Saudi investors exit Pakistan’s largest pharmacy chain. What happened and why?

When you first start looking at the story of Servaid, it sort of looks like a game of passing the parcel. In the nearly 20 years it has been around, one of Pakistan’s largest retail pharmacy franchise chain has seen four different sets of owners.

Initially founded by the Servis Group, Servaid has changed hands within the three families that run the group, seen, two different consortiums have been formed and disbanded, and major foreign investors, including Saudi Arabians, lose their patience and tap out.

But a closer look tells you that it isn’t so much about passing the company around as it has been a case of bad timing and rotten luck. Servaid, one might say, is cursed. 

Throughout all this Servaid has remained one of the most recognisable pharmacy chains in the country, particularly in the Punjab. So why has nobody been able to hold on to it? Probably because the business has faced serious losses and multiple investors have abandoned ship. The reasons are multi-faceted. For one, the pharmacy business is not easy in Pakistan. There are lots of small sized competitors, supply is never entirely guaranteed, and finding reliable staff and managers can be a herculean task. And then there are the other reasons more specific to Servaid: A string of management groups that have either been uninterested in running it or distracted by other business interests. 

The last time the company went through a management change was in 2015. Now, the company is on the brink of faltering again. The only question is whether Servaid will be able to steady its ship once again.  

The beginning

In 2005, the Servis Group decided to enter a new line of business by launching Servaid — a pharmacy chain store they hoped would spread all over the country. It was a strange space to expand into. 

The origins of Servis in Pakistan go back to 1941, when three college friends, Chaudhry Nazar Muhammad and Chaudhry Muhammad Hussain from Gujrat and Chaudhry Muhammad Saeed from Gujranwala district decided to set up a business. The three young men pooled together a grand sum of Rs 62. They began by selling mosquito nets and leather slippers (chappals), mostly for government personnel. In 1941, under the Servis name, they started producing and selling handbags and some sports goods. By 1947, the British were gone and the company had to find new markets. They decided specialisation was the way to go, and immediately focused on producing leather chappals and little else.

In 1953 they formally formed Service Industries in 1953 and installed a shoe manufacturing plant in Gulberg, Lahore in 1953. then followed up with a giant complex in Gujarat, that manufactures not just leather but also plastic and rubber footwear. The introduction of this new material was a gateway, and the Gujarat factory also started producing canvas fabric and bicycle tyres and tubes.

The group grew and they grew fast. But up until now they had followed a very particular path to expansion where one business popped out of the last. 

The pharmacy business was new, but entering it was very much a third generation affair. You see because there were three different families involved there were plenty of scions going around wanting to leave their own print on the business group. Around the time that Servaid was set up, the Servis Group was being run and headed by Omar Saeed, son of Chaudhry Muhammad Husain, one of the founders of the Servis Group. 

The Servis Group itself had already been divided between the friends. On the one hand there was Service International which was the company’s manufacturing arm set up in 1953. On top of this, the original founders had also set up Service Sales Corporation (SSC) as the retail arm of the group and divided the responsibilities and profits amongst themselves. 

In 2005 when Servaid was launched, it was run under the SSC banner. The idea was that Omar Saeed would use the experience of SSC in retail to make the Servaid concept work like the Servis stores had. Mr Saeed was also interested in the retail business and considered to be an expert on this front. 

But his plans were cut abruptly. Very soon into Servaid’s nascent existence, around 2010, there were changes taking place within the Servis Group. The families involved in the business were all expanding beyond comfort and it seemed prudent to divide the business. Despite Mr Saeed’s vision, the elders had spoken. Omar Saeed’s side family got the shoe manufacturing business including tyres. The retail end, meaning SSC, was taken over by Ch Shahid Hussain, son of Chaudhry Nazar Muhammad. And this became the first change of hands that Servaid went through. 

The first of many ownership changes

The asset division of the Servis Group landed Servaid into the lap of Ch Shahid Hussain, the CEO of Service Sales Corporation and the current rector at LUMS. Hussain’s main area of interest was managing the retail business of Servis shoes and growing Servis’ imprint over Pakistan. But he was in for a ride when it came to the pharmacy business. 

