Founder Interview: Lessons from the founder of Chemist Warehouse (Part 2)

First published in Morningstar, 8 June 2023


In Part 1 we detailed how Jack Gance and his brother, Sam, built the sunglass and cosmetics distributor Le Specs before selling the business in 1990. The Le Specs business was originally launched as a pharmacist-to-pharmacist wholesaler, and Jack and his brother Sam were themselves qualified pharmacists with their own established pharmacies.

Separate to the Le Specs business, Jack was concurrently cultivating a footprint of pharmacies in Victoria which grew from 2 to 35 through a series of partnerships. This chain of stores would eventually be branded as the MyChemist. It would be the first iteration of what would spark the creation of Chemist Warehouse – the second phase of Jack’s career and his biggest success. It would become a pharmacy brand that would dominate the Australian market.

Jack Gance (right) with author Lawrence Lam

Creating new opportunities in crowded markets

Prior to Chemist Warehouse, the pharmacy market in Australia was fragmented and traditionally hard to scale due to strict regulations and the requirement to have qualified pharmacists on premises. That was until Jack changed the business model.

Traditionally, the local chemist was a member of the community, just like the local doctor. Roughly 70% of revenues of the average pharmacy store were from prescription drugs, and the remaining 30% being from non-prescription drugs and other health-related products.

The Chemist Warehouse model flips this script. Most sales are from non-prescription drugs such as vitamins, fragrances, cosmetics, skincare, and natural medicines. This segment, often referred to as the ‘front-of-shop’ sales, accounts for approximately 70% of revenues, whereas prescription medicines (behind-the-counter) are 30% of revenues. Readers should not misinterpret Chemist Warehouse as generating less prescription sales, but rather it sells far more front-of-shop products than the average pharmacy in Australia. Prescription sales remain on par, if not more, than the average pharmacy.

Chemist Warehouse’s growth comes from the ability to create a new market within an established industry. It does this by increasing the floorspace allocated to front-of-shop products, flipping the traditional drug-focused pharmacy model into a warehouse focused on showcasing all the non-prescription products. Jack’s retail philosophy centres around bombarding customers with such a wide variety of products that they will eventually find something that they want. “If you walk into a shop looking for a tie and the shop has three ties, you might not buy one. But if the shop has 1,000 ties, you’re more likely to find one or more that suit you”, Jack says.

“If you walk into a shop looking for a tie and the shop has three ties, you might not buy one. But if the shop has 1,000 ties, you’re more likely to find one or more that suit you” – Jack Gance

This philosophy also gives the ability to cross-sell more products. Like the Costco model, customers of Chemist Warehouse often walk out buying more than they intended simply because of the overwhelming product range and overt signage which serves as a reminder of all the forgotten shopping list items. On average, the revenue of a Chemist Warehouse store is roughly four to six times that of an average pharmacy store due to the velocity at which they turn over stock. This brings scale and buying power from suppliers which in turn enables low pricing for customers.

From an investment perspective, Chemist Warehouse is akin to a platform business. It’s reputation as the preeminent low-cost pharmacy brand means consumers will gravitate to their shops. They match these consumers with vendors selling cosmetics, vitamins, skincare, and health products. Their ‘platform’ is the network of 500 stores that give them the footprint to be the country’s number one pharmacy retailer.

The physical store network is connected by unified sales systems and inventory management systems which allow head office a centralised view of the platform. Like most platform businesses, they have self-perpetuating monopolistic characteristics as buyers and sellers reinforce the need to transact through Chemist Warehouse. Ultimately this creates scale and reduces inventory risk for Jack’s business. The more they sell, the lower the prices they can offer, and the more customers they win.

A founder’s connection to their business

Many pharmacy retailers have attempted to create a national chain though none have dominated the market like Chemist Warehouse.

From the outset of my interview with Jack, it’s abundantly clear he retains intimate knowledge of the business despite much of the daily operations now being run by his team of 500 at head office. He cites store sales figures from the prior week and tells me which products are trending in his stores. He receives daily reports from the centralised sales and inventory management systems.

