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COLUMBUS, Ohio – The Medicine Shoppe and Medicap franchise owners association is upset because their franchisor refuses to engage in discussion with them after they served the franchisor with a lawsuit. After several leaders of the independent association filed their class action lawsuit last month against Medicine Shoppe International, Inc. (MSI) and parent company Cardinal Health, franchisee plaintiffs hoped they could work with the company in a new environment. Although they seem to be getting their wish, it’s not the one they had hoped for. They are now in a quandary because Medicine Shoppe seems to have no intention of recognizing their group, Pharmacy Franchise Owners Association (PFOA), because of the litigation.
The Pharmacy Franchise Owners’ Association was formed in 2004 with 37 members and has since grown to a membership of over 300 independent and franchise pharmacy owners. Currently, Medicine Shoppe reports its store count at 708 in the U.S., with no company-owned units. Although the company has listed the PFOA in its latest franchise disclosure document (FDD), at PFOA’s request, Medicine Shoppe has not been eager to work with their organization even prior to the lawsuit.
Stan Winters, owner of one pharmacy in California and active in the association, explained that the pharmaceutical business is becoming a banner program with purchasing associated with it. “Basically it’s the opportunity to use the name, have national brand recognition, and have a product line that has your labeling on it; in essence to go forward with trying to sell pharmacy services underneath that banner.”
As president of the association’s Medicine Shoppe arm PFOA-MS, Winters contends that the PFOA has every right to represent its membership about purchasing issues and other matters through its relationship with the company. He said filing the class action against Medicine Shoppe to resolve issues is one thing, but what is more important is being able to move forward with the franchisor during and after the litigation. “It remains to be seen if the PFOA is able to negotiate something that is fairer in terms of the contractual grievances that they have, and what will happen going forward with Cardinal,” he explained. “Are they going to be a franchisor that is concerned about its franchisees? That is the big question mark,” he said.
Last month, Medicine Shoppe general manager Terry Burnside expressed his disappointment in the franchisee plaintiffs, asserting that their claims have no merit. He touted how Medicine Shoppe’s 2009 franchise offering showed the franchisor’s ongoing commitment to support the success of franchisees.
But therein lies the problem. The pharmacy shop owner-operators feel that the franchisor reneged on its promises attached to the 2009 franchise agreement, when it vowed to provide a single standard agreement to current franchisees, only if it received an overwhelming response, 95%, from franchise owners on the first of three options offered. But some franchisees are saying that the franchisor went forward with only 55%, and then cut side deals with favored store owners. Franchisees responded with their lawsuit seeking damages and rescission of their current agreements, alleging fraud and breach of contract. Their lawsuit filed on March 9 in Ohio federal court, could include more than 600 franchised pharmacies that account for $1 billion in drug sales.
Franchisee Advisory Council, Cardinal’s Pill of Choice
In response to Blue MauMau’s request for an interview, Medicine Shoppe responded with a statement saying that they do have an Owners’ Advisory Council that typically meets three times per year. “Prior to introducing new franchise agreement options last year, Medicine Shoppe openly sought and received substantial input from Medicine Shoppe and Medicap franchisees, and incorporated their feedback to create new franchise agreement options,” they explained.
Winters said several years ago he and another PFOA plaintiff spent a tremendous amount of their personal time as members of the Owners’ Advisory Council, at a time when the system was rapidly declining under Cardinal’s ownership. But the advice they gave to Terry Burnside and other executives came to nothing. “All that time spent discussing how we could make the franchise program more competitive and position it for the long term did nothing for franchisees. He said, “Cardinal Health had no intention of changing anything. They said they liked the big money they were getting and wanted to hang on to it. Quite frankly, I think it was to the detriment of the system, but they did not care.” Winter felt the executives were only interested in what they could reap in the short-term, that the advisory council was largely window dressing.
Don Schreiber, a current Medicine Shoppe franchise owner in Illinois and former CFO of the franchisor agrees that Cardinal is more interested in distribution than franchising. He said when Cardinal bought them in 1995, they felt it was a good thing because the new owner had deep pockets. Their management team hoped Cardinal could carve out a very attractive pharmaceutical distribution program and give some benefit to the royalties being paid. But Schreiber said that didn’t happen, that Cardinal bought the company mainly for distribution. “They were not interested in making a dynamic franchise company. When franchisees are paying 5.5% off the top to the franchisor in an environment where you don’t control the pricing, that doesn’t work,” he said.
Because pricing schemes in pharmacy today are so incredibly complicated, Winters stresses that their trade association is vital, not only to franchisees and other pharmacy owners but also to individuals choosing a system. He said it is hard to understand the pricing unless they have a knowledgeable consultant to help them. “That’s where the trade associations comes in,” he said. “We’re here on an ongoing basis to monitor this pricing so franchisees and potential investors are not pulling down their signs every three months,” he explained. He said PFOA has the voice with their wholesalers to make sure prices are not out of line.
Schreiber took the option offered by Medicine Shoppe, requiring him to stay under his original contract with fewer services and support from the company. He said, “To me it just didn’t make sense. My buyout on my store would have been over $1 million based on future royalties.” Schreiber challenges the concept franchisors use today telling franchisees they owe them future royalties [liquidated damages]. His answer is, “The franchisor has not earned those fee.” He said there is no guarantee that he, as a franchisee, will be successful five or ten years from now. “Who knows what my volume is going to be?” he asks.
Gaye Moseman, a Medicap franchisee in North Carolina and secretary of PFOA-MC, the Medicap arm of the main association, is another plaintiff in the lawsuit. She has been in the system for over nine years and at age 66 feels the options the company presented in its new offering were very limited. She said she had no choice but to also go with the third option presented by Burnside in his “take it or leave it” address. By doing so, she will remain subject to her “legacy” agreement, which again offered fewer services and less support. “My store, in my opinion, is unsellable at this point, because I am paying over $10,000 a month to Cardinal with 12 more years left on my 20-year contract.” But she says there are some franchise owners paying up to $25,000 a month.
What Moseman finds offensive is that under the new offering someone can now open a new Medicine Shoppe or Medicap store two miles away from hers and only pay $499 a month, instead of a royalty of 5.5% like she pays. She feels the company should be giving current store owners the best possible buying deal. “They should be treating us royally, so we would be able to make a profit and pay a nice royalty back to them.” But instead, she said they make their sweet deals with their biggest distributor customer, CVS,” reiterating that Cardinal is all about a focus on distribution and not franchising.
Overall, Moseman thinks pharmacists are a very caring group of people and they will always take the opportunity to serve their customers over pushing for their own interest. “But at some point our group had to say, we can’t do this, we have to move forward,” referring to the litigation. She knows a lot of people don’t want to make waves and they are fearful of retaliation from Cardinal. Others feel that they don’t have time to get involved and assume the results will trickle down to them anyway. “That’s not necessarily true because we don’t know how the court will treat this in the long run,” she explained. She knows there is a tremendous amount of interest in the class action and if the deadline was today there would probably be a flood of people joining.
But Medicine Shoppe insists they are giving franchisees the support they need. In their statement to Blue MauMau they assert all of the programs and services they offer are geared toward helping them run efficient, successful businesses. “The programs and services we offer can be tailored to the individual needs of each franchisee. For example, we help franchisees optimize reimbursements, improve local store marketing and identify new market niches. Our franchise business consultants also work one-on-one with store owners to help them optimize the economic productivity of each store,” they stated.
Medicine Shoppe did not provided answers to questions regarding its relationship with the Pharmacy Franchise Owners Association.