Low-cost Tel Aviv Drugstore Becomes Bitter Pill for Rivals to Swallow

Adam Friedler and Ohad Sandler of the new Good Pharm chain say they have a strategy to undersell their bigger competitors, but it seems that at least some of the other players want to make sure it never happens.

Good Pharm founders Adam Friedler, left, and Ohad Sandler at their Tel Aviv store.
Moti Milrod

Adam Friedler and Ohad Sandler got an early lesson in the rough and tumble of Israeli retailing. Well before the young partners opened the doors of their first Good Pharm drugstore in Tel Aviv — where cosmetics, toiletries and many other products are all sold at less than 10 shekels ($2.66) — their rivals were all ready to pounce.

“The moment the media reported that we were opening a chain where everything is for sale for no more than 10 shekels, the problems with competitors started. Even now, some competitors are still causing us and our suppliers problems,” says Friedler, 31, as he sits among empty boxes behind his store, joined by Sandler, 30.

Together, the pair own 51% of Good Pharm, with the balance owned by the U.S. Grass family — the founders of the Rite Aid pharmacy chain, which Walgreens agreed to buy earlier this year for $17.2 billion.

Are you are suggesting that there are competitors threatening suppliers who want to work with you?

Friedler: “Let’s say there’s a nail-clipper supplier, 70% of whose sales are with one major chain — and then he starts selling to us. Then the same chain suddenly comes to him and says that it wants to buy less merchandise from him. [The supplier] calls us and says that he suddenly has no more merchandise and that he can’t work with us — but privately he tells us the [real] reason. The stories I can tell could fill entire articles, but I prefer not to.”

He displays a text message he received from a supplier who suddenly said he could no longer do business with Good Pharm. The SMS added that Friedler would understand why when they meet face-to-face and the supplier can explain everything.

Have you been contacted by Super-Pharm, the country’s largest drugstore retailer? Have they asked to visit your store?

Friedler: “They come to visit, and that’s all right. We don’t want war — war isn’t our business. We act within the confines of the law, and we also expect all of the players around us to do the same. As long as they do, everything will be all right.”

Have there been cases where you’ve felt that suppliers were pressured not work with you?

Sandler: “There have been cases.”

Friedler: “Enough. Let’s not get into this any further.”

Little Good Pharm, with one store up and running and another on the way, shouldn’t concern the country’s major pharmacy chains. On the other hand, the fact that it portrays itself as a drugstore chain and sometimes compares its prices to Super-Pharm’s — and against the backdrop of media coverage showing that Good Pharm charges less — raise questions over the fairness of the other chains’ pricing.

Feeling the pressure?

TheMarker did a price comparison when the first Good Pharm store opened on King George Street in central Tel Aviv, which showed that the upstart retailer was cheaper than Super-Pharm on nine of 10 items checked. Super-Pharm declined to comment for this article.

Is Super-Pharm feeling the pressure from you?

The opening day of the Good Pharm drugstore in Tel Aviv. Everything in the store costs 10 shekels.
Ofer Vaknin

Friedler: “The more that suppliers tell me, ‘We have a problem working with you. Let’s talk,’ I understand that [Super-Pharm] is under pressure. They purportedly shouldn’t be afraid of two kids with a store, but when people see the difference in price between 22 shekels there and 10 shekels at our store, somebody needs to take notice. Even salespeople at the nearby AM:PM [convenience store] shop at our store, even though they get an employee discount.”

“People see the [price] differences between us and the other pharmacy chains and ask themselves, ‘Have they been stealing from me up till now?’” says Sandler, pointing out supporting evidence as we move around the store.

“Here we have our ‘power wall’ with the biggest-selling products. For example, Axe extra-large deodorant, which they don’t sell for under 25 shekels, costs 10 shekels here [and had been selling at Super-Pharm for 31.90 shekels]. Indola hair color dye, which hairstylists come here to buy — before we opened this store it cost 22 shekels at Super-Pharm. They lowered it for a period after the opening, and then increased the price again.” (It is now selling for 19.90 shekels at Super-Pharm.)

“Oral-B dental floss used to cost 27 shekels everywhere [and was selling for 21.90 at Super-Pharm]. We are selling eyeglasses for 10 shekels, while the competing chains are selling them for 60 to 70 shekels and for the promotional price of two for 100 shekels. Even the consumers are sometimes skeptical regarding our prices. They turn over the products and say, ‘It’s expired.’ And then we explain that that’s the production date. A lot of times, people ask how we can sell at such a price and whether it is stolen merchandise.”

