Country: Ecuador Corporación Grupo Sector: Health and Retail $30 million Fybeca S.A. (GPF) IFC Investment: The mid-1990s were a challenging time for low-income Ecuadorians that needed to access affordable, quality medicines. Because of political turmoil and a severe financial crisis, urban poverty increased from 35 percent to 65 percent between 1998 and mid-1999 in Ecuador.1 The lack of universal public insurance meant that private spending on health was almost entirely out-of-pocket, with an estimated 61 percent on pharmaceuticals.2 Both the rural and urban poor were equally impacted by the Against this backdrop, Corporación Grupo Fybeca crisis. At the time, about 45 percent of Ecuador’s population S.A. (GPF), a pharmaceutical retailer with a history of resided in rural areas.3 The rural poor had limited or no innovation, saw an opportunity to complement its high- access to public health facilities and experienced medicine end pharmacy chain, Fybeca, with a down market chain shortages because pharmacies were concentrated in cities so that customers could access quality medicines at with high population densities. Instead they turned to economical prices. In 2000, GPF launched SanaSana — traditional healers, travelled great distances to purchase its first pharmacy for low-income customers. GPF is a medicines they could barely afford, or went without private holding company that dates back to 1930 with third medicines. In cities, pharmacies were plentiful, but they and fourth generation family members still involved in catered to middle and high-income customers, neglecting management. The company employs 4,500 people and is the urban poor. committed to promoting gender equality — 65 percent of 1 its staff are women — and the values of trust, transparency, THE STORY BEHIND THE NAME SANASANA and a desire to serve others. The SanaSana name is based on the popular Today, there are 510 SanaSana pharmacies across 120 Latin American song ‘Sana sana colita de rana,’ cities and towns in all 24 of Ecuador’s provinces. Around which is sung to children when they are sick or 218 SanaSana pharmacies are located in rural areas, smaller get hurt. A central character in the song is a frog cities, and towns. SanaSana is now the country’s largest which has become SanaSana’s iconic symbol and pharmaceutical chain of company-owned and managed communicates the company’s strategic concept of stores and the second largest in market share. The brand providing relief in one thousand ways. has become prominent for selling prescription and non- prescription medicines, personal care products, general merchandise, and mobile phone airtime along with handling utility bill payments. In 2016, SanaSana pharmacies contributed to more than 50 percent of GPF’s revenues. ESTABLISHING A PHARMACEUTICAL RETAIL FOOTPRINT The Early Years GPF was founded by Galo Villamar Villafuerte, a pioneer who helped shape Ecuador’s pharmaceutical retail industry. In 1930, his father established a small drugstore in the historical district of Quito, the country’s capital. After pursuing degrees in civil engineering and economics, Villamar took over the store in 1948. Villamar offered competitive prices and more personalized service than the competition, which underpinned the company’s growth. By the early 1950s he was able to acquire his largest competitor in Quito, Botica Pichincha. Villamar became one of the first in Ecuador to introduce packaged medicines in his pharmacies in addition to mixing and dispensing medical compounds, which was standard Medicinas S.A. FARCOMED in 1985. By then the company had practice at the time. In 1957, with several pharmacies 14 pharmacies and Villamar’s three children came on board. under his management, Villamar created the legal entity Farmacias Quito y Botica Pichincha C.A. Fybeca pharmacies were between 140 and 900 square meters in area and targeted customers in the highest Building a Brand income brackets.4 The family continued to modernize the From 1965 to 1985, the company changed its name twice and business and innovate, becoming the first in Ecuador to began to unite all its pharmacies under the brand Fybeca. introduce key elements of the United States’ pharmacy This brand would stick even though the official name of the model, which included self-service, over-the-counter, company was changed to Farmacias y Comisariatos de and personal care products, as well as gifts and discount 2 GPF’s Value Chain An Overview of Challenges and Solutions Procurement Distribution Marketing & Customer & Product Sales Service Development Value Chain • Insufficient • Saturation of • Customers’ • Lack of local supply of distribution low purchasing personalized pharmaceuticals center capacity power and service erratic cash flow • High cost Challenges in of imported • Varying Serving pharmaceuticals customer Low- • Limited preferences Income availability Customers of low-cost personal care products • Purchase in • Build a state- • Offer low-cost • Develop bulk to lower of-the art pharmaceuticals customer service procurement automated and non- protocol costs distribution pharmaceuticals • Ensure consistent SanaSana’s • Increase sales center • Sell medicines in service through Solutions of generic single units ongoing training pharmaceuticals • Offer everyday • Develop private low prices label affordable • Tailor discounts personal care and promotions products by location • Conduct regular market research on customer preferences 3 cards, to increase customer convenience. In the years reasonable profit. Decades of experience managing that followed, Fybeca became a household name and the pharmacies, a robust distribution infrastructure, and strong