The idea behind Servaid was to form Pakistan’s first national chain of pharmacies providing 100% genuine medicine to its customers at uniform rates no matter what the location. At the time when Servaid was launched in 2005 pharmacies were small, family-run businesses usually. Some of the bigger names such as D-Watson or Fazal Din had also grown from these beginnings and opened numerous stores. D-Watson, for example, was based in Islamabad and stuck there other than opening one store in Lahore. Similarly Fazal Din was a Lahore based company. Servaid was the first serious attempt to make a uniform chain of pharmacies across the country. 

Initially, the business also saw some success. According to an internal report of the Servis Group seen by Profit, Servaid had already become the largest pharmacy chain in the country in less than four-years. By 2009 they were operating through 31 stores in five different cities providing services to more than 250,000 customers every month. They had also found success in operating 24 hour pharmacies at various hospitals. 

While the expansion was a good sign, it wasn’t all roses and rainbows for the Servis Group. The pharmacy business was not a pleasant one to break into. The existing players were mean spirited and finding good pharmacy managers was difficult. The only way to succeed in a retail chain model was to expand, expand, and expand. But the more you expanded, the more the systemic problems of the industry became exacerbated.  

This was also a time when the original business of the group, shoes, was facing a tough time. Hush Puppies had been launched in Pakistan in 1995, and while it was slow to grow initially the foreign brand was giving a tough time to both Servis and Bata at the turn of the century, especially when it came to high margin luxury footwear products made in leather. 

The pharmacy business did not have good synergy with the main footwear business, and after turning around the company, it was sold based on the right offer at the right time. Some close to the business have said that it was not because of any sort of competition in the shoe market that the decision to sell Servaid came about, but the internal view was in fact to use the sale of Servaid to further invest in the footwear business which was going well despite the increased competition. 

Because of this amalgamation of factors, in 2015 Shahid Hussain found a suitable buyer and sold 100% of the company that owned Servaid. 

Another set of owners

The company would now be moving on to its third set of owners. Except this time around the change was not happening within the three Servis families. Shahid Hussain sold the pharmacy retail chain to a company by the name of Peninsula Healthcare Partners Limited in 2015. There is some confusion as to this sale but it was confirmed by an internal source as well as by a document of the Competition Commission of Pakistan which cites the sale. 

Peninsula was formed as a company in 2015 — the same year that Shahid Hussain sold Servaid. Now, Peninsula’s composition was interesting. The majority partner in this company were a few Saudi investors including the Saudi Nahdi family which runs the biggest pharmacy chain in Saudi Arabia under the Nahdi Medical Company banner. This little company and this group of investors was banded together by an expat Pakistani by the name of Issam Hamid. 

The idea then was that if Servaid had worked out in Pakistan, individual shareholders of the Nahdi family would then integrate Servaid into the mother company in Saudi Arabia, the Nahdi Medical Company. The idea also was that if Servaid had worked in Pakistan and generated returns, Saudis would then go on to also invest in hospitals in Pakistan. 

Peninsula now owned 99% of Servaid with the remaining 1% ownership with some employees. But Peninsula itself had become a sort of holding company that was only 94% owned by the different Saudi investors. The remaining 6% of the company was owned by a few individuals. Of this, 4% was with Issam Hamid while 1% was with another individual, and 1% was with a new co-founder named Haroon Sheikh, an MBA graduate from INSEAD and a senior executive advisor at Strategy&, the strategy consulting arm of PwC, where he heads the firm’s defence practice in the Middle East. In fact, it was Haroon who had introduced Issam to the Servis family.

With this new coalition in place under the Peninsula banner, the Saudi investors decided it was time to go big. And that is when they played their hand and pumped a billion rupees into the business with an eye on quick expansion. 

The 2015 thesis

At the 10 year mark, a few things were becoming clear. The first was that it was very much possible to build a pharmacy change in Pakistan. At that point pharmacies were located in pockets, dominating certain cities, without having a national presence. For instance, DWatson and Shaheen Pharmacy had a strong presence in Islamabad whereas Clinix and Fazal Din Pharma Plus had a strong presence in Lahore. Likewise, Care Pharmacy was dominant in Faisalabad and Ahsan Pharmacy in Multan. 

