Dis-Chem opened its first store the year Grease graced the big screen. The second shop came six years later in 1984, when Terminator hit theatres. The pharmacy retail group has since grown to 302 outlets, with the latest year a blockbuster for ribbon cutting – 35 new stores in 12 months!
In a typical year, Dis-Chem would add 16 stores. In just this half, it’s opened 17. These store openings have helped usher in sales of R21.3bn for the six months to end August. A huge number given that the group started with a single pharmacy in the south of Joburg in 1978. Yet, on a comparative basis, it is less impressive: year-on-year, retail revenue growth is 8.7%; comparable pharmacy store sales are up just 5.4%. Headline earnings per share grew 9%.
The latest rollout does however extend Dis-Chem’s bricks and mortar footprint in parts of the country where it is under-represented, notably the Western Cape and Kwazulu-Natal says CEO Rui Morais.
But new shops are only a part of the story. The real moves are being made in getting those who already shop at Dis-Chem to buy more and to get a better read on their spending behaviour. The group, you see, is not only selling pills, nailclippers and supplements, but wading ever deeper into other parts of the health business.
Two years ago Dis-Chem started selling health and gap cover; last year the group opened its first standalone clinic, and earlier this year it began flogging life cover. More recently, it has teamed up with Capitec to give its loyalty offering a shot in the arm.
Swiping a Capitec card linked to Dis-Chem’s Better Rewards programme unlocks a discount of up to 20% on top of other promotions. Nothing to scoff at in this economy. And there is hardly a more lucrative piece of online real estate than the Stellenbosch-based bank’s app – Capitec already has some 14-million users on there.
Banking on Capitec
Morais calls this “the biggest lead generation engine that has ever existed” in the healthcare space. He is banking on sharply increasing the number of policies from the current level of 300,000. As at other retailers, loyalty club members also tend to be more engaged. And they spend more. At Dis-Chem the typical basket size for a non-loyalty shopper is R246, compared with R405 for its 7.6-million loyalty members.
Some of the questions in the earnings call revealed concern among investors about heavy promotional activity, but Morais says they’ll closely monitor the effect on profits. The deal with Capitec is only weeks old, which means more will only be revealed in the next results presentation.
So, Dis-Chem seems to be gunning for Discovery. But it is also taking a leaf out of Spar’s playbook, having developed a wholesale offering that now supplies hundreds of mom-and-pop shop pharmacies, many of them franchisees under the brand The Local Choice (or TLC). And of course, it is also fighting Clicks head-on and, increasingly, the pharmacy offering of grocery giant Shoprite.
Morais says Dis-Chem and Clicks each have a market share of 26%, while Shoprite’s Medirite is only around 2%. But judging by Shoprite’s latest moves, the intent is clearly to grow that number.
This is all part of a multi-decade consolidation. More of those mom-and-pop shops will disappear and Morais reckons South Africa, similar to the UK and US, will eventually have big retailers owning about 70% of the market.
There’s all quite a lot going on for a CEO in the saddle for less than three years. Before taking the reins, Morais was CFO at Dis-Chem for more than a decade. He knows the business. But can he make it hum?
Dis-Chem’s biggest near-term challenge will be execution, says Shaakir Salie, Head of Research at Aeon Investment Management.
“Building an integrated healthcare ecosystem to rival Discovery’s Vitality program, while fending off Shoprite’s pharmacy ambitions, is a bold move into uncharted territory. That said, the Capitec partnership might temper investor concerns, as their vast, digitally engaged customer base could be the game-changer in making this multi-year investment pay off,” he adds.
And the expectations are high, says Denker Capital equity analyst Craig Metherell.
“Whilst earnings growth of 9% is commendable and points to success in executing their plan, current expectations for the full-year mean they need to deliver a very strong second half in order to meet consensus expectations. [These results] would have disappointed the market in our opinion,” says Metherell.
Dis-Chem shares rallied more than two percent in early trading but slumped after the results presentation and closed 1.96% weaker at R33. Clicks stock, by comparison, was down 1.12%. Year-to-date, Clicks has slipped 2.3% while Dis-Chem has lost 9.5% in value.
Still, its strong capex shows that Dis-Chem remains in a growth phase, says Momentum Securities equity analyst Faheema Adia. But, she cautions, the biggest challenge lies in navigating weak consumer spending within South Africa’s stagnant economy.
“While core healthcare and chronic medication categories remain relatively resilient, discretionary front-shop spend — including beauty, wellness, and personal care products — has softened as consumers cut back on non-essential purchases.”
Will discounting and Capitec as a partner be the right prescription?
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