What he detests are business leaders detached from their customers. Jack tells me about a conversation he had with the CEO of a leading Australian health company selling a significant amount of product to Chemist Warehouse. Jack asked the freshly appointed CEO, a non-founder, if he knew the name of Chemist Warehouse’s representative buyer – the key influencer who determines which products Chemist Warehouse will buy and in what quantity. The CEO was not able to. Jack asked if the CEO knew the buyer’s name from one of Australia’s largest supermarkets, another key client. “Jack, I know the CEO of the supermarket chain, but I don’t know the buyer by name. I’m a CEO of a multinational business, I have thousands of clients and it’s impossible for me to know every buyer by name”, he said.

But that is the essence of why founder-led businesses are different. As Jack points out, both Chemist Warehouse and the supermarket chain represent a significant portion of this company’s revenues. In his view, a CEO must foster a close relationship with those individuals at the heart of the decision-making process of their customers.

In search of the next Jack Gance

Jack is cautiously aggressive when it comes to business. An example is Chemist Warehouse’s expansion into the New Zealand and Ireland. “Many companies have failed with big overseas expansion plans,” he tells me, reeling off names of Australian companies that have expanded too fast overseas. Although the eventual plan is to expand into the United Kingdom, Chemist Warehouse has opted to test the market in nearby Ireland first by piloting a small number of stores.

“I don’t assume I know more than the local market,” Jack emphasises. He looks to form partnerships with local operators to minimise the learning curve and expansion costs.

Like many founder-led companies, Jack runs Chemist Warehouse with very little debt. The focus has been on positive cashflow generation and long-term financial stability, an awareness he gained from his Le Specs days which was an operation hungry for working capital.

He favours organic growth over large acquisitions. In 2017, Chemist Warehouse expanded into New Zealand with its first stores initially funded with $5 million of starting capital. New Zealand, with its less stringent regulatory framework compared to Australia, has proven a fertile ground for Chemist Warehouse’s expansion. Aside from the initial capital, the expansion has not required additional investment – the new stores continue to be self-funded by revenues from existing New Zealand stores.

With organic opportunities in abundance, very few acquisitions make sense to Jack. Like most long-term minded founders, that is exactly the way he prefers.

Jack’s style errs on self-reliance rather than outsourcing. Early on he chose to run his own centralised sales software system on Chemist Warehouse’s cash registers to centralise the sales data. The vertically integrated model is a core strategic advantage of the business. It gives head office granular visibility over the entire store network and standardises the technology infrastructure, enabling efficiency when rolling out new stores and products.

A lesson on risk taking

Jack believes true entrepreneurs are risk mitigators. He did this with the marketing deal he struck to launch Le Specs, paying no upfront costs, and instead sharing a percentage of subsequent profits, thereby reducing the expenditure outlayed in case the venture was unsuccessful. And Chemist Warehouse’s cautiously aggressive UK expansion plan has Jack’s risk management philosophy written all over it.

Though a success story, Jack has experienced his share of failures. After he sold Le Specs, Jack remained in management for two years, working with the new owner during the transition. He watched Le Tan decline under new ownership as he lost the decision-making power to reverse the trend. He attributes the experience as a lesson in the importance of maintaining good relationships with suppliers, not just customers. When the new owner took over, suppliers were strong-armed into renegotiating contracts with unfavourable terms for them. This proved successful for Le Tan in the short-term but eroded the quality of the product as relationships later deteriorated.

Companies that localise an already proven global model

Smaller niche markets may appear less appealing to investors, but even in the sunglasses and pharmacy market in a relatively small country like Australia, Jack Gance has managed to create significant value. The conventional view teaches investors to focus on markets with a large Total Addressable Market (“TAM”), but with larger TAM comes greater attention and increased competition. Instead, investors may find opportunity in companies that localise products and services that have already been proven to work overseas.

For instance, Le Specs introduced a tougher, more flexible sunglass range that was first manufactured and sold in France. Jack localised it for the Australian market after his wife Evelynne visited a trade show in France.