The biggest at that time was Clinix with 20 stores and Fazal Din Pharma Plus had 12 stores at that time. And there were again fragmented pockets. There were leaders in Islamabad and Pindi, Shaheen and DWatson. Care Pharmacy in Faisalabad. Ahsan Pharmacy in Multan. These were all little groups that were under 10 pharmacies each scattered all over the country.

The total retail universe of pharmacies in Pakistan is estimated to be between 40,000-50,000 pharmacies, including prominent chains and smaller unorganised retailers, according to pharmacy chain operators Profit spoke to. Out of the 40,000-50,000 pharmacies, organised chains are estimated to be forming about 1-2% of the total number of pharmacies, about 400-800, all combined. 

There is a clear lack of a national level chain in Pakistan. Unlike in other parts of the world, for instance, Walgreens and CVS have a presence across almost all of the states in America. In India too, Apollo Pharmacy has 5,000 stores located in 21 out of 28 states. In Pakistan, organised pharmacies have either been able to expand within a city, or tried expanding for instance in the case of Servaid, within a province.

But how exactly do you make this happen? Servaid had initially gotten some success but the changes in management were making sustaining the growth difficult. The other thing becoming clear was that building a pharmacy chain in Pakistan was going to require dedicated effort and they couldn’t keep throwing the keys to the shop around. Whoever was at the top would need to give it their full attention. The other aspect was that this required quite a bit of capital injection — hence the billion rupee capital injection by the foreign investors. 

With this money, Servaid was reimagined, came out with new branding and quickly saw its footprint grow all across Punjab. Even on Servaid’s website in the about us section, it says that while the company was founded in 2005, it really embarked on its mission in 2015.

“The idea was to provide growth capital and to build a scalable national brand in the pharmacy sector,” says Haroon Sheikh, the co-founder of Servaid. The investment thesis at Servaid was that if a company could put in a lot of money in the pharmacy retail segment, it would come with economies of scale and give a pharmacy retailer the ability to negotiate better supply chain terms with distributors and even directly with manufacturers. Better cash flows would allow further expansion, thereby potentially creating a chain that exists nationwide.

For Saudi backers as well, the alluring factor could have been an absence of a national level pharmacy chain in Pakistan. One of the backers did have a very strong presence in the pharmacy retail in Saudi Arabia that actually owned the biggest pharmacy chain in Saudi Arabia. 

“The fact that there was no big player, there was a lot of room for someone to come in and create that value for customers first and then for shareholders,” says Haroon. “The value for customers lies in getting genuine medicine, dispensed through someone who could also advise them also on how to take the medicine, what compliments the medicine that they have been prescribed and what is the alternative to that medicine. So lots of market gaps that existed in 2015 and most of them still exist.”

With this intent in 2015 and on the back of a Rs1 billion investment, Servaid was looking towards aggressively achieving this goal by focusing on network growth, opening stores one after the other. Haroon refused to disclose how much investment the company received in total. 

The Franchise Putsch 

On the back of new investment, Servaid embarked upon an ambitious journey of growing its retail presence through investing its own capital. There are really only two ways for a retail chain to grow. In the initial period, a retail store opens up a few outlets in different areas and proves that it adheres to a standard that gets customers coming through the door. Once these first few outlets are successful, the chain can either use the money from these branches to open up new ones or embark on a franchise model. 

Initially, Servaid decided to go the self-owned route. According to Servaid’s Information Memorandum from 2023 when the company was put up for sale, between 2015 and 2020, Servaid opened 39 new stores. By June 2022, the company had reached 73 self owned stores in the network, making it one of the largest chains in Pakistan. But by March 2023, this number had dropped significantly: the owned stores network had been decreased to 45 stores.

Around the time that their self-owned stores were getting boarded up, Servaid decided it would charge an upfront franchise fee of Rs 3 crore and a flat 1.5% of the annual sales of the franchisee. This proved more fruitful. By March 2023, the company had successfully franchised 68 stores, with Servaid’s presence now spanning all across Punjab, from Rawalpindi up in the North till Bahawalpur down in the South. The company reached the highest number of 150 stores in 2022, 73 self owned and the remaining franchised, quickly scaling down the number of self owned stores soon after, unwilling to expand to a national pharmacy chain anymore, at least on the back of its own investment. 

So what exactly was going on over at Servaid? On the one hand the company had new investors that were bringing a bunch of shiny money to play with and on the other their expansion plans seemed to be stalling. The reality was a mixture of the nature of Pakistan’s pharma industry and some bad management at Servaid’s HQ. 

