Selfish interests rule the world

Author’s article by international expert, economist, member of the “Economic Discussion Club” Igor Garbaruk

Greed, avarice, self-interest, excessive and selfish desire for profit, multiplied by an insatiable and morbid desire to grab a larger piece of resources – these are the characteristic features of today’s world.

And if modern golden-headed emperors and their political entourage think in terms of acquiring the most resource-rich territories, foreign islands, key shipping canals, and sometimes entire countries for their undivided ownership, then smaller leaders strive to simply redistribute the market to suit themselves, in order to have the opportunity not only to earn more, but, most importantly, to dictate their own terms and rules of the game to others.

“You have no cards in your hands,” the new head of the White House told President Zelensky in the Oval Office. And this phrase most clearly reflects the situation today in almost every market confrontation, when the democratic idiom “Rule of Law” is replaced by the dictatorial concept of “Might Makes Right”.

For example, in the confrontation that is currently taking place in the market for the production and sale of medicines in Ukraine.

In short, about the situation and who has the “joker” up their sleeve.There is no need to explain how fantastically expensive medicines are in our pharmacies.

When it comes to imported products, it’s one situation. Everyone understands that it is impossible to influence foreign manufacturers and suppliers, the exchange rate of foreign currency against the hryvnia is risky high, real inflation rates are off the charts and have nothing to do with what the NBU and the State Statistics Service announce. Therefore, unfortunately, the high cost of imported medicines is understandably justified.

The alternative to imports has always been domestic manufacturers.But here, too, the situation is getting worse every time, and the cost of Ukrainian-made medicines is often no longer critically lower than imported analogues.

And this is a problem. After all, the country is at war, a large number of wounded people need serious treatment, and an aging population burdened with chronic diseases and the consequences of PTSD needs more and more medicines. And all this is against the backdrop of a projected decrease in the ability of the population to buy them in the context of an unstable economy and declining incomes.

Official statistics report that Ukrainians spend 6.4% of their income on medicines. But, as they say, there is a lie, there is a big lie, and there is state statistics. After all, if we talk about the real expenses of the population of Ukraine on medicines and on maintaining their own health, they are fundamentally different.

For example, according to a study by Gradus Research:

• for 62% of respondents, medicines are one of the main categories of expenses;
• for 90% of them, this has become a serious problem;
• 79% of Ukrainians who took part in the survey are forced to reduce their spending on other goods in order to buy medicines.

The worst situation is among pensioners (60+ years old) – 62% of them, in order to buy medicines, face the question of reducing food costs. That is, between the concepts of being hungry or alive, people choose life.

If we move away from soulless statistics or research, the real situation shows that in a family where there are two pensioners left, one pension is spent on paying for utilities and food, and the other is spent entirely on buying medicines. If a pensioner needs to have their teeth treated, there is not enough pension.

All this, against the backdrop of war and the balancing of the national economy on the brink of survival, can lead to serious social consequences at the national level.

An aging and dying population (and for the state, we are all primarily consumers and taxpayers), a difficult demographic situation in general, the outflow of young people abroad and their assimilation in a new environment without a desire to return to Ukraine, destroyed infrastructure and an unbalanced economy are unlikely to become an attractive factor that will force real foreign investors, and not those who only feed promises, to invest anything real in Ukraine, and our national businessmen to return money to their homeland from those offshore zones where they have withdrawn it in recent years. If the government does not find effective tools to radically change the situation, then it is more likely to expect not investments, but another speculation by foreign financial groups, as it once was with domestic government bonds (OVDP), or a banal plundering of its natural resources accompanied by another sweet lie about reforms and development.

It should also be remembered that as soon as peace comes to the territory of our long-suffering State, our society will face another great challenge – ELECTIONS! And any government that is even slightly concerned about its own survival must think about who will potentially vote for it. And if we talk about pensioners, this is generally the most stable and most responsible part of the population that still goes to the elections.

Therefore, resolving the situation on the pharmaceutical market of Ukraine, where a dispute is being fueled between manufacturers of medicines and pharmacy chains on the issue of significantly reducing prices for basic drugs to meet the needs of the population of Ukraine and to ensure that the State, through its regulatory and legal changes and legislative initiatives, can demonstrate concern for the interests of the people, is extremely important.

In essence, the question is simple, who will pay for this with a decrease in their own profitability – pharmaceutical manufacturers or pharmacy chains.

Again, I will not retell the preamble to the conflict, in short – there are so-called marketing payments that manufacturers of medical products pay to pharmacy chains for the high-quality presentation of their products on pharmacy shelves and sales efficiency.

