Mail-and-medicine scheme bends rules in the west

Where in the world could one walk into a post office and buy medicine for a cough or a cold? Up until two months ago, the answer would probably have been: nowhere.

But as of June, in the small city of Kaili in Guizhou province, locals have been able to do just that. Two foreign-owned pharmacies were opened inside the city's post offices, allowing customers to buy medicine at the same time as they dropped off their mail.

The use of state-run post offices for commercial ends is by no means usual in China. Allowing foreign investors to make money from state post offices appears even more unlikely.

This development demonstrates that, under the government's 'Go West' policy to develop the economically backward western provinces, just about anything goes. The 'pharmacy-in-a-post-office' is wholly owned by now foreign-controlled Guizhou Ensure Chain Pharmacy, and jointly operated with the Guizhou Province Postal Bureau. SAR-listed Hong Kong Pharmaceutical Holdings last month acquired a 51 per cent stake in Guizhou Ensure for HK$15.25 million.

The acquisition makes Hong Kong Pharmaceutical the first foreign investor in China's tightly controlled medicine retail sector, in which foreign investment is still officially prohibited.

Hong Kong Pharmaceutical's equity investment in Guizhou's medicine sector, and the postal bureau's commercial participation, was permitted through special exemption by Beijing.

In China, the medicine retail business is highly regulated, and normally only licensed domestic companies are allowed to run such businesses. Foreign investors are strictly prohibited from participating in the sector until after China's accession to the World Trade Organisation.

Post offices, all of which are state-owned in China, are not normally allowed to engage in commercial activities. However, given the government's Go West policy, 'certain flexibility' in regulations can be shown. Such flexibility is providing room for private enterprises to invest in normally prohibited businesses, and furthermore, exploit public resources in the western provinces for private profit.

The pharmacy-in-a-post-office is just one case where private and public entrepreneurs have been given exemption from laws and regulations in the interests of economic development.

The venture, which combines the names of its parents, is called Ensure Post.

Under a co-operation agreement, the postal bureau has designated 40-square-metre spaces in post offices in Kaili City for Guizhou Ensure to set up retail medicine counters. The bureau, which operates an extensive and robust logistics network, will also provide logistics support for the pharmacy chain by delivering medicine.

Although the post offices do not own equity stakes in the pharmacies they will take a 50 per cent cut of the profit of each Ensure Post pharmacy through a profit-sharing arrangement.

Following the launch in Kaili City and the injection of new funds from Hong Kong Pharmaceutical last month, the pharmacy chain and the postal bureau have decided to expand the Ensure Post model throughout Guizhou Province.

They are planning to open 200 new pharmacies inside 200 select post offices in prominent locations within the province over the next two to three years, according to Hong Kong Pharmaceutical deputy chairman Huang Shuyun.

'The post office provides the space while we are responsible for running the stores,' said Ms Huang. 'By combining our efforts, we can easily grow the number of our chain stores without the need for huge start-up investment.'

With 58 shops in three provinces in China - including Guizhou, Zheijiang and Hubei - Guizhou Ensure is still small when compared with the country's largest pharmacy chains.

Sanjiu Enterprise Group, for instance, owns well over 400 retail chain shops across China.

However, Ms Huang said the company was planning to quickly increase the number of its retail outlets via the Ensure Post formula to other provinces in the country.

The pharmacy was in talks with a few other provincial postal bureaus and hoped to be able to reach an agreement soon, she said.

With an average of 150,000 yuan (about HK$140,560) per month in revenue, each chain was estimated to generate about 1.8 million yuan in revenue a year, according to Ms Huang.

Last year, the 58 shops generated 22.5 million yuan in sales revenue for Guizhou Ensure.

If Guizhou Ensure's plan to build a 1,000-strong pharmacy chain within three years worked out, the medicine retail distribution business was expected to make a substantial contribution to Hong Kong Pharmaceutical's long-term earnings.