The pharmaceutical giants are growing

After more than two decades of chasing the same shoppers in the same malls in the same suburbs, South Africa’s largest pharmacy chains are confronting a growth problem: how to keep selling into a near-saturated market while expanding into riskier, underserved areas.

In affluent and middle-class centres, Clicks and Dis-Chem are often within a few stores of each other or just a short drive apart. Yet in townships — a market Standard Bank estimates is worth R900bn a year — they barely have outlets, even though together the two firms control roughly half the country’s dispensary market.

But now — with rivals such as Shoprite’s Medirite encroaching on their turf and further consolidation likely as smaller independents battle rising costs and their lack of incentives such as loyalty rewards — Dis-Chem and Clicks are resizing, redesigning and reconceptualising. The result: 24-hour medical destinations as big as 15 padel courts, high-end stores focused on meeting all consumers’ health-care needs, and downscaled shops as small as 150m² — about three-quarters of one of those courts.

“They are squeezing out growth where people thought none remains,” Casparus Treurnicht, portfolio manager at Gryphon Asset Management, tells the FM, pointing to opportunity in underserved communities and all-day formats.

Following the success of Shoprite’s Usave and Pick n Pay’s Boxer, confidence is also growing that retail can thrive at the lower end of the market, where demand for pharmacy-based retail is strong and largely unmet.

Clicks has yet to settle on a name for its low-end offering, says CEO Bertina Engelbrecht. The company wants to avoid diluting its core brand or confusing customers about what to expect.

In Alexandra and Soweto, Clicks operates five stores, whereas Engelbrecht believes 10 are viable. In parts of the Western Cape that could support five or six stores, there are only three. The constraint has been space: landlords in these nodes offer plots of 200m²-300m², below Clicks’s historic threshold.

“We realised that was a constraint, and if we could solve it, we’d be able to grow much faster,” she says. The answer is a format of 150m²-300m², near transport hubs. Many customers earn daily or weekly wages and cannot afford to buy the wrong product. Their homes are small and don’t accommodate bulk purchases.

The stores will focus on baby, health, personal care and everyday essential products, with smaller pack sizes and higher private-label penetration than the one-in-three ratio Clicks now achieves. Virtual doctors and clinic services are being considered in the place of a traditional dispensary, given that many customers lack full medical aid and because the annual cost of a pharmacist, at R575,000-R950,000, would compress the economics of a store this size.

Ten pilots are planned for the current financial year. Staff will be recruited from local communities, different uniforms and different music will feature, and trading hours will be extended for customers who get home only after 6pm. The same 23%-plus return-on-investment hurdle will apply.

Dis-Chem and Shoprite are taking different paths.

Dis-Chem uses its wholesale arm to supply more than 1,000 independent pharmacies, and rebrands many of them under its The Local Choice (TLC) franchise.

Shoprite’s Medirite leverages the group’s existing supermarket footprint to bring health care directly to customers. Rather than launching new brands or franchises, Medirite piggybacks on Shoprite and Checkers stores, rolling out pharmacies and “smart clinics” that use virtual doctors and digital diagnostic tools for affordable primary care inside stores where residents already shop.

The same cluster strategy is being applied to Medirite Plus — large-format stores with beauty halls, specialised medical equipment and Little Me baby shops, mainly in affluent areas, directly targeting Dis-Chem and Clicks customers. The standalone stores sit right next to a Shoprite or Checkers, capturing a larger share of the basket in a single trip and leveraging Checkers Sixty60’s delivery service.

They are squeezing out growth where people thought none remains

—  Casparus Treurnicht

Dis-Chem this month unveiled its Melrose Arch Health Hub. It’s a blueprint for all future locations, says CEO Rui Morais. He calls it a “defensive moat” cementing the group’s identity as a health-care destination rather than a pharmacy with retail on the side.

The back section of the T-shaped store is anchored by a pharmacy and financial services offering, while cosmetics and supplements line the sides of the middle part. A staffed concierge hub at the centre handles digital queueing, script submissions, a nurse-led clinic with virtual doctor access, on-site diagnostics and advisers selling medical, funeral and life cover.

The store is just bigger than 800m² and has 600m² of trading space. All store rollouts from August will use the new format. Existing Dis-Chem stores typically span 1,300m².

For Clicks, the core format, which averages 550m²-650m², remains the engine of the business. But the 2023 acquisition of Cape Town super-pharmacy M-Kem signalled what was coming. Rebranded as UniCare, and in teal-accented green to signal a health-care-first identity, it operates around the clock from stores of 1,000m² and larger, with the Bellville store stretching to 3,000m².

Anchored by 24-hour doctor availability, each location houses four or five specialist clinics covering women’s health, wound, baby, diabetes and travel services as well as vaccinations. Clicks is also in talks with the health department about co-delivering the rollout of treatment for HPV, the world’s most common sexually transmitted infection.

The investment is already paying off, says Engelbrecht. UniCare in Bassonia, in the south of Joburg, opened in November as the group’s 1,000th store and draws customers from a 60km radius, which is wider than the flagship Clicks outlet nearby. There is no sign of cannibalisation, Engelbrecht says, and landlords are now approaching Clicks rather than the other way around. “Unlike in Clicks stores, where the front shop dominates, this is driven by doctor referrals.”

The shift in market focus won’t drain cash or rattle investors: the group’s annual capital investment of R1.3bn-R1.4bn and its 65% shareholder dividend policy remain unchanged.

A report released last month by Jonty Fish, an analyst on Allan Gray’s investment team, argues that the consolidation that has been under way since the 2003 reforms, which allowed nonpharmacists to own medicine outlets, has translated into strong, consistent revenue growth for both Clicks and Dis-Chem.

Over the past decade, Clicks has grown revenue at about 8% a year. Dis-Chem, which now has more than 310 own-branded pharmacies, more than 40 Baby City outlets and about 260 TLC franchises, has grown faster, at 11.7%, starting from a smaller base. Allan Gray clients now own just over 10% of Dis-Chem.

Dis-Chem’s return on capital has dropped over the past decade, which Fish says is “due to fixable issues”, pointing to cost cuts and downsizing of stores “too large for their catchment areas”. Management is targeting an 8% retail margin over the longer term, against 4.7% now; Clicks sits just above 10%, due partly to a different product mix.

Fish notes that improving returns are protected by Dis-Chem’s efforts to hold repeat and chronic prescriptions, and through scale, as it has shifted from opening 20 to 25 new stores a year to 40 to 50, which would double the base by 2030.

Also, Fish adds, “you head into a Dis-Chem or Clicks wanting to buy one item and end up coming out with 10”.

With Dis-Chem trading at about 25 times trailing earnings and Clicks at about 19, Fish concedes that Dis-Chem doesn’t “appear cheap”.

“However,” he says, “given the improvements management is implementing, we think there is significant upside to margins.” For a defensive business with a long growth runway, “this is an attractive entry point”, he says.

Clicks, by contrast, has “a more limited store rollout pipeline and less scope for margin expansion”.