A Quick Follow Up on Raia Drogasil
$RADLY $RADL3
I recently met with Flavio de Moraes Correa the company’s Investor Relations Officer.
Flavio has an interesting background, having spent much of his career working for Abilio Diniz, one of Brazil’s most successful retail entrepreneurs, as well as for the local Walmart business. He initially joined RD in February 2020 to head their Omnichannel & e-Commerce strategy and, assisted by the Pandemic, grew the online business from zero to 20% of sales.
Flavio shared that only pharmacies can sell drugs online in Brazil. So Amazon for example, which has a large presence in the country, cannot compete with them. Hence RD has a 40% share of the online market. RD’s online business alone would be the 4th largest pharmacy in Brazil.
All ecommerce orders are fulfilled from the stores, not a distribution center. RD’s internal software connects with Uber and other providers who deliver (by motorbike) 95% of goods within an hour, with an average delivery time of 35 minutes. This is very different to the broader marketplaces (like Amazon) which have much slower delivery times. The customer of course pays for this convenience.
Flavio confirmed that while they don’t expect the Brazilian market to morph into the US model, where either private insurers or the government pays the majority of the cost of prescription drugs, this would be a big net positive for RD. It would put a lot of downward pressure on industry margins, forcing weaker competitors out of business, particularly the small independents. The top 2 pharmacies (CVS & Walgreens) have 50% market share in the US, and something similar would happen in Brazil with RD the clear winner. Lower margins, much higher volume.
Drogasil spends 4 years preparing an employee to be a store manager. Quite a long term investment! Typically an employee will start as a store clerk, or a pharmacist and be trained up. With 350 new stores opened a year there are plenty of opportunities for promotion and as a result RD has lower employee turnover than peers.
Pharmacists can make twice as much money opening up their own pharmacy versus working at RD, but of course have to invest capital in the business and endure plenty of headaches. Also, the average life expectancy of an independent pharmacy is only 2 years, primarily because Drogasil will typically open up across the road and eat their lunch. RD generates at least twice the sales per store of an independent.
RD’s stores typically break even within a year and pay back the initial investment within 2 years, for an internal rate of return (IRR) of over 20% so remain very attractive investments for the company.
No change to conclusion, BUY.