CHAINS and BUSINESS

New franchise contract draws mixed reactions

Medicine Shoppe International recently offered franchisees a new contract that includes a reduction in royalty fees. Still, the contract has not drawn acclaim from all franchisees.

Todd Pendergraft, D.Ph., a Medicine Shoppe owner in Broken Arrow, Okla., and acting president of The Pharmacy Franchise Owners Association (PFOA), a six-month-old organization that tallies 110 Medicine Shoppe members, isn't in favor of the new contract because it involves the stipulation that franchisees must extend their contract by 10 years in order to receive the reduction in royalty fees. Pendergraft said a significant number of owners already pay a royalty fee of 5.5% of gross sales as well as an additional fee that runs as high as $200 to participate in a marketing fund.

The new contract reduces the continuing license (or royalty) fee to 4.1% and includes 0.8% for a business development fund covering store technology and store improvements, for the remainder of a franchisee's contract, if the franchisee signs on for another 10 years at 2.2% in royalty fees and 0.8% for the business development fund.

Pendergraft said that while he believes there is value in the Medicine Shoppe franchise system, the company hasn't made adjustments for decreasing margins on third-party Rxs, the increasing amount of third-party prescriptions pharmacists fill, and fewer cash prescriptions. "This new agreement is a move in the right direction since there's a decrease in the amount of royalty, but I don't know if it's anywhere close to a large enough move in the right direction to help sustain this system," he said.

Ron Robichaux, treasurer and member of the board of directors of PFOA and owner of a Medicine Shoppe in Lockport, La., echoed Pendergraft's sentiments. "Our royalty fee has become burdensome. The majority of stores are paying 5.5% royalty, and many stores can't afford it anymore. With this 10-year extension they are giving you a little bit up front, but then they are going to take back a triple or quadruple amount in the end," he said.

Alan Arnowitz, R.Ph., owner of a Medicine Shoppe in Hackensack, N.J., for 26 years, is also disenchanted. "When I renewed seven years ago, I thought it was the right thing to do for a number of reasons, most of which turned out to be wrong. I don't see that the new contract is any significant improvement. We've been hollering for years that with third party, margins are razor thin. I fill prescriptions for expensive drugs where Medicine Shoppe makes more money than I do. Something's wrong. I'm doing all the work and taking all the risk and they are doing nothing but letting me use their name. The franchisees have been screaming for years that they have to lower their royalty fees. You can't pay 4%, 5%, or 5.5% in today's marketplace. You are not making those numbers with third parties reimbursing at AWP minus 14%, 15%, and 16%. The Cardinal contract is good, but it's not that good. We were holding out hope that this new contract was going to make a significant difference."

High distribution costs

In a separate but related development, PFOA is in negotiations with at least two wholesalers—McKesson and AmerisourceBergen —to enable members to get a better deal than they now do with Cardinal for drug distribution.

"We have discovered that in a number of circumstances the Medicine Shoppe contract with Cardinal for wholesale purchasing is not as competitive as it should be," said Pendergraft. "Those stores are paying more than necessary, especially based on the size of the group that Medicine Shoppe represents. The current Medicine Shoppe contract on generic products and the rebates we receive on generic products is also not as competitive as it should be," he added.

William Tatum, a Medicine Shoppe owner for 19 years in Suffolk, Va., and a member of PFOA, has already replaced Cardinal with McKesson and IPC, an Internet-based wholesaler, over a year ago. "I'm saving $800 a month. They were charging us more than they have to. When I first started looking for another deal, I found a better deal with Cardinal, but Cardinal wouldn't give me that deal because it said I was a Medicine Shoppe."

One franchisee who is positive about the future of Medicine Shoppe is Henry Gialanella, R.Ph. He is owner of a Medicine Shoppe in Andover, N.J.

At press time, Gialanella was optimistic about Medicine Shoppe's unveiling of a new common computerized platform at its annual conference in Anaheim, Calif. "We are now using 20 or more pharmacy computer systems. The new platform will be a communication system for the whole network, and it will enable Medicine Shoppe to obtain all the data from Rx claims that are transmitted. We're waiting to see more about this and what kind of deal they will offer with it," he said.

