A model for pharmacists

In the process, the drugs and beauty business could eat into the market share of listed supermarket chains like Pick n Pay and Shoprite, while leaving an opportunity for larger competitor New Clicks, also listed, to occupy a