In need of a big band-aid

There is a fundamental problem within the pharmaceutical industry and in particular the retail end of the business. And that problem is a four-word acronym: DRAP — the Drug Regulatory Authority of Pakistan. 

Regulatory oversight by DRAP means that manufacturers, distributors and retailers have to eat from a pie that is not going to grow based on market forces of supply and demand but is instead forced upon them. This margin, at gross level, hovers on average at around 15-16%. This is the pharma retailers’ bane to begin with. That these margins are low to begin with compared with other countries in Europe and even India where these margins top 20%. A 15-16% margin leaves only 3-5% margin at a net level to play with. 

Servaid’s case was an anomaly. It wasn’t even making those 3-5% margins. 

According to the company’s financials available with Profit, Servaid had solid topline numbers. For fiscal year 2020, the company had a revenue of Rs 3.28 billion, declining slightly to Rs 3.20 billion in 2021 and was at Rs 3.25 billion in 2022, achieved mostly on the back of owned stores. But the company’s net loss for 2020 was Rs 32 crore, for 2021 it was Rs 14 crore, and for 2022, it was Rs 49 crores. 

In fact, Servaid has never made any profits since 2015, co-founder Haroon Sheikh candidly admits. Partly, he attributes losses to trying to run the pharmacy business professionally, like a big corporation. Remember, the vision for Servaid was to  run it like a top-of-the-line affair. According to a source privy to the company affairs, this corporatisation of Servaid was what the Saudi investors had envisioned for the company. That they would do things the right way no matter what. This would mean that the company would maintain proper books, pay taxes by the book,  sell only genuine medicine etc. In summary the Saudis were clear that profits from the Pakistani business could not be at the expense of any reputational risk.

The corporatisation of Servaid would also mean that the company would have massive costs associated with the head office where chartered accountants and MBA graduates from top universities like LUMS would be getting hefty salaries. The company would also have certified pharmacists to dispense medicines to customers.

On top of that, being a professionally run company, costs associated with regulatory compliance and compliance associated with ensuring that the medicine quality, such as refrigeration at outlets and refrigerated vehicles, and taxation would eat away the margin of the company and hence the losses.  

At one point in time, the company did make a profit before tax. In 2020, the company achieved its first ever before tax profitability of Rs27 million. Now in normal circumstances, if a company makes a pre tax profit, and assuming a 30% corporate income tax rate, should leave a company with a final profit equal to 70% of the pre tax profit But this does not always happen in Pakistan. To meet their targets, tax authorities resort to arbitrary taxation without regard to their own rules.  

“What tax authorities do is that they say we will assess if the turnover is to be taxed or profit is to be taxed. Whichever results in collection of a higher tax amount, authorities impose that tax even if it goes against the rules. In our case, they taxed our turnover instead of income, so the margins became unfeasible,” a high-ranking source close to the company said. The turnover tax is collected when companies that make losses can not be taxed for their income. The turnover tax is 1% of the total revenue a company generates. Consequently, Servaid made a net loss of Rs32 million for the said year. 

This is where the penny dropped for the Saudis. That the Pakistani pharmacy retail industry was structured in a way that did not incentivise organised retail. That their costs of operations would be high due to high inflationary environment, DRAP would always keep margins thin for retailers and taxation by authorities would be arbitrary. This was the structure that would never allow them to make money. On the other hand, unorganised retailers would flout all the rules, would sell medicine they bought from the black market and even sell fake medicine, tax rules would be flouted and unorganised retailers would use margins earned from tax avoidance to give discounts to customers, making organised retailers uncompetitive.

Besides these broader external issues, there were internal issues associated with how Servaid was managed and that would have had a bearing on the profitability of the company. For instance, Servaid was not profitable at a per store level. What this means is that Servaid’s own stores were not generating enough revenue that could cover their own costs, let alone cover costs associated with the head office.

Here’s roughly how the maths worked: for the years 2020 to 2023, company’s per store revenue on average was around Rs 1.99 lakh in 2021, Rs 1.86 lakh in 2022, and Rs1.79 lakh in 2023. This revenue is slightly short of Rs 2 lakh, according to industry officials as well as Haroon, in revenue per day from each store to break even.  Executives in the pharma industry say that on a per store basis, the costs including rentals, electricity bills and salaries for pharmacists require stores to make sales worth around Rs 2 lakh to achieve break even. 

