Saturday Interview: ALLAN GORDON is happy to see Walter Davidson remain an independent chemist chain.

IN not many sectors of the economy does government have the power to cut private sector profits by 30% at a stroke, but that is what happened last October to pharmacists in Scotland.

The sudden clawback by NHS Scotland of inflated profits on generic drugs has added to the pressure on small chemists to sell out to German-owned Lloyds, newly-merged Alliance Boots or the Co-operative, the consolidators big enough to stand up to the supermarkets.

It also came as the latest business challenge for Allan Gordon, who has built the 26-outlet Perthshire chemist Walter Davidson into the largest of Scotland's handful of healthy surviving independents.

Brought into the family business as its first trained accountant 18 years ago, Gordon has steered it from loss into healthy profit, more than doubled its stores and proved that loyalty to local service is still alive and well in Scotland.

Gordon's eyrie is in the attic of an imposing Victorian house in Blairgowrie, commanding views of the river, the picnic park and rival Boots across the road.

It is the house in which Walter Davidson, grandfather of current chairman Douglas, 80, opened his first shop on the ground floor in 1897, living on the top three floors.

And when Boots finally landed in the small country town, by buying up a local chemist a decade ago, the giant was in for a surprise. "They thought everybody would leave Davidson," Gordon says. "It didn't happen. We provide a great service and we have increased our position."

He adds: "I know how much business we do and I know how much business they do for every one (prescription) they do, we will do 10." He admits, however, that competition in over-the-counter medicines from the big retailers has become tougher.

But the whole industry in Scotland is now feeling the squeeze of the new £50m profit cap on generic drugs, despite government intentions to maintain the overall £220m a year budget for community pharmacies.

Davidson's accounts for last year show profits falling from £2.4m to £1m, on turnover of £25m, and Gordon says the new tariff will slash £800,000 off this year's profits. "It has had a big impact," he says, adding that the industry is now seeing a wave of redundancies and wage freezes.

"The chains that have sold out over the last five years have been bought at very inflated prices. Given the squeeze on borrowings, there will be a lot of chains out there that have maybe overstretched themselves."

Amid consolidation in the sector which in March saw the sale of the Munro chain to Lloyds, abandoning a £20m plan to double its outlets to 50, Davidson last year invested £3.5m in acquiring two pharmacies. Gordon admits to paying "£2 for every £1 of turn-over", against 50p a decade earlier, and says: "We are fortunate we started expanding in the mid-90s."

When Dundee-born Gordon was hired in 1990 as a 24-year-old newly-qualified CA, Davidson had 10 branches and no in-house accountant. "If I'm being honest I had never heard of them in my life," he says. "After being in the company for about three months I came to the conclusion it might not last much longer - they were technically insolvent."

Putting his training into swift practice, Gordon's belt-tightening, business plan and stock reduction stabilised the business, kept the bank on board, and drove it into profit by 1996, providing a platform for modest growth.

"I had got the bit between my teeth, I was still in my late twenties and thinking let's try and do something', and a lot of trust had been put in me by the directors."

Chairman Davidson, whose son and daughter are shareholders but not involved in the business, wanted to see the family company now in its fourth generation continue to expand. In 1997, Gordon approached two small rivals and made offers. "We negotiated very hard, though not to the point of putting guns to heads," he recalls. "It is all about encouraging people to accept the price."

He decided to limit his targets to a 60-mile radius of Blairgowrie (population 7900), and has since added a further 16 acquisitions, while closing one outlet and selling another. "The place to be is not the city centres, it is Alyth, Scone, Bridge of Earn, villages around the principal towns which are growing in population."

Gordon says Davidson will not overpay to compete. "We haven't won anything when we have come up against someone else we will approach people we would like to begin discussions with, then it's about trying to get to know them, what makes them tick, not right, there's our wad on the table, we will beat anyone in sight'."

He goes on: "I like to think we have a good reputation for taking over people and not cutting costs and getting rid of staff. When people join us, immediately they get better holidays, better rates of pay."

Gordon says: "We are not laying off anyone, we are not cutting people's wages, we don't have to, we are not in that financial predicament. What we will be looking at very carefully is unnecessary expenditure."

Meanwhile, pharmacies are set to play a growing role in community healthcare. They already provide a minor ailments service, diverting people from busy GP surgeries, a public health service is taking shape, and in the pipeline are plans for chronic and acute medical services. The four-pronged strategy for NHS Scotland is more ambitious than the new pharmacy arrangements in operation south of the border.

"Their new contract has not been as visionary as ours," Gordon says. "It is one of the benefits in Scotland, we can do things fast, take decisions much faster."

The future of Walter Davidson is uncertain and will depend on family decisions. But 3% shareholder Gordon and his management team, which includes second wife Karen, expecting their first child, will hope to play a part in it.

He says: "At this point in time it is all about continuing to do what we are doing, continuing to expand, and when the time comes, shareholders and directors will decide what they are going to do."