company carried on its tradition of innovation, introducing brand name worked to their advantage. The strategy home delivery, drive-through services, and eventually ushered in a new phase of growth for the company. online shopping in 2014. SanaSana Pharmacies: Balancing Risk GOING DOWN MARKET TO and Returns INCREASE GROWTH In 2000, the Villamars opened the first SanaSana pharmacy in a low-income neighborhood outside Quito. SanaSana In the mid-1990s, several political and economic events pharmacies provided affordable medicines and an ample negatively affected Ecuador’s economy, including a costly assortment of non-pharmaceuticals. However, they carried armed conflict with Peru. An international financial crisis a narrower range than Fybeca since they focused on basic spread to Latin America and oil prices dropped. By the late everyday needs and had fewer brands. Stores were smaller 1990s, Ecuador was in the midst of the worst economic in area than Fybeca, but offered personalized services and crisis in its history. The country’s currency depreciated a quality experience in hygienic conditions. (Figure 1). By the rapidly and inflation reached more than 50 percent in 1999. 5 end of 2000, there were ten stores in Quito and the port city Guayaquil. The stores, which operated under a newly By then the Villamar family owned 40 Fybeca pharmacies created company called Econofarm SanaSana, created a in four major cities, but they needed to evolve their great stir with their value proposition of low-cost products strategy to grow the business during the crisis. In addition, and good service, but, above all, because they were a bet they wanted to find a way to alleviate the economic on a new brand in the midst of an economic crisis. hardship of Ecuadorians. The family believed that the moment was ripe for a double bottom line opportunity: Determining the Product Mix they could offer high-quality medicines at economical SanaSana aimed to become a fair-priced and quality prices to low-income customers, while earning a pharmacy known for excellent service. To pick the 4 right products, company management analyzed all 1. OFFERING EVERYDAY LOW PRICES, pharmaceuticals in Fybeca pharmacies and selected those SINGLE UNITS, AND DISCOUNTS: In 2000, that cost the least. They ended up selecting about 400 SanaSana pharmacies were launched with products to keep in stock. As the company researched the big discounts to attract customers and prove market, it learned that its customers desired a greater the concept of a low-cost pharmacy. Also, per regulation, variety of products so it introduced diapers, shampoos, oral medicines could be sold as single units making them very hygiene, and other items, as well as snacks, ice-cream, and affordable. A pill of aspirin, for example, costs around $0.05. beverages. SanaSana provided the benefits of a convenience Many people completed a full course of treatment by store, while offering the largest variety of products in the purchasing a single pill every day as they couldn’t afford to low-income pharmacy market. In 2005, it also began to buy a full prescription upfront. add services. By 2001, with 30 stores up and running and $5 million in Increasing Affordability sales, the company successfully proved its concept. It began The majority of SanaSana customers were in the lower- gradually reducing big discounts so it could open pharmacies middle and low-income brackets; they had incomes ranging in new locations and shift to building a financially sustainable from $50 to $200 per month and were very price sensitive. 6 model based on everyday low pricing. As the number of In addition those customers at the lower end of this income SanaSana pharmacies grew, the company tailored its range had unpredictable cash flows so they needed to discounts and promotions to customer preferences. (Box 1). make daily small purchases. The company pursued several It also introduced a rewards card so customers could earn strategies to keep its products affordable, including: points for purchases through promotions. Figure 1: SanaSana Pharmacies at a Glance Target Store Size Locations Staff Product and Customers Service Mix Lower-middle 40-150 Central, high- Up to five Pharmaceuticals and low-income square meters traffic locations employees and a smaller customers that are easily variety of non- between the ages accessible to pharmaceuticals of 26 and 45 years customers by such as personal foot or by public care, toys, gifts, transport seasonal items 5 2. LAUNCHING A PERSONAL CARE Box 1. Generating Customer PRODUCTS LINE: Given the limited Insights local supply of affordable and small unit size personal care products, the company Market research helps SanaSana adapt its launched the SanaSana private label in 2015 with local product mix and promotions to customer manufacturers. Today, stores stock more than 80 preferences in different locations. Five years SanaSana private label products such as shampoos, after launch, the company learned that deodorants, oral hygiene products, and razors with prices women with young children were a significant ranging from $0.50 for toilet paper to $8 for shampoo. proportion of its customer base so it introduced Package sizes vary from single units, such as 20 milliliter promotions and steep discounts for baby sachets, to family packs and are between 5 percent and 15 products such as diapers and formula. percent cheaper than branded equivalents. A customer experience team now surveys 3. PARTNERING TO EXPAND GENERIC patrons in stores every quarter to collect PHARMACEUTICALS: Ecuador has a small demographic information and assess their level pharmaceutical industry so the country of