Why was the company not achieving the breakeven number at a per store level? After all, one can say that Servaid was paying the price of being in a difficult industry and was also suffering from being principled, but there is more than meets the eye. 

For example, remember how we mentioned that one of the costs associated with running Servaid were chartered accountants and MBA graduates from top universities like LUMS weighing down the salary bill? Well the company’s information memorandum does not mention any highly qualified managers. In fact, the three key people in the management either have a BCom or a Masters degree from one of the universities that are not considered top for business studies. Interestingly enough, the same information memorandum does not even mention Haroon by name, the most qualified of them all, and only mentions him as a cofounder. Haroon, who remembers from his introduction in this story, has a full-time job outside of Servaid that he needs to give his time and attention to. 

It seems that there was a serious lack of managerial commitment from the get go. But there also was bad strategy when it came to opening stores, and unavailability of products at stores. The poor management also led to corruption by employees. 

A multilayered disaster 

For a better insight into how Servaid was being run, we need to go to someone that was in the trenches. A former high ranking official, Arif Paracha, who served as the acting CEO as well as the COO from 2021 to 2023, detailed a multilayered disaster at Servaid ranging from opening stores at unfavourable locations, misimplementation of an important software that led to unavailability of products in the stores, and corruption by employees due to which losses swelled. 

The first problem was that the company was opening stores at locations that were cheap. But because they were cheap, they did not have a great revenue generation potential. Because of low rentals, these locations were supposed to generate profits by saving costs. But since these locations were cheap, they were bad and could hence not generate enough revenue either. For instance if a store was being opened at locations where rental was Rs 40-50,000 instead of say Rs 1 lakh which would be the case for a better location, the said store would also be generating an amount equally less in revenue. On the other hand a store which had to bear a rental cost of Rs 1 lakh would generate significantly high footfall and hence more revenue leading to a store level profitability. 

The said stores were significant in number to bring down overall profits, leading to an overall loss. “Servaid was bleeding money and we had to shut down these stores so that this bleeding could be stopped,” says Arif. The said shutting down of stores happened between June 2022 and March 2023. Between this time period, the company shut down a total of 28 stores. This shutting down of stores also led to piling up of inventory shortages that were written off, eventually increasing overall losses. 

The second biggest issue, according to Arif Paracha, was that because of a lack of oversight at the company, employees were engaged in corruption, stealing stock without any oversight or consequences. In another example, employees at stores, essentially the pharmacists, were caught selling stock without giving the receipt, pocketing the money from the sale without giving it to the company.

According to another senior official of the company who commented anonymously, shortages started in 2020 when the ERP (enterprise resource planning) software implementation (discussed below) was messed up and the company lost count of the stock. Basically, the ERP transition led to losing control and visibility on the stock. 

According to the company’s financials available with Profit, inventory shortages at the company ran in tens of millions of rupees, that had to be written off. This is essentially the stock that went missing because of leakages, theft or pilferage or what Arif says was corruption by employees. Stock shortages worth Rs 3 crore were written off in 2023, worth Rs 8 crores 68 lakhs were written off in 2022 and Rs 1.3 crore in 2021. But it is well within the dynamics of the industry where shortages that are written off happen to be at around 0.5%, as a percentage of revenue but can go as high as 2%, according to a pharmacy retail executive Profit spoke to.

For example, Servaid had Rs 1 crore 30 lakhs worth of stock shortage in 2021. As a percentage of Rs 3.2 billion revenue for that year, it’s 0.4% in inventory shortages. For the year 2022 when these shortages were Rs 8 crore 68 lakhs, the company’s revenue again was Rs 3.2 billion. As a percentage of revenue, it comes out to 2.5%, only slightly above what usually happens in the industry but only for one year. For the year 2023, the company forecasted a revenue of Rs2.5 billion. For the same year, shortages at the company were Rs 3 crore, which as a percentage of the revenue comes out to 1.2%. 

The only abnormality here is during the year 2022 when shortages went over the 2% mark, reaching to 2.5%. The number was abnormally high according to Haroon as well, who attributed it to the aforementioned store closures which led to bigger shortages while for instance moving inventory back from these stores. 