Gialanella also took a positive view of the new contract. "It's a first step on Medicine Shoppe's part. Rather than totally reject the proposal, I'd like to evaluate it a little more and see if we can come back and work with Medicine Shoppe to make some changes, rather than totally trashing it," he said.

Gialanella said he was informed that franchisees would be getting back most of the 0.8% fee for advertising, marketing, and store development, which includes technology. "We're looking for a better definition of the terms and who controls the money and how we get it back. They are working on trying to clarify some of these issues," he said.

Acknowledging that licensees are upset with the new licensing agreement because they've waited a long time for it and felt it wasn't as good a deal as could have been offered, Gialanella said, "I'm looking at it positively because it's the first time in Medicine Shoppe history that it's offered a reduction in royalties—4.1% is a decent reduction. I'd like to see them reduce the 0.8%."

Pendergraft said Cardinal's new contract has also become a bone of contention because it prohibits franchisees from opening a non-Medicine Shoppe business that offers programs or services similar to those offered or supported by Cardinal without Cardinal's permission.

Gialanella said Medicine Shoppe explained that the move is designed to prevent former franchisees from opening a competing pharmacy. "It does seem fair, but there are some licensees who have multiple stores that are not Medicine Shoppe and it's going to impact them," he said.

Joe Smith, R.Ph., owner of a Medicine Shoppe in Falls Church, Va., for 23 years, is one franchisee who believes that blaming the company is misguided. "[Franchisees] should attack some of the problems that hit us in the business sense—pharmacy benefit managers are one problem, and Canadian drugs are taking some of our business away."

Smith insisted that if franchisees weren't part of Medicine Shoppe, it would be difficult to survive without being part of another association or buying group for which there would also be a hefty fee. He pointed to membership fees for PFOA that are about $1,000 for three years.

"I prefer that people work within the system to try to get changes. They'd be far better supporting organizations that are trying to make changes in the profession, especially against the power of the PBMs. There are places to channel your frustrations that are positive," Smith said.

For the time being, Smith said he is finding satisfaction as a Medicine Shoppe pharmacist. "It's fulfilling to have a practice of pharmacy where your patients regard you as a professional as opposed to a place to pick up a commodity. You get that because, as a Medicine Shoppe, you are focusing 95% of your attention on Rxs and counseling. The front end is health and care, not health and beauty aids."

Response to charges

Ron Cook, MSI spokesman, who spoke to Drug Topics from Cardinal Health's Retail Business Conference (RBC) in Anaheim, Calif., confirmed that a common technology platform system, which consists of pharmacy management software and hardware, a complete point-of-sale, signature capture, and an in-store local area network, was unveiled to franchisees at the meeting. They will be able to sign up for the system within the next couple of months for an undisclosed fee.

Commenting on the new contract, Cook acknowledged that some licensees may have wanted a lower royalty rate, but he countered, "It's important for us to adequately fund the services they want to receive from the franchisor."

Cook said implementation of the business development fund (BDF) was precipitated by a survey of licensee satisfaction. "They wanted more resources to go for marketing, and this is the way we are going to bring about more dollars for marketing. The 0.8% will be spent on marketing, store technology, and store improvements. Franchisees will pay the 0.8% and Medicine Shoppe International will use that money for that purpose. In the past there was an advertising fund, but it was just a flat amount per month. The BDF will enable MSI to deliver the marketing value licensees are looking for," he said.

There are currently only two of Cardinal's Medicap franchisee owners who are members of PFOA. Cardinal acquired Medicap in January 2004 (Drug Topics, Jan. 12, 2004).

Pendergraft said his association has sent a letter to Medicine Shoppe to let it know the organization exists and that it wants to work with the franchisor. "We need to get to the table and discuss those problems and how we can work out a win-win situation between both systems," he said.

Sandra Levy

Sandra Levy. New franchise contract draws mixed reactions.

Drug Topics

Aug. 23, 2004;148:52.