satisfaction, store experience, such as speed relies on imports of branded and generic and quality of service, and product preferences pharmaceuticals. Generic medicines are a source of savings including pricing. This information helps the for low-income customers, but they represent only 6 company identify brand attributes that are percent of national sales given the preference for branded most important to its customers. In addition, medicines and historically poor reputation of generics ‘mystery shopper’ surveys determine whether for quality.7 This has been difficult to change, but there is staff are providing good customer service. now a greater emphasis on selling quality generics in the country. They also constitute 14 percent of sales volumes in SanaSana pharmacies. In order to increase its future sales of top-of-the-line generics, the company partnered with a leading pharmaceutical lab in Colombia in 2014. Apart from these strategies, the company’s ability to purchase in bulk enabled it to secure large volume discounts from suppliers and keep prices affordable for customers. Ensuring Quality Quality is a key element of the SanaSana value proposition. The company procures products from reliable suppliers and maintains the right temperature and humidity conditions for storage at the distribution center, during transport, and at pharmacies. In addition, it trains staff in the storage and handling of medicines. Products past their expiration dates are collected and disposed of in accordance with national regulations. 6 INITIAL EXPANSION OF SANASANA Counter-only Stores: Pharmacies were PHARMACIES rolled-out in the counter-only format in which medicines and a small selection of non- Identifying Store Locations pharmaceuticals were sold from behind the In its early days, the company introduced SanaSana counter. They worked well in high traffic locations, such pharmacies in low-income neighborhoods of cities with a as those near a bus stop, where customers expected quick Fybeca presence, making it easier to distribute products to service. The format also worked in rural areas given their both types of stores on the same route. As a result, it was small size and narrower product portfolios. able to quickly grow the number of SanaSana pharmacies to 60 by 2003. Counter + Self-Service Stores: With growing customer interest in non-pharmaceuticals, But the company also leased space so that it had the the company introduced a store format that flexibility to shift locations as needed. In order to serve featured self-service shelves in the front of the thousands of customers across Ecuador, the company store for these products. Pharmaceuticals continued to be identified new locations based on population size, sold behind the counter. These pharmacies were suited demographics, employment rates, infrastructure, and other to residential neighborhoods and locations where people pharmacies. It also considered the availability of labor, had time to shop. The self-service format increased sales particularly people with pharmaceutical knowledge and volume and more efficiently amortized fixed operational customer service experience. costs, enabling the company to offer a wider selection of non-pharmaceuticals at competitive prices. Developing Point-of-Sale Formats As the company expanded its presence and product mix, it Large Format Store: The SanaSana large developed several point-of-sale formats as a one-size-fits- format pharmacy was created to serve all approach didn’t work for all locations. (Figure 2.) secondary cities that didn’t have Fybeca Figure 2: SanaSana’s Point-of-Sale Formats COUNTER-ONLY STORES COUNTER + SELF SERVICE LARGE FORMAT STORES STORES Launch Year: 2000 Launch Year: 2004 Launch Year: 2011 Size: ~40m2 in area Size: ~100m2 in area Size: ~150m2 in area Footprint: 278 stores as of 2016 Footprint: 222 stores as of 2016 Footprint: 10 stores as of 2016 Products: Products: Products: • Pharmaceuticals and • Pharmaceuticals sold behind • Pharmaceuticals sold behind non-pharmaceuticals sold the counter and self-service the counter and self-service behind the counter non-pharmaceuticals non-pharmaceuticals • Small selection of non- • Wider selection of • Largest selection of non- pharmaceuticals (e.g. personal non-pharmaceuticals pharmaceuticals (e.g. beauty and care products, and some snacks child care products, food and and beverages) beverages, gift items) 7 Figure 3: Key Milestones in GPF’s History Gallo Villamar 430 takes over SanaSana pharmacies 510 family 40 Fybeca SanaSana pharmacy pharmacies pharmacies 1948 1985 2000 2010 2016 14 Fybeca pharmacies $321 million in SanaSana SanaSana pharmacy sales pharmacy brand launched stores. They were typically located in public squares to SERVING THE NATIONAL MARKET generate foot traffic. By offering the largest selection of branded and generic products in these stores, the company SanaSana grew rapidly from 2000 to 2015. The company could reach customers across all income segments. knew that for the model to be successful it would need to achieve scale so that it could dilute costs. Building a Customer Service Ethic SanaSana customers not only valued affordable prices, Competitors targeting the low-income segment entered but also personalized service. The private sector typically the market within a few years of the first SanaSana minimized the importance of customer service for the pharmacy, but the company had the advantage of being low-income segment, but surveys of SanaSana customers a first mover and viewed competitors positively. By indicated that they preferred it. While the company replicating its model, competitors helped SanaSana build its emphasized customer