These are good times to be a discounter.

Soon after Jack Gance graduated as a pharmacist, back in 1967, he opened a chemist in suburban Melbourne. But he quickly tired of the business because he wanted to be more entrepreneurial than he felt was possible within the confines of the pharmacy.

In the past 15 years he’s found ways to bust through those confines to drive the biggest shake-up the highly protected and regulated world of pharmacy has seen.

The Gance family – Jack, his brother Sam, Sam’s wife, Lydia, and their son Damien – have woven their way through prescriptive ownership and location rules to create a retail empire linking hundreds of pharmacies and related businesses.

The Chemist Warehouse is the cornerstone of this group, which has revenues of $1.6 billion.

The chain’s unrivalled ability to drive down prices is adding to the pressures on other community pharmacies, which are already grappling with weak retail sales and a government intent on cutting billions from the cost of the pharmaceutical benefit scheme.

For a while the 5000-odd pharmacy owners around the country sniffed at the model. With goods piled high, the average Chemist Warehouse looks more like an Aldi supermarket than a traditional chemist, where white-coated pharmacists pride themselves on their important role in community health, rely on prescriptions and trade discounts on generic medicines for the bulk of their revenue, and often treat retail as an afterthought.

There are pharmacists in every Chemist Warehouse as well – that’s the law. But its customers tend to walk out with their baskets piled high with goods, as well as a few filled scripts.

The group now has a 12 per cent share of the $14 billion revenues that flows through retail pharmacy each year. It took in about $500 million of the $9.6 billion the government outlaid on the pharmaceutical benefit scheme in 2010/11. Its reach is astonishing in a market where individual ownership is limited in the five states to a handful of stores.

It even discounts prescription medicines, and while the Gance family didn’t lead the way in online pharmacy, it bought the business that did.

The family has not only built a business big enough to benefit from substantial economies of scale but one that’s retained momentum, posting double-digit growth as the retail market cruelled.

Not everything is going Chemist Warehouse’s way. Recent changes to the rules that dictate where pharmacies can be located have forced the group to shelve plans for seven new stores. Four others will go ahead, however, and the chain will continue to maximise economies of scale and undercut competitors.

“There are plenty who purport to be discounters but none of them do as well as Chemist Warehouse,’’ says NSW pharmacist Warwick Plunkett, the immediate past president of the Pharmaceutical Society of Australia.

“The group has brought enormous change to the pharmacy market and the discounting model has forced many to think about the way they do business.’’

The PSA is focused on helping pharmacists offer services that will give them a point of differentiation. “Only one person can be the cheapest," Plunkett says.

Terry White from Terry White Chemists says: “The Chemist Warehouse group is certainly having a dramatic effect on smaller players. For us they are a fact of life. There’s no doubt the market is supporting them. A lot of that comes down to perception; they are very aggressive in marketing and promotion."

In the 1970s and 1980s, the Gance brothers brought the Le Specs, Le Tan and Australis brands to the country. After selling that distribution business, Jack gained an MBA, studying at Monash University and NYU before turning full circle and opening a chemist in suburban Melbourne, the first under the MyChemist banner.

That was in 1995. Two years later, Jack’s nephew Damien Gance opened his first pharmacy in Footscray. One more pharmacy followed before the ChemStop name was ditched in favour of Chemist Warehouse.

By 2005 there were five Chemist Warehouse outlets. Today there are 195 in the group, chaired by Jack Gance with Damien Gance as group commercial manger. There are also 38 MyPharmacy outlets, a substantial and growing online business under various brands and 24 BeautySpot stores.

There is more than a touch of ruthlessness about this operation which has outplayed many small businesses and raised fears about the commoditisation of medicine dispensing.

There are other partners in the My Chemist/Chemist Warehouse group but the Gance family, together with the Verrocchis, another family of pharmacists, are the most prominent.

The group does not disclose its finances but has given a quiet nod to industry estimates that put Chemist Warehouse revenues at $1.35 billion, up from $1.3 billion in 2010. Total group revenue is around $1.6 billion.

Jack Gance is a retiring kind of guy, saying he prefers to keep a low profile and refusing a request for an interview. The Chemist Warehouse business, however, is all about profile. It’s hard to open a suburban newspaper without being dazzled by pages of red and yellow branded Chemist Warehouse advertising. There is always a substantial sales catalogue and a dedicated digital radio station playing ’90s music and Chemist Warehouse advertising instore and online.

Every Chemist Warehouse docket asks: “Is this Australia’s Cheapest Chemist?’’ Changes to government pricing for medicines will give the group more scope to use some cheaper prescription medicines as loss leaders to build its business.

Price cuts negotiated by the federal government with pharmaceutical companies will reduce the cost of the pharmaceutical benefits scheme by $1.9 billion over four years.

Some pharmacists warn this will squeeze their margins and say tough times lie ahead. In contrast, Chemist Warehouse sees only opportunity as many medicines fall below the co-payment threshold of $34.20.