What’s your business model?

Friedler: “We work on a gross profit margin of 25% to 30%. We buy items at an average of 7 shekels and sell them for an average of 9 to 10 shekels. Our model is to sell in volume at a profit that is not large, and we’ve been profitable since the first day. To turn a profit, we need to sell at least 2,000 items a day — whereas now we’re selling about 4,400 items a day.”

Good Pharm reports that it sold 140,000 items at an average price of 9 shekels in the first 32 days of business, which amounts to 1.26 million shekels in revenue. With 24 business days on average every month, that works out to about 945,000 shekels in monthly sales. The partners’ claim they can be profitable with these parameters because of low rental costs: Good Pharm outlets will be located in small city-center outlets rather than in more expensive malls. A small headquarters staff will also keep costs down.

Sandler: “When you don’t spend a fortune in advertising and a headquarters in Herzliya Pituah [the high-rent area where Super-Pharm is based], in a large headquarters and in expensive locations, you can sell for less. Our HQ currently consists of four and a half people. Adam and me, Roger Grass and a part-time secretary. We also have [former basketball player] Pepi Turgeman, who helps us, and we plan to have him manage a store or take on another role in the future.” Grass is a former shareholder in Rite Aid, which, as mentioned, has a 49% stake in Good Pharm.

“The headquarters will expand in keeping with our size, but we won’t have a big head office. We won’t advertise even when we have dozens of stores, because the ones ultimately paying for that are the customers.”

From your experience up till now, what are the profit margins of the leading drugstore chains?

Friedler: “I don’t know exactly, but it’s high. They make too much. After all, they buy most of the products for less than we do, because they have a lot more purchasing power. It could be that, on the bottom line, they earn the same as we do — because they have prime-time television advertising at a million shekels a time and pay rent at the Ramat Aviv Mall. I don’t need to be ashamed of saying that I earn less.”

What advantages do you have over Super-Pharm?

Sandler: “I don’t have special promotions. You don’t need to wait for specials and don’t need a warehouse at home and buy four of every product on sale. In addition, we offer lower prices.”

Friedler: “If people want to manage their schedules based on the specials at Super-Pharm, I wish them luck.”

Next stop, Petah Tikva

Despite the fresh concept at Good Pharm, its business plan includes a number of drawbacks. The stores will be very small, and because no item sells for more than 10 shekels, the selection is much more limited — some 1,400 items, compared to about 80,000 at a typical Super-Pharm outlet. Good Pharm doesn’t sell higher-end shampoo such as Pantene or Head & Shoulders, or leading brands of razor blades or some cosmetics or baby products.

In addition, it has to work harder to bring shoppers into its store. Super-Pharm attracts shoppers coming to fill a prescription, while in supermarkets, people end up buying toiletry items when they’re doing their weekly food shop. But Good Pharm has no pharmacy counter, so its major draw is its prices.

“We are trying to open stores near pharmacies, and soon will also offer nonprescription medications from a leading company. We have begun the licensing process with the Health Ministry, but it takes about three months,” says Sandler. “We’ll also have Pantene in the not-too-distant future and other products for which we will find a solution.”

Sandler adds that one of the lessons they’ve learned since they opened their first location is that outlets need to be bigger.

“The store in Tel Aviv is 120 square meters [1,290 square feet]. The store we’re opening in Petah Tikva after the holidays will be 170 square meters, which is the size we’ll be looking for in the future.”

History is full of examples of retail chains that started with a bang and quickly went bust — starting with Ehad and Rami Shavit’s Cost 365 supermarket retailers and the Kika furniture chain. What makes you think you won’t end up like them or as a niche chain with just a few stores?

Friedler: “We aren’t experiencing a drop in the rate of sales since we began. Other than the first day or two at the opening — which of course were crazy. I can’t say we’ll be a smashing success everywhere, but we’re selling products that everyone uses at a fair price.”

But you have no retail experience.

Sandler: “I’ve been involved in purchasing and logistics at cafés and I’m a partner in them [at three locations in Tel Aviv].”

Friedler: “We have the folks from Rite Aid helping. Roger Grass goes with us to see branch locations and is involved on an ongoing basis. He was [Rite Aid’s] purchasing director, which is many times the size of Super-Pharm and Super-Sol [Israel’s largest supermarket retailer] put together. His son Harrison is also at the store a lot. He and his fiancée have helped us a lot.”