Dis-Chem expects new discovery points from insurance products

Is health-care retailer Dis-Chem planning to disrupt South Africa’s medical cover and insurance market, dominated by financial services powerhouses like Discovery?

Recent financial results show that the largest pharmacy retail chain in South Africa by market share is fast evolving into an integrated health-care provider. The big question, though, is whether Dis-Chem’s push into specialised insurance and medical cover is a savvy and lucrative diversification off a sprawling retail base — or a strategic response to flagging sales in the front shop in categories such as personal care, health care and baby care.

In the year ended February 28, the baby care division’s turnover declined 7.1% to R2.5bn, with market share slipping from 17.8% to 14.6%. Personal care and beauty products dropped to 17.2% from 17.6%, while the health-care section edged down from 46.7% to 46%. The company closed nine Baby City stores during the year.

Dis-Chem CEO Rui Morais attributes some of this softness to an increasingly promotion-driven retail environment. While the group still holds a strong 24.3% share in the dispensary market, it is not leading in promotional activity, where competitor Clicks is thriving.

At the same time, Dis-Chem’s entry into insurance and medical cover has gained momentum. The business is still in its infancy, but early indicators are promising. Dis-Chem Life, launched in February, offers life insurance, funeral cover and chronic illness policies, as well as other tailored products targeted at the affordable end of the market.

Financial advisers are now in 17 stores, and there are plans to extend this across the networks by financial 2026.

Morais sees low-cost medical cover as a huge opportunity in South Africa, as there are 12-million employed people and dependants in the country who are not covered. Membership in traditional medical schemes is constrained by stagnant GDP and job growth. Dis-Chem aims to fill the gap with lower-cost, accessible products.

The company claims it is now the country’s largest retail medical insurance provider, with nearly 40% growth in policy sales year on year and R500m in related customer spend — up 37% over the same period.

While still small in scale, Dis-Chem’s insurance push is resulting in a change in consumer habits. Policyholders visit stores five more times a year on average. During the review period, prescription scripts from these customers rose to 262,000 from just 10,000 in financial 2022.

Dis-Chem is also expanding into wellness programmes, life insurance, gap cover and broader health services (which overlap with those offered by operators like Discovery). A new innovation hub harnesses data to improve product development, promotional effectiveness and overall health-care delivery.

Morais believes the hub will enable data-led decision-making to design health-care products more effectively and manage costs across the supply chain.

Dis-Chem will operate in the shadow of the big insurers. “We believe our differentiation is that we own the supply side and are able to invest in margin and reduce the cost of health-care delivery,” Morais says.

He acknowledges missteps on the retail side. Promotional activity and loyalty programmes lag behind those of Clicks, which generates 47% of turnover through promotions and boasts a more established rewards programme. Dis-Chem will be relaunching its own programme this financial year.

Clicks customers know what to expect from its promotions. That consistency builds loyalty and drives foot count, says Sean Culverwell, equity analyst at Anchor Capital. He also notes that Clicks’s smaller store format (550m² vs Dis-Chem’s 1,125m²) is more capital efficient, allowing for faster payback periods and greater flexibility in retail site selection. Dis-Chem has started shifting to smaller formats.

We believe our differentiation is that we own the supply side and are able to invest in margin and reduce the cost of health-care delivery

—  Rui Morais

Culverwell notes that Dis-Chem’s advances on the pharmacy side would have been helped by Clicks not having been granted new pharmacy licences for an extended period due to a legal dispute, which has now been resolved.

As for the front shop, it would take more strain, as traditional retailers and platforms like Checkers Sixty60 may be putting pressure on sales. “I suspect certain essential items that were previously purchased at Dis-Chem are now being picked up on Sixty60.”

Morais is confident that financial services will enhance margins and introduce annuity income into Dis-Chem’s model. But he’s tight-lipped on specific growth targets, citing commercial sensitivity. The aim is to deepen customer engagement with funded products that drive utilisation across pharmacies and clinics — and by extension the retail front shop.

Culverwell is sceptical. “They’re losing market share in core retail areas,” he says. “They should fix that before expanding into new sectors.”

He also questions whether Dis-Chem can truly compete with the established giants, which are after a higher LSM market that requires a wider range of benefits. “They’re targeting a different segment — more affordable cover. But those are not the same customers as the ones covered by Discovery or traditional insurers”.

Alec Abraham, senior equity analyst at Sasfin Wealth, says Dis-Chem’s comparable sales continue to lag Clicks’s. While the move into insurance might help bring more foot traffic and enhance the rewards programme, he doesn’t see it as transformative for the industry.

“It might help on the margins, maybe draw a few more feet and support loyalty,” he says. “But I don’t think it’s going to shift the needle in terms of broader health cover.”

While there is overlap, the two companies play in a different space. Where Discovery is a health insurer, Dis-Chem is focused more on primary care and looking at providing solutions. Discovery is a medical aid and governed by the Council for Medical Schemes, whereas Dis-Chem is not.