South Africa’s biggest pharmacy chains have embarked on a new “space war”, with Dis-Chem announcing a near-50% increase to its store base and Clicks gunning for a 30% expansion over the next few years.
Dis-Chem aims to open about 140 stores in the next three years by adding 137,000m² to its retail footprint. At the end of the half-year to August, it had 268 retail pharmacy stores and 54 Baby City stores. Clicks, with 885 stores now, has a longer-term target of 1,200 on the cards.
These aggressive growth plans appear to have ignited a rally in both companies’ shares: Clicks gained over 10% after it released numbers; Dis-Chem is up 13% over the past week.
Dis-Chem is particularly strong in Gauteng, where it was founded, while Clicks is stronger in its original base of the Western Cape. Space is equal between Dis-Chem and Clicks in Gauteng, though Dis-Chem has fewer, but bigger, stores. Crucially, both are growing ahead of the market — most likely as small independents fold.
“The property expansion strategy is fundamentally important to the delivery of future earnings growth,” Dis-Chem CEO Rui Morais said in the investor presentation this week. “Obviously we are underrepresented outside Gauteng … in pharmacy and the front shop.” Nationally, he says, there are 300 malls in which Clicks features where it’s keen to take space as well.
“We drive higher foot traffic and our trading densities are the highest in the country,” says Morais.
Yet the group posted a slump in interim earnings for the six months to end-August, despite a 9.4% rise in revenue to R17.9bn, as expenses (a rise in the number of employees, diesel and IT costs) outpaced the growth in like-for-like revenue. Group headline earnings per share fell 17.2% to 58.2c. Its dividend was similarly lower, at 23.24c a share.
According to Gryphon Asset Management portfolio manager and research analyst Casparus Treurnicht, “there are signs that the worst is over … store sales on a real like-for-like basis are still negative, but less negative”.
He says: “The pharma space is getting more competitive by the day, and getting saturated. Every pharma chain is stepping up store rollouts and Shoprite is also going to try to get this space running hard. I think the good old days of retail are over compared with 10 years ago [but] pharma is the last area where they can still grow.”
Consider that Dis-Chem’s pharmacy market share stands at 36% in Gauteng, where Clicks has 21.6%.
Both companies are at the mercy of an uncompromisingly tough economy, however. For example, shoppers bought fewer expensive fragrances (Gucci) in favour of mass-market brands (Coty) as they traded down, which knocked beauty sales at Dis-Chem.
“We didn’t shift quickly enough to the mass market,” says Morais, referring to lower-end fragrances. “It’s a good example of consumers shifting their share of wallet; we see it across a lot of categories.”
Once you lose a chronic script, you lose it for six months and the basket that goes with it
— Rui Morais
Then there were the customers lost following the fallout from founder Ivan Saltzman’s notorious memo — a moratorium on hiring white people to meet equity targets. “Once you lose a chronic script, you lose it for six months and the basket that goes with it,” Morais tells the FM. Obtaining the script is critical, because it helps grow front-shop market share and drive foot traffic.
Most of those customers lost over the furore had returned by the second quarter, he says.
Dis-Chem’s new ventures — such as medical insurance — are going well, however; customers have doubled over the past six months. “The market definitely exists. We are very comfortable with the trajectory of sales and the concept of integrated health care,” says Morais.
Morais’s vision in this sphere doesn’t end at medical insurance. “We think we will eventually have a basket of financial services products that make sense when you look at it through the health-care lens”, such as gap cover.
The growth in this area would pit Dis-Chem against the likes of mighty old hands such as Discovery.
For now, Dis-Chem says keeping costs down will be one of its key focus areas in the second half. Less than half its stores showed revenue growth ahead of payroll growth in the first quarter, though this had improved to 67% in October.
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