Similarly, he describes how the idea of Chemist Warehouse came about after having visited the “busy, in-you-face, warehouse-style” pharmacies in the US during the 1970s.

The localisation strategy epitomises Jack’s focus on risk minimisation; adapting a proven model overseas is much less risky than creating an untested one.

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Founder Interview: Lessons from the founder of Chemist Warehouse (Part 1)

First published in Morningstar, 31 May 2023


Jack Gance is a rare entrepreneur who’s created not one but two dominant market leaders from scratch. He built Australia’s leading pharmacy retailer, Chemist Warehouse, after founding and ultimately selling Le Specs, one of the top brands in fragrances, cosmetics, suntan lotion and sunglasses. Throughout my interview with Jack, he sprinkles lessons in getting businesses off the ground with limited capital, on how to create and extend strategic advantages, building businesses over a long horizon, as well as the importance of making fair deals with suppliers.

Jack Gance (right) with author Lawrence Lam

Getting your foot in the door

Within the opening few minutes of our interview, it becomes apparent Jack chooses to take calculated risks in areas where he has a strategic advantage. ‘What exactly do you define as a strategic advantage?’ I ask. In a matter-of-fact tone, Jack explains it’s about getting yourself into unfair fights.

For example, the Le Specs sunglasses business was launched as a pharmacist-to-pharmacist wholesaler. Jack and his brother Sam were themselves qualified pharmacists with their own established pharmacies. Jack had the insider’s advantage of being a relatable colleague familiar with how pharmacists should position the product. Jack was able to distinguish Le Specs, which had a unique feature of being unbreakable, from the hundreds of other sunglass products and distributors to garner the support of fellow colleagues.

The insider’s angle combined with a unique product proved to be enough of a differentiator to give Jack the leg-up he needed. He knew how to price the sunglasses, and he could coach his sales team on how to maximise sales.

A story he recalls involves a time when he would ask pharmacists to step on the sunglasses to demonstrate why they would appeal to the masses. He would also encourage them to repeat this in front of customers – a way to grab their attention.

Combined with the attractive wholesale prices, Le Specs was an immediate success. And as any founder would, Jack pressed on further with an innovative marketing deal which would propel the brand on a national level.

Getting the first break with limited capital

Jack recalls approaching an advertising agency in 1979 to propose a unique marketing deal (at the time he didn’t have the capital to invest large amounts into advertising). Instead of Le Specs giving the agency a large upfront fee, the agency would receive a percentage of sales. In return they would help brand, launch and create the advertising for the product. Jack won them over by ‘throwing the sunglasses on the ground and stepping on them’ – to demonstrate the uniqueness of the product.

The deal incentivised the advertising agency and it went above and beyond to promote the product, finding extra TV marketing slots for Le Specs that otherwise would not have been filled. A year later, Le Specs expanded nationally, having established itself as the market leader in tough and affordable sunglasses.

The marketing deal allowed Jack to limit his initial capital outlay, de-risk the venture and create an incentive structure with the advertising agency that would allow Le Specs to gain national brand recognition.

By the time competitors started entering a year later, Le Specs had already established a substantial lead in market share and support from customers. As Jack says, ‘the advertising deal gave us the break we needed to kickstart our operations’.

Minimise initial risk and capital outlay, gain a foothold and expand your strategic advantage over time – this is the modus operandi that would resonate through Jack’s career.

Expanding your strategic advantage

As more competitors entered the market, Jack had to secure exclusive distribution agreements from the French manufacturer. On one trip, he flew to Lyon to meet the manufacturer to convince them he should be the sole distributor in Australia of its unbreakable sunglasses. Exclusivity helped to temporarily prolong Le Specs’ first mover advantage, crucial in the early stages of the business. Over time, more manufacturers appeared but Jack could only secure exclusivity deals with so many. He could see Le Spec’s strategic advantage was under the microscope of its competitors, soon to be studied, dissected, and replicated. But Jack had other ideas to broaden his business. He was already thinking about the next horizon – In his mind the key question was:

Is Le Specs a sunglasses business, or is it a distribution business?