Nonetheless, the remaining years were well within the industry standards, with similar shortages happening at other retail chains as well. That shouldn’t be a big deal for Servaid too. But Arif argues that since the margins at the end are thin, a tiny percentage of even 0.4% matters. He, however, conceded that low tier managers knew what was happening but didn’t do anything about it, and that he had to clean the house and get rid of people involved in corruption. 

This is essentially an issue of lack of strong supervision at Servaid in the absence of a committed CEO to run the company. The company was structured in a way that the chief operating officer would manage the day to day affairs and reporting to the co-founder, Haroon Sheikh. At times, Servaid has tried to bring CEOs to run the company. Haroon claims that three different CEOs were tried out in an eight year period, a high number but because of unavailability of qualified professionals who understood pharmacy retail. 

Part time executive operating 

At the same time the company had a strange governance structure that would make it hard for any CEO to come in and make things work. Normally the CEO is the head honcho. In the case of Servaid, it was the co-founder who was the de facto leader of the company, with the final say on all matters. This was especially strange because Haroon Sheikh was exercising the powers of the CEO but somehow shying away from taking the title. On top of this, he was also not looking at the business too closely, and day to day operations were being run by the chief operating officer, according to a company insider. The company’s earlier mentioned information memorandum also outlines that the COO reported to the co-founder at the time the sale was initiated. 

The problem, however, was that co-founder, Haroon, had other engagements as well. As earlier mentioned, he is a senior advisor at a big Middle Eastern firm where he heads their defence practice and would therefore mostly be based in the Middle East. His designation as co-founder of Servaid entails a role that does not involve managing day to day affairs of the company back in Pakistan. This designation can go without any conflict with his role at Strategy&. But it possibly comes with a lack of commitment towards the Pakistani business Servaid where a lot of investor money had been pumped on a great idea that could have been scaled if the company was well managed. Haroon is also the co-founder of Lahore-based Smash Burgers. 

And it isn’t just Haroon. It seems that Servaid has been dealt a hand in which nobody is ever really making the chain their first priority. The company’s acting CEO and COO between 2021 and 2023, Arif Paracha, also had multiple other engagements, one of them being founder and CEO of test preparation service SmartPrep, the other one being co-founder and managing director of another company by the name of KlockWork. He had all these engagements while he was serving as the top guy at Servaid. 

But perhaps the biggest problem that Servaid faced was the implementation of the ERP system to manage inventory and sales. The teams at Servaid that were using this system were able to order inventory from manufacturers and distributors through the system but were not able to dispatch this inventory to stores through this system due to some bugs. As a consequence, transfer orders could not be issued into the network, leading to unavailability of stock at stores. 

“There was also a problem with reporting! Data was not being collected accurately and forecasting could not be done on this data. What to order and when to order. We had to clean all that data up and get it into the system first. It all turned out to be a big mess,” says Arif. 

“Audit shortages were not being posted properly. There was a lot of hotchpotch in the data. We took that data and migrated it into Dynamics and that is when we realised that things were very off. There was absolutely nothing that was tallying. We carried out a massive audit of the inventory across the board, and got the accurate data. Once the data was put in, Dynamics wouldn’t let stores get the inventory.”

Arif openly blames Systems Limited, Pakistan’s premier software house and one of the technology companies that does the implementation work for Microsoft Dynamics ERP. That they did not train the teams at Servaid at using Dynamics properly. That there were bugs in the system that cost Servaid in a dire manner. 

“Dynamics was allowing us to do some things but it was not allowing us to do many many things. We did not have Power BI, we did not have analytics, we had to do all of that manually,” says Arif. The consequence of that? According to one source at the company, if the company’s sales were Rs1.5-2 crore in a day, they went down to Rs 70 lakhs because of the issues with the ERP. Systems Limited has refuted Servaid’s claim that poor implementation was the reason for decline in Servaid’s sales. “Our stance is rooted in the success of our implementation and diligent support we provided throughout the process – which is offered after successful delivery and implementation.” 

“The primary issue faced by the company was related to their stock count and operational processes. Our implementation was not the cause of their decline; rather it was their inadequate processes that struggled to handle the scale at which they were operating,” a representative from Systems told Profit. 

