two."

But for a 27-year-old foreigner to build a market-leading pharmacy chain in Vietnam would take more than determination. Blank knew he needed guidance from a partner that had been there before, and Mekong Capital believed it could apply knowledge gleaned from past experiences developing homegrown retail brands at Pharmacity. Over the last two years, the firm has helped Blank refine his vision and unlock his company's growth potential. Now it is poised for the next stage of expansion.

Exception to the rule

Blank's initial approach to Mekong did not come at random. The entrepreneur was already acquainted with Chris Freund, Mekong's founding partner, who had backed his company in its first years, and he had asked Freund's advice several times as the first few stores struggled to gain a foothold. By 2017 Pharmacity had 41 outlets in Ho Chi Minh City and Blank felt a formal relationship with an institutional investor could help the company's growth more than his personal bond with Freund.

For Mekong, it represented an enticing opportunity to enter a fragmented, inefficient market that lacked a true national leader. A 2017 report by the International Journal of Environmental Research & Public Health had projected that per capita drug spending in Vietnam, which stood at $44 in 2015, would reach $85 in 2020 and $163 by 2025. It also found that consumers had a plethora of options to get drugs, with around 57,000 retail pharmacies in 2017. This corresponded to a ratio of 6.6 outlets per 10,000 people nationwide, and higher in urban areas – 45 per 10,000 in Ho Chi Minh City, for example. 

With the market already so crowded, opening another outlet might seem like a long shot. But Blank believed that far from being spoiled for choice, customers were frustrated with the overabundance of family-owned shops and ready for a chain that could offer a consistent experience nationwide. In this environment, opening 100 stores might offer a better chance than offering one.

"This is one of those retail segments where there's a clear argument for economies of scale. As Pharmacity scales up the company will have much more purchasing power and better credit terms from vendors and will be able to get better marketing contributions from vendors as well as brand owners," says Chad Ovel, a partner at Mekong and another of Pharmacity's angel investors.

Winning over consumers meant giving Pharmacity an identity that would stand out from the crowd. Blank believed the best way to achieve this was through design. Unlike the cramped, poorly laid-out, and dimly lit family shops that most Vietnamese associated with pharmacies, Pharmacity took its lead from overseas brands like Guardian and Walgreens with spacious aisles and a wide range of product types. Personal hygiene products, snacks, and beverages sit on the shelves alongside medicine. 

In addition to borrowing design elements from overseas counterparts, outlets had to include certain elements that are expected by Vietnamese customers, such as a window facing the street where motorbike riders can stop for quick transactions or even consultations with pharmacists. Pharmacity embraced this concept and took it to the next level: a wide range of products are placed in view of this window so that drivers will be tempted to get off their bikes and go inside to buy more.

A reputation for integrity was just as important as design to this question of identity. Traditional Vietnamese pharmacies tend to operate with little transparency in pricing and sourcing of their products, which most consumers accept because they see little choice. But in his previous job as a senior account executive at stock brokerage Ho Chi Minh City Securities Corporation, Blank had seen how strongly customers responded to a financial services provider that didn't take their trust for granted. He felt it was time for someone to offer the same kind of openness in the pharmacy space.

"When I started we were number 87 out of nearly 100 in the brokerage market, and by the time I left we were number one," Blank says. "And the way that we got to the number one position was by doing something that nobody else was doing at that time: bringing integrity to brokerage. So when I saw an opportunity to get into the pharmacy space in Vietnam, I thought that I could win this market by bringing integrity, because that's how we got to number one in my last company."

Staffing up

By 2017 it was clear to Mekong's leadership that Blank had done his homework, even visiting other consumer businesses outside of working hours to measure their drive-through windows, and they were impressed with the company's initial growth. 

But there was still plenty of work to be done preparing the chain for further expansion, particularly in improving the leadership team, and the private equity firm felt it could provide an edge that no other financial or strategic partner could copy. Seeing a chance to build another leading domestic retail brand as it had a decade earlier with Mobile World in consumer electronics, Mekong agreed to provide an undisclosed amount of capital in October 2017.

"We've had great experience building modern trade retail companies in this country, in the restaurant sector, in mobile phones and electronics, and in jewelry," says Ovel. "We were very attracted by the high level of fragmentation in pharmacy retail, but more importantly Chris had a very big vision to grow the largest modern pharmacy retail company in Vietnam, and to do it with integrity."

