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The Healthcare Shop (in Shop)

December 20, 2018

The shop-in-shop or store-in-store(s-in-s) model has been existing since 1930s when retailers realised the opportunity to lease out spaces to provide a one-stop shop to customers looking for multiple products/services. There are restaurants having counters inside gas/petrol stations, a coffee shop inside a bookstore, and so on. The idea is to create a win-win-win scenario for the lessor-lessee-customer. The reasons for allowing someone to set shop inside their own ‘shop’ can vary from (i) gaining more customers (and income) by strategically opting for services that complement its own offering (ii) better customer/employee engagement by outsourcing a part of its non-core operations to expert(s) (iii) better utilisation of space and extra income in the form of rent.

 

  

You might have noticed a branded pharmacy in a neighbourhood hospital, a branded clinic handling one speciality in a multi-speciality hospital, a branded optics store in a smaller eyecare hospital or a toy store inside a maternal & child care hospital. You may have even seen a fully operational healthcare clinic within the premises of your employer that is run by doctors or nurses who are not directly employed by your organisation. These are all examples of the s-in-s model in healthcare ecosystem.  This model’s presence in healthcare is much more than what meets the eye as some hospitals bind the partners contractually against using a different branding inside the hospitals. You might have been diagnosed by a lab, inside a hospital, that is not owned or managed by the hospital, and if you did not face any challenge in communication from hospital or the lab, it signals successful sync of operations.

 

Income source for these stores and doctors/hospitals can vary. A toy store inside a maternal care hospital might just be paying a fixed fee in lieu of rent for its operations, whereas an optics store might be paying the doctor/hospital in the form of revenue share. The model makes equal sense for a single-doctor run small hospital or a corporate facility. The income share ultimately depends on the brand power of the partner. An optics centre might be paying much larger revenue share to a large hospital run by star doctor(s) in a premium location, compared to a small eyecare hospital run by a young doctor couple.

 

The most common rationale for a hospital to follow this model is to let it focus on its core offering of consultation and treatment. The other rationale is to leave the specialised jobs to specialists. There are hospitals outsourcing speciality (and critical) services like providing dialysis services to patients suffering from Chronic Kidney Disease. Are the hospitals then outsourcing its core operations? That might as well be a topic for another blog.

 

There are number of start-ups in the Indian healthcare space that are leveraging the shop-in-shop model and building robust businesses entirely around that concept. There are several advantages in this model of growth as outlined below.

 

Advantages of the Shop-in-shop model:

 

Revenue Certainty: Some of the models of engagement include a revenue promise from those offering their premises. This model is seen especially in cases where the entity offering the space is regulatorily required to provide a service that is non-core or highly specialised. In those cases, revenue certainty is a key feature for those setting up shop inside a larger shop.

 

Low upfront capital investment: The capital expenditure required by the in-shop unit is often funded by the entity offering the premises. Even otherwise, given that the civil construction (building) related expenses are borne by the lessor, the capital expenditure on equipment, etc is much less. It may as well be that the unit operating within the premises of the other entity is not required to pay any rental.

 

Of course, there are challenges, too. Some of the risks and challenges faced can be outlined as below.

 

Risks and challenges:

 

Brand value risk: An obvious risk associated with this model across industries is the brand reputation. A hospital facing patient’s (and court’s) wrath for alleged negligence or incorrect treatment by a different department might also lead to closure of a partner running renal dialysis centre (shop) inside the hospital, and the brand of dialysis partner might suffer collateral damage. It can very well be vice-versa, where a 1000-bedded hospital might suffer (or shut-down) because of a patient’s death due to the negligence of the renal dialysis operating partner.

 

Operational Challenges:  Think of a partner running pathology lab for a 50-bedded single-speciality hospital owned by a doctor in Tier Y/Z town, and another partner running the pharmacy.  The doctor might not have/want additional resources to monitor operations, hence the lab & pharmacy partners needs to be in-sync in terms of appointment, billing, medical records, and a general communication flow. These might appear obvious but the adoption of electronic medical records and Hospital Information Systems in India are majorly restricted to corporate hospitals and remains minimal otherwise. Having a simple yet robust IT platform is not just better for operations, but also brings transparency and becomes a key differentiator for anyone wanting to set up any kind of shop inside hospital. ‘Simplicity’ is the keyword here. This is equally important for a 50-bed or a 1000-bed hospital, and becomes critical (even a criterion for partnering) if one is operating any such centre/shop inside a government hospital under Public-Private-Partnership (PPP).

 

An organisation built on s-in-s as a business model is at a higher risk than an organisation using the concept as an operating model and not completely dependent on host/lessor for revenue. The latter organisation is better equipped to handle shocks.

 

Data Risk :Another challenge is the data security/privacy, and India is moving in the direction towards a strong policy for protecting the data through DISHA (Digital information security in healthcare Act). Healthcare information might well be considered as the most private information by people, and equally valuable by the parties that want to use the data to build/sell products (insurance, pharmacy, e-commerce). The doctors and patients are equally wary of their information being used by multiple parties which might bombard them with advertisement for products/services. The trust is of utmost importance, and the IT platform of a partner lab or pharmacy can help in winning this trust.

 

Majority of the companies operating on this model have moderate asset requirements, standard operations, good unit economics, possibility of franchising business and thus scalable models to the extent that some of these can set up a new store/centre/shop in a day or two. These factors make this model quite attractive for VC funds.

 

Investors’ Interest

 

Venture Capital (VC) money has been steadily flowing into companies operating on this model in healthcare. While healthcare delivery is generally a capital-guzzling business, the shop-in-shop model has lower capital intensity but requires strong operational expertise. So, VC funds seem to prefer teams with nuanced understanding of the specific sub-segment of the industry and strong operating experience. Ventureast and Asian Healthcare Fund have invested in Eyegear Optics, a company that operates a chain of optics stores under ‘Ben Franklin’ brand. Matrix Partners has invested in Techmed Health Centre, a company that runs pathology labs inside private and government hospitals. Dialysis care chains operating on this model inside private and government hospitals have been quite popular with the investors; Nephroplus has raised funds from Sealink Capital, IFC and Bessemer Venture Partners while Asian Development Bank has invested in DCDC Kidney Care, and Tata Capital Healthcare had backed Sandor Nephrocare (which was later acquired by Fresenius).

 

At Caspian, we have funded several companies in the healthcare space with a shop-in-shop model. Our funding to companies is for working capital or for capital expenditure (medical equipment and other infrastructure for opening new centres). We have funded a total of 12 companies in healthcare till date (Sep, 2018) and the total amount of funding that we have provided is around INR 400 Million. We believe that start-ups that are building asset-moderate models utilising technology as a lever and dealing with the operational complexities through operating and business model innovations will succeed in the long run. 

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