With the leading brand name and national sales channels, Jack saw Le Specs as a distribution business first, which just so happened to sell sunglasses. And with this conclusion, the way he needed to expand his strategic foothold was to sell another product to his customers.

It was Jack’s intention to diversify into a winter-orientated product to balance out the summer-heavy sales of sunglasses, but he struggled to think of any promising ideas. Instead of taking a dogmatic approach, Jack went with developing another summer product – suntan lotion. Yes, it meant his sales profile was heavily tied to the summer season, but suntan lotion had the advantage of being an easier sell. Jack’s orchestrated sales process made sure every salesperson pitched a bottle of suntan lotion at the same time they sold a pair of sunglasses. The lotion was branded Le Tan, designed to ride off the positive branding of Le Specs. It worked. Sales grew organically as the product range expanded.

With the self-clarity of knowing he was running a distribution business, not a sunglasses or suntan lotion business, there was an impetus to keep rolling out new products. The next idea was the perfume market, which was a much larger market and traditionally sold through department stores, not pharmacies.

This led to the acquisition of Australis, a brand which had historically struggled to grow. The reason, in Jack’s view, was because Australis’s branding was competing head on with fragrance brands like Chanel and Dior. The branding was too serious; Australis would always lose in a battle for sophistication. Instead, Jack emphasised the need for products to create a ‘smile factor’ – he was going to counter the strategic advantage (and million-dollar marketing budgets) of the well-established European brands, with a fun factor with which they could not compete. He commissioned artwork from Ken Done and progressively launched variants of Australis products each year. Australis was followed by Australis for Men, which was followed by Love Is Australis. Sales volumes were stable each year, but the growth came from expansion of new product lines.

Jack gestures the size of each market to me. ‘The sunglasses business is this big, the suntan lotion business is this big, the perfume market is this big,’ his hands widening as he describes each market. And finally, he describes his eventual move into cosmetics and widens his hands even further. ‘And that’s why I decided to move into the cosmetics market with Colours of Australis, which is this big.’

With each product launch, Le Specs’ offering broadened. Concurrently to the growth of the distribution business, Jack and his brother Sam would simultaneously expand their footprint of pharmacies which went from 2 stores to 35 while the distribution business was expanding in its own right. This chain of stores would eventually be branded as the MyChemist chain of pharmacies. The hidden benefit of running both a distribution business and a chain of pharmacies was the inside knowledge of which products sold best. The pharmacies owned by Jack were used as testing arenas for different colours of eye shadow, lipstick and makeup – once demand was established, the new line would be sold externally to other pharmacies.

Fine tuning the optimal business model

There are businesses that face more structural headwinds than others. For example, some businesses generate revenue on a per hour basis, which naturally limits how truly scalable the model can be. That is not to say these businesses cannot be profitable and successful, but they face greater challenges and are more vulnerable to adverse market conditions. This was the nature of Jack’s distribution business.

As revenues grew, the working capital required to manufacture and pre-order the sunglasses, suntan lotion, cosmetics and fragrances snowballed. This business model required a large outlay of cash each year, with cash sales received sometimes up to one year later. There would be a build-up of debtors over the year. Compounding this headwind were the banks, who offered working capital financing but required a personal guarantee from Jack and Sam. The larger the business grew, so too did the working capital outlays. It made Jack uncomfortable knowing that he was personally vulnerable to any unforeseen changes in market conditions.

In 1990, twelve years after he started the Le Specs brand, Jack received an offer to sell his business. He and Sam didn’t hesitate to accept, knowing the buyer had much deeper pockets to absorb the working capital requirements. At the time of the sale, Le Specs, Le Tan and Australis business were one of the largest cosmetic distributors in Australia.

The experience gained from the distribution business would serve Jack well in years to come. Jack and Sam had a group of 35 pharmacies in various partnerships and re-focused on growing those to 50 stores. It would be the early formation of what would become Chemist Warehouse – the second phase of Jack’s career and his biggest success. It would become a pharmacy brand that would dominate the Australian market.

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Part 2 of this feature story on Jack Gance will appear in Morningstar and Firstlinks. 

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