An early priority for Mekong was establishing spheres of influence for the firm and Pharmacity's management; this is helpful in Mekong's growth investments to ensure that the founder never feels as though the GP is overstepping its bounds. In the case of Pharmacity, Mekong decided to use its overseas and domestic networks to recruit new talent for the management team that would be very difficult for Blank to find on his own.

Mekong estimates that 70% of Pharmacity's senior management team was hired on its recommendation, including a merchandising director previously employed at UK-based pharmacy chain Boots, and directors of human resources and retail operations with strong Vietnam retail experience. However, the private equity firm is careful not to take too much initiative, for fear of pushing the relationship in an unhealthy direction.

"We start with the concept that we are not investors, we are their partners. We can work with them to create the vision and provide any necessary consulting or coaching, but at the end of the day we need them to do it by themselves," says Nguyen Thi Minh Giang, Mekong's director of talent and culture. "We don't want them to rely on us, because when we complete our exit we want them to be fully confident to continue growing the business without our involvement."

Mekong also pushed for the addition of an independent director to the board of Pharmacity. This is unusual practice in Vietnamese companies, but it was seen as essential for providing an honest, outsider's opinion. In response, Blank brought in the co-founder and CEO of Peru's largest pharmacy chain, who is credited with providing crucial guidance as Pharmacity implements an aggressive new growth plan.

By the end of 2017, the store count hit 70. Since then, the company has expanded more rapidly: it surpassed 150 outlets last year and recently celebrated the launch of number 200. Meanwhile, average basket value increased from VND70,000 ($2.99) to VND130,000 in 2018, and the Extracares customer loyalty program added its millionth customer earlier this year.

On the back of this strong performance, Blank and the management team decided in early 2019 to ramp up the growth plans. The goal is to reach 1,000 in all 53 provinces in Vietnam within 1,000 days. At present, the company is present in five provinces, with the vast majority of its locations in Ho Chi Minh City.

Competitive threats

The urgency to capture nationwide consumer mindshare as soon as possible is driven as much by external threats as by previous success. Inspired by the rapid expansion of Pharmacity, several new challengers have emerged. The most formidable of these are Mobile World and FPT Retail, both of which acquired pharmaceutical chains last year with the aim of surpassing Pharmacity.

"When Pharmacity was growing from 10 stores to 30, there were still a lot of skeptics in the market that someone could actually achieve a pharmacy chain of scale and make money," Ovel says. "We were confident that we could make it work, and we scaled up very quickly, but we didn't expect there to be new entrants so soon on the back of our rapid growth."

Neither of the new entrants is considered a threat right now. Mobile World is currently focused on expanding its grocery business and has made little investment in the pharmacy chain so far, while FPT has opened several dozen new stores but is said to have struggled to build revenue due to an outdated store design and limited product offering. However, eventually both are expected to become major players, making it vital that Pharmacity consolidate its early-mover advantage.

Though he is conscious of the growing challenge to his company, Blank also sees the new entrants in the market as a validation of his original thesis. Not only do consumers find Pharmacity's model appealing – even domestic retail giants are maneuvering for position in a space that wouldn't exist without his company.

"It's actually quite an exciting time. It's exciting for consumers because they will soon have multiple choices for modern retail pharmacy rather than just one choice," says Blank. "It's also exciting from our perspective, because many of the new regulations coming down the line are expected to be supportive of modern retail pharmacy chains."

Geographic expansion is not the only card Pharmacity can play in the pursuit of consolidation. The company is also working on increasing its stickiness by broadening its ecosystem through new digital products, like a smart phone app that gives reminders to pick up or refill medications, or links to the customer's rewards program membership.

Outside capital is still essential to these growth plans and another funding round is scheduled for later this year. But the company expects to outgrow this dependence in the near term: many of its stores are already profitable on a standalone basis, and management hopes to show a profit on a corporate level by the end of the year despite the previous investments in expansion.

If profit can be maintained, Pharmacity will be in a strong position for an IPO in the next two years, once the 1,000-day plan is complete. This is the preferred exit scenario for both Mekong and company management, though a sale to a foreign or domestic strategic buyer is another possibility. Both parties hope that when the time comes to exit, Pharmacity will be recognized as both the originator of modern pharmacy retail in Vietnam and its best operator.

"Considering the fact that we've been doing this for nearly eight years now, we've got a lot of knowhow built up," Blank says. "Of course, anybody could come and disrupt that, but we've got a significant head start over everybody else, and we're going to keep going at the same pace or faster so that we can remain competitive."   

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• Topics
• Southeast Asia
• Consumer
• Healthcare
• Expansion
• Vietnam
• Mekong Capital
• Pharmaceuticals