service from the start, as it expanded brand as a leading innovator. it needed to embed this ethic within its work culture and standardize its practices. In 2002, it introduced a protocol The company focused on expanding into locations not which focused on timely attention, kindness, and provision adequately served by pharmacies offering a large selection of advice among other elements. The protocol was of products and services, better prices, and an enhanced incorporated into staff inductions and key concepts were customer experience. During this phase, it experienced reinforced through ongoing training to ensure consistent challenges such as identifying ideal rental spots at the right service. prices, managing store expansion within limits set by the government, and working with available labor. Expansion slowed during the 2008-2009 financial crisis and picked up 8 in 2010 when the company acquired Farmacias Victoria’s 75 drugstores. THE GPF UMBRELLA Between 2011 and 2016 it also expanded its network with In 2010, the holding company GPF was established 44 franchise outlets. As small entrepreneurs, the franchise to bring together all of the Villamar family’s owners had good connections to the community and were businesses. These included the pharmacy chains attuned to their customers’ needs. Over time, however, the Fybeca and SanaSana, the distribution and shared company found that franchises had a less defined commercial services center Provefarma, and Abefarm S.A., culture and faced difficulties in obtaining finance. In response, which handles corporate accounts and business- the company introduced strategies such as segmentation to-business initiatives. of franchisees, financial assistance, operational and IT support, and tailored commercial strategies. The Villamar family has an 84 percent stake in GPF and the remaining 16 percent is owned by As SanaSana pharmacies grew in popularity, they became other investors. models for better business practices and good customer service in the industry. To maintain these standards and prepare for the future, the company started investing in its workforce. Talent Management Offering a consistent, quality experience in SanaSana pharmacies meant recruiting the right people and investing in their training. It was easier to attract people to work in pharmacies in small towns and rural areas where SanaSana was the employer of choice. In large cities, however, the company faced typical retail industry difficulties in retaining staff. Millennials in particular worked for a few years and moved on to other jobs. Learning to efficiently manage this personnel turnover became a critical competence for the company. In the retail sector, good benefits, training, and career progression can alleviate retention challenges and these strategies have helped GPF. To attract and retain youth who value skill development, GPF offers one of the strongest benefits packages in the industry along with Good benefits, training, training. Now about 65 percent of GPF’s workforce is under and career progression the age of 30 years. can alleviate retention In 2014, the company launched a “corporate university,” which is an in-house training unit that provides employees challenges. between two to three years of technical training in sales, 9 COMMITMENT TO GENDER EQUITY meter distribution center south of Quito to centrally handle logistics for Fybeca and SanaSana pharmacies. In 2016, GPF became the fourth company in Ecuador More than 500 suppliers delivered products for sorting, to sign “The 7 Principles for the Empowerment of storage, and shipment to stores — the latter outsourced Women” with United Nations Women. to transportation companies. The distribution center had sufficient capacity to serve both Fybeca and SanaSana pharmacies for more than a decade. 3 of 7 6 of 10 67% members of employees are of women the board of women employees By late 2011, rapid business growth led to saturation of directors are hold its capacity and productivity began to decrease due to women management positions labor intensive processes. Labor costs had also increased significantly, making the distribution operation less efficient and profitable. In 2011, the company decided to build a second 12,250 square meter warehouse and rent distribution centers while construction was underway. It also commissioned pharmacology, leadership, and customer service. Senior several studies from international experts who concluded supervisors and top performers conduct trainings. Today, that the best solution to improve logistics was to install nearly 2,400 people are employed in SanaSana pharmacies automated processes in the new warehouse. and 10 percent undergo training every year. An online training program will be rolled-out in 2017 to reach staff in By installing automated, semi-automated, and manual remote locations and reduce training costs. equipment and using the latest layout and workflow designs, a single distribution center would be sufficient INCREASING PRODUCTIVITY for the next decade. This state-of-the-art facility was AND EFFICIENCY THROUGH completed at the end of 2016. It is the first-of-its-kind in TECHNOLOGY Ecuador and one of the few automated retail distribution centers in Latin America. Its key features include a single In 2013, GPF began an ambitious project to modernize its space for warehousing functions, a mix of manpower and technological and distribution capabilities as well as to automated warehouse-handling technologies for loading, improve its value proposition and customer experience, sorting, picking, and packing of products, and an increase in in order to prepare for the future. In addition, these storage