Once this occurs, government regulations on the mark-up and prescription fee pharmacists charge fall away. Priceline Pharmacy showed earlier this year what can be done when it sold 40 popular prescription medicines for just $5.99.

Damien Gance says Chemist Warehouse will gain the ability to discount “hundreds if not thousands of additional medications to the Australian public, saving our patients many millions of dollars each year on their essential healthcare".

Retail pharmacy is a heavily subsidised market with more than 50 per cent of turnover coming in the form of government payments for medicines listed on the pharmaceutical benefit scheme. Pharmacists are paid a dispensing fee and have persuaded governments to keep the supermarkets out of the medicine business. There are strict rules that state how many pharmacies can operate and where.

Every new Chemist Warehouse store comes from a closed pool of about 5000 approved locations. Ownership laws vary from state to state but there are limits on the number of pharmacies any individuals can own outside Canberra and the Northern Territory. Such ownership is also limited to registered pharmacists or companies owned by pharmacists.

Fortunately, there is no shortage of pharmacists in the Gance family. Jack Gance, Samuel and Lydia Gance and their son Damien are all registered pharmacists. Together they own 16 pharmacies in Victoria alone.

Company records suggest that many of the properties out of which these and other pharmacies operate are also owned by a member of the Gance family, often in partnership with the Verrocchi family.

Adrian, Marcello and Mario Verrocchi are also all pharmacists who own nine pharmacies in Victoria. The most extensive owner of pharmacy businesses in the state is the East Yarra Friendly Society, which has 21 MyChemists (two of which are co-owned with Jack Gance and Mario Verrocchi) and 16 Chemist Warehouse operations registered in the state.

Until 2004, friendly societies were able to own as many chemists as they wanted in Victoria. A group led by the Gance and Verrocchi families bought East Yarra when it was an inactive concern in 2002 and proceeded to buy pharmacy businesses.

Changes to the law in 2004 stymied plans to repeat the move with another friendly society purchase but the Chemist Warehouse has continued to expand by recruiting franchisees. Often these franchisees have a Gance or a Verrocchi as landlord.

Also in the group are the My Beauty Spot business, Vitamins Direct and various online channels. Jack and Sam Gance and Mario Verrocchi are also directors of ePharmacy, along with ePharmacy founder Brett Clark. That company, which claims to employ more than 1000 people and turn over more than $200 million a year, is also part of the My Chemist/Chemist Warehouse empire.

Size matters in pharmacy. Terry White estimates his group, Chemist Warehouse and Amcal together account for about one-third of all retail pharmacy turnover and says this will continue to grow as pharmacists seek safety in numbers.

“They realise if they are going to compete, they are going to have to tie up with someone with an engine to run large-scale stores with a wider inventory and a value for money proposition that can give customers a good shake on price,’’ Mr White says.

The average Chemist Warehouse is two or three times bigger than the traditional pharmacy and average turnover is correspondingly higher.

A typical visit reveals stores stocked high with vitamins, nappies and every other possibility in health and beauty, with prescriptions dispensed at the back of the store.

Few doubt the group has a winning formula, but will it last?

Several of the country’s biggest selling drugs, including Pfizer’s Lipitor, the cholesterol-lowering drug which is the biggest single item on the pharmaceutical benefit scheme, will come off patent in the next 12 months. This will lead to dramatic reductions in the PBS and a big knock-on effect for pharmacies, White says.

“The Lipitor molecule is worth $750 million now. In three years’ time that will be $100 million. The PBS will flatline or even go backwards, and for the first time in my memory, pharmacy sales will deflate.’’

Treasury doesn’t agree, predicting the PBS will continue to grow above inflation. But there is no question the price the government pays for off-patent or generic medicines will drop in coming years.

Damien Gance agrees this is a time of great change for pharmacy and says the regulatory environment may also need to adapt.

“The nature of pharmacy is changing rapidly under a number of pressures and it is important that the arrangements governing our industry do not constrain new models of delivery that meet with customers’ acceptance.’’

Earlier this year the group secured a planning permit to build a dispatch warehouse in Colac in western Victoria for its online store and a shopfront operation.

Damien Gance says the group had refocused its efforts on its web business.

“It is through this medium we believe we can take our discount offer everywhere and to everyone, regardless of geography.’’

Market observers note online sales reduce Chemist Warehouse already low-cost overheads even further.

The changes to PBS pricing will gather steam next year and, when they do, furious discounting on cheaper prescription medicines is likely to make life even more difficult for both smaller pharmacies and the other pharmacy groups, Terry White and Priceline Pharmacy.

Chemist Warehouse doesn’t have the field to itself. Pharmaceutical wholesaler API has flagged plans to expand its Priceline pharmacy chain by up to 50 per cent by attracting new franchisees.

“It’s Rafferty’s rules once the total dispensed value drops below the co-payment,’’ notes one market observer.

“What many pharmacists still don’t understand is Chemist Warehouse can maintain this strategy for longer, and do it more often than other discounters, because of its low-cost environment – which is, of course, even lower online.’’