Systems further said that the company had different business plans in place, including strategies for market penetration and engagement from Saudi and Dubai investors, and implementation by Systems was not the issue. 

So here we have a situation where a company opens stores at wrong locations that messes up their sales revenue, employees are engaged in stealing stock or selling them without crediting money to the company and there is a lack of managerial commitment. On top of that, if a customer walks in, he is also told that a certain medicine is not available because the store couldn’t receive the medicine because of glitches in the ERP, even though the medicine would be stocked at the warehouse of the company. All of this leading to a decrease in per day sales at stores, leading to overall losses. The company closes stores and there is more inventory-related corruption. Because it closes stores but is in contracts to pay lease dues, it bears those losses as well. 

On the overall loss-making performance of the company, Haroon admits that the management has to take a lot of responsibility. That the management has to take responsibility for not implementing the technology stack properly and timely as required, which led to lack of availability of products at stores. But he also says mismanagement is easy in pharmacy retail business because there is a dearth of professionals that understand such retail. 

“It was very difficult to find people to run Servaid who knew what the sector was about. You could either go and hire a pharmacist who had very little commercial or management exposure and just technical knowledge, or you could hire a generalist from the retail industry who did not understand the details of running a pharmacy, which is quite technical as well. So that has to be, you know finding the right HR was a big big problem. In retrospect, I think we should have brought someone from outside Pakistan, who could do both of these things.” 

Experts in the industry also corroborate that the HR problem is generally an industry problem because of a lack of professional manpower to run pharmacies according to corporate standards. 

Investors exit

By January 2023, the company’s foreign sponsors had started contemplating an exit following the company’s poor performance over the entirety of its existence. That they would not invest anything further into the company and set a deadline of December 2023 to complete the exit.  

“The shareholders were not happy with the performance of the company and that has to be the biggest reason. But also the macroeconomic outlook in 2023 wasn’t that great for Pakistan. They wanted to reduce their exposure and decided to withdraw from the company.”

The exit of the Saudis could have been prompted back in 2021 when they realised that Pakistan’s retail pharmacy sector was structurally flawed which made it impossible for organised retailers to make money unless rules were bent. This was, of course, on top of the bad management at the company where part-time executives were half-heartedly running affairs of the company leading to piling up of losses, eventually leaving the Saudis with no choice but to exit from Pakistan. 

The exit of Saudi investors could potentially be a big loss for Pakistan. Such investors could have brought in a lot of money not in Pakistan’s pharmaceutical sector had the going remained smooth at Servaid. 

The same year Servaid was put up for sale with potential buyers in Dvago, Fazal Din Pharmacy and Muller and Phipps among names known to Profit.  None of these bids materialised and the company has been bought over by the current management instead. 

“We were talking to a lot of investors and we were looking at different combinations of how we could continue this growth journey. Do we need to pivot and look at different business models? Ultimately, we thought it was in the best interest of the company to consolidate a bit, regroup, get the house back in order and get back to the market ourselves in the first or second half of 2024.” 

Haroon did not disclose at what valuation the company was bought but according to a source close to the transaction the management bought the Saudi’s without having to pay anything. 

What’s next

The Servaid story is not done yet. The management has already initiated plans to resurrect the company by shutting down stores which reduce expenses under multiple heads which were contributing towards losses at the company. 

At the moment, the company has a total of 20 self owned stores that it plans to keep running until 2028, without any increase in the number of these stores. The idea then is to bring these stores to a point where they are able to generate Rs 3.5-4 lakhs in sales per day and achieve per store profitability first. 

“Once the per store profitability is achieved, we will use the company’s profits to invest in opening new stores again and carry on with the expansion of the pharmacy,” says Haroon. 

Company’s financial forecasts show that Servaid would be profitable in 2024, reaching 4.1 crore in annual profits. The profitability trajectory continues until 2028 when the company expects it will be able to achieve Rs 16.3 crores in profits on Rs3 billion in revenues. This translates into a net margin of 5.43%.

A significant portion of Servaid’s income will come from the franchises that Servaid plans to grow to 270 by 2028. The only question that remains is who will come and deliver on this planned growth, and would enough people be interested in investing in a Servaid franchise, especially now that the brand name also stands tarnished?