capacity by 40 percent. investments will help to increase process efficiencies and control, enhance big-data processing and business With these advancements, GPF expects to lower labor intelligence capabilities, and increase logistics reliability costs, improve productivity, and boost throughput by 30 and productivity. percent. It will also be able to increase the frequency of deliveries, optimize delivery truck capacity, and implement Shifting from Manual to Automated product traceability with the new distribution center. Distribution In 1990, the Villamars established the company Provefarma Integrated Retail Management System to handle distribution for its growing number of Fybeca Prior to its distribution center upgrade, GPF invested in pharmacies. Provefarma initially operated several small retail management and business intelligence software distribution centers, but in 2005 it built a 10,000 square systems in 2015, which will be fully implemented by 2018. 10 The systems will evolve how the company gathers and IFC’S ROLE AND VALUE ADD uses information from its customers, suppliers, distribution center, stores, and other stakeholders. They will integrate In 2015, GPF was in the process of implementing a financial enterprise resource planning (ERP), warehouse $52 million technology-based project to improve management, point-of-sale, and other retail management distribution and retail management capabilities. subsystems. It needed long-term financing to support these investments, but local banks only offered loans The new systems will improve processes such as demand with tenors of up to three years. IFC stepped planning, supply chain, customer loyalty, financial in, providing a corporate A-loan of up to $30 management, and business intelligence. The changes in million with an 8-year tenor. This funding would core technologies will enhance the customer experience, also finance existing store renovation and new increase business agility and improve financial performance. store construction. In addition, IFC could share knowledge such as input on GPF’s business model The future of retail involves developing personalized and organization structure based on its global solutions and emotional connections with customers. It industry expertise and network of clients. also involves operating with streamlined processes that are efficient and provide business flexibility. State-of-the For IFC, the loan to GPF aligns with its strategy art technology is necessary to attain these capabilities, and in Ecuador to finance projects that facilitate GPF is leading the use of such technologies in Ecuador and economic inclusion. It also fits well with IFC’s health in the region. strategy to provide access to affordable and quality medicines. GPF was an attractive opportunity given MANAGING CORPORATE its national presence, strong corporate governance, GOVERNANCE and focus on providing quality medicines and personal care products to low-income consumers. Family-owned businesses often grapple with corporate governance issues, which can be problematic as the businesses grow and seek investment. To position itself for growth, GPF took several steps to improve its corporate governance: • First, the company strengthened its board of directors in 2010 by including independent directors along with shareholding family members. In addition, it created a formal “Family Protocol” to define the roles, rights, and obligations of shareholding family members, further promoting a meritocratic, results-based culture. • Second, GPF recruited outside talent for key senior management positions such as the CEO and CFO, both of whom are professionals with ample corporate experience and no ties to the family. Independent professionals also hold the majority of second tier executive positions. 11 • Third, although it is not required for a private company, GPF is committed to increasing transparency by publishing an annual sustainability report that adheres to international sustainability guidelines set by the Global Reporting Initiative.8 It is the only pharmaceutical retail company in Ecuador to do so. LOOKING AHEAD Today there are more than 6,200 pharmacies in Ecuador and competition is fierce among pharmacies that serve the low-income market segment. GPF will need to continue its tradition of innovation to stay ahead of the competition. The company sees itself transitioning from a provider of healthcare products to one that also offers healthcare solutions. Toward this end, it is developing the concept of the ‘SanaSana 2.0 store’ to offer even greater convenience for low-income customers. In 2017, for example, the company plans to pilot partnerships with physicians to add walk-in clinics and labs to its stores. For more information on inclusive business at IFC, visit www.ifc.org/inclusivebusiness ENDNOTES 1 Maldonado, C. 2004. “Pobreza, Dolarización y Crisis en el Ecuador.” Abya-Yala. Quito, Ecuador 2 IBID 3 World Bank Group. World Development Indicators. 1990 data 4 A and B socio-economic categories 5 Luis I. Jacome H. 2004. “The Late 1990s Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization at Work.” IMF (International Monetary Fund). IMF Working Paper WP/04/12 6 C and D socio-economic categories 7 Ortiz-Prado E, Galarza C, Cornejo León F, Ponce J. “Acceso a medicamentos y situación del mercado farmacéutico en Ecuador.” Rev Panam Salud Publica. 2014;36(1):57–62. 8 GRI is an international, independent organization that helps businesses, governments and other organizations to understand and communicate the impact of business on human rights, corruption and other sustainability issues. Its reporting framework is widely used in the world. 12