Most manufacturers consider these payments a necessary evil and do everything to ban them at the state level, and pharmacy chains defend the need to pay them because it is thanks to them that they are able to develop their own networks and make services for providing a full range of services available to every citizen of Ukraine at the moment when they need them, not tomorrow or in a week, but at the moment when buying medicines is a vital action.

That is why today there is a confrontation at the level of powerful pharmaceutical companies of Ukraine and retail pharmacy chains on this issue.

Let’s leave the legal subtleties of this confrontation and future legislative changes to the lawyers.

And I suggest that we all ask ourselves the question of where to put a comma in the phrase:

“IT IS IMPOSSIBLE TO STOP PAYING”

• If the comma is after the first word, the situation is on the side of the pharmacy business.
• If we move it further, the manufacturers of pharmaceuticals are the winners, as if they are the winners.

Using my own experience working in the field of domestic trade in Ukraine, when I first worked in a manufacturing FMCG company (food group), then in one of the large national retail supermarket chains, and then in the Ministry of Economic Development and Trade of Ukraine, heading the relevant Department of Trade Development of the Ministry, I can say that I encountered the issue of paying marketing payments at each stage of my professional growth. The only thing is that each time I looked at it not so much from a different point of view, but rather from a different angle.

When the manufacturing company I was working for at the time paid marketing payments for the representation of its products on the store shelves of one of the retail supermarket chains, I mostly thought it was a kind of “extortion” on the part of the retailers, which allowed them to earn not only on the markup on the goods that we produced and delivered to the retail chain with such efforts, but also additional funds.

When fate brought me into the structure of a retail chain, where I headed the marketing department, and receiving such payments was one of the indicators of assessing my work, assessing the real situation from the inside of the retail chain business, I realized that it is precisely due to such payments, which concerned goods with high margins on the part of the manufacturer, that it becomes possible:

• to compensate for the loss of markup on social goods that form the basis of the consumer basket of buyers – especially the socially vulnerable segment of the population, including pensioners;
• to implement price promotion programs for basic food groups;
• to improve the level of service for buyers at the retail locations themselves, to upgrade refrigeration and retail equipment and much more.

After starting work at the Ministry of Economy, I realized something else: that working in business companies, whether it is a product manufacturer or a retail chain, the interests of the enterprise and obtaining maximum profit are still put first. The interests of a particular ordinary person, not just as a consumer of products offered by a business company, but as a component of society with the entire system and hierarchy of its needs and problems that affect both the person and society as a whole, are of little interest to the management of business companies in general. Perhaps this is true, because this set of issues is precisely the systemic task of the State, which it must solve, and not withdraw from it. Did our state solve this issue – I think the question is rhetorical.

What I want to draw attention to.The key understanding that must be present at the level of absolutely all enterprises in the industry, both manufacturers and retail chains, is that they are like two wings of one plane that performs its functions. An imbalance on either side will lead to a significant deterioration in the market situation.

Having conducted hundreds of negotiations in my life, both with key suppliers (national and international product manufacturers and their exclusive distributors) and with national retailers, and also having my own comprehensive experience in this field from different sides of this conditional barricade, I can 100% assert that product manufacturing and retail, as a system for its high-quality delivery to the consumer, is an absolutely equal business in terms of its technology and complexity. Just as manufacturers must respect and appreciate retailers, so retail chains must appreciate the efforts of manufacturers – their market partners.

When I still have to hear the opinions of certain representatives of manufacturing companies with the leveling of the role of retail chains: “well, what is there to organize that business: take and sell”, and from some retailers another: “if we don’t take products from you, we will take them from someone else, or we will even set up our own production”, I, like a child, am sincerely surprised.

• On the one hand, it’s like that. Let’s take an example from the food market, when the confectionery company ROSHEN opened its own chain of stores, and the company MHP (TM Nasha Ryaba and others) its chain Myasomarket.
• On the other hand, almost all retail chains have launched their own production brands (Private Label): in Silpo it is Premia, Povna Chasha and others, in ATB – Rozumny Vybir and Svoya Liniya.

But at the same time, let’s admit it, the buyer will not specifically look for an exclusively branded store to buy products from a particular manufacturer – it is, of course, more convenient for him to do this in one place together with other goods. But also when making purchases at a systematic point of sale, he wants to see not only the products of his own brands of the retail chain, but also the products of well-known manufacturers with guaranteed quality and high recognition on the market.

In the market for medicines, the situation is similar in many aspects. Introducing an imbalance in the relationship between pharmaceutical manufacturers and pharmacy chains will 100% result in higher prices for medicines and a significant deterioration in the level of service for the end consumer.

I meet opinions that such a number of pharmacies as today is not needed, and they can be safely reduced, and the relationship regarding the payment of marketing payments can be legally removed, and this will supposedly lead to a decrease in the final selling price of medicines.

In theory, it may be so – at least you can enjoy this thought.

In practice, everything will be different.

Not far from my house is a busy intersection of two roads, near which there are 6 (six) pharmacies in close proximity to each other (and two of them are from the same pharmacy chain). The seventh pharmacy is located in a nearby hypermarket. The logical question is, why so many?!.., after all, one would be enough. In fact, there is enough work and customers for each of them, because:

• someone works in the format of a classic pharmacy and focuses on a wide range and availability;
• someone appeals to low prices and the possibility of pre-ordering – when you come to the pharmacy and you don’t need to spend extra time, because your order is already waiting for you in a special section;
• someone works in the format of a farm market and provides the opportunity to purchase a variety of care products, and most importantly – to talk to polite, professionally trained employees who are ready to provide advice according to the customer’s request, not only on medicines, but also on related products;
• and someone works in the format of a pharmacy kiosk, and it is so convenient for him – a balanced minimum assortment and a stable client who will come to him.

Let’s imagine a situation where a decision is made to close six of the seven of these pharmacies, absolutely no marketing payments and the abolition of additional services. What will this lead to:

• firstly, consistently large queues at rush hour (even if there are several employees), dissatisfaction of nervous people waiting, the spread of viral diseases due to their carriers, who will be in these queues in a confined space;
• secondly, an automatic decrease in the provision of services – there is no competition, the client will still come only to us, accordingly, why bother. Trampled floors and crumpled robes on the staff – this is the least we can roll down to;
• thirdly, reduction, and possibly complete abolition of all kinds of additional services. The pharmacy staff will simply not have time to advise and answer questions from customers, let alone form pre-orders or do anything else that takes time.

Next, let’s take a broader look at pharmacy chains, they definitely:

• will not introduce innovations and invest in the development of new technologies or the development of new auxiliary product groups and services – they simply will not have the time or desire for this;
• will ensure the operation of only those of their pharmacies that will bring a high level of income and the lowest possible costs. All unprofitable facilities will be closed. For example, why ensure the availability of services in a place where there are not enough people?!.. – for example, in a small village. Or, how do you think: how profitable is the trip of the so-called mobile pharmacy, a specially equipped car with staff that delivers medicines to where there are no stationary pharmacies – especially in those settlements located near the line of military clashes with the enemy. The fact that a sick person needs help and medicine here and today, and not in a few days or a week – it’s not even worth talking about, I hope everyone understands this.

Everything said is the minimum.

At the same time, employees of these pharmacies will be thrown into the street, in fact, without the possibility of further employment in their specialty, because the labor market will be significantly reduced, and these are, as a rule, women with children. Of course, if someone sets themselves the dubious goal of having even more young women and their children go abroad, then this is the “right” way to an even greater social imbalance. When men are at the front, and their wives and children are actually thrown into the street without means of subsistence – has anyone thought about what consequences await us in the near future?..

The state and local self-government bodies will receive a reduction in budget revenues in the form of taxes that these people and their companies paid when calculating wages. And further reductions in revenues will occur due to the abolition of payments for various special permits, licenses, etc.

The owners of the premises where these pharmacies were located will lose their earnings, the owners and employees of transport and logistics companies will lose their earnings, as always, the State will lose again, which will receive a significant reduction in revenues and an increase in the number of people deprived of stable incomes that allow them to plan their future life in the country.

In the end – prices for medicines will increase, the quality of service will decrease, everyone will lose financially – from people to the state. And if some pharmaceutical manufacturer thinks that he will benefit from this situation, he is definitely mistaken. Because when there are physically fewer consumers of their products and their drugs will steadily become more expensive, people will not care whether to buy a local product or an imported one, they will buy an imported one, and the money of Ukrainians will once again feed foreign manufacturers of medicines.

The only thing I want to offer to both the state and the participants in the pharmaceutical market is to be balanced when making decisions. If someone has forgotten, there is a war in the country, and if someone is eager to implement drastic changes in an imperfect but functioning system of relations between pharmaceutical manufacturers and pharmacy chains, this will lead to the fact that you will lose more than you earn. 100%!

Involve professional specialists in the analysis of the situation, calculate the risks of abrupt changes in the rules of the game in the market and whether these changes will become another trigger for the deterioration of the situation as a whole. Look at the esteemed Donald Trump, at everything he does, and even more so – says, in terms of implementing isolationist approaches to the American manufacturing sector, and then look in the mirror – and think, think, think, because the “Joker” in the sleeve may turn out to be a “six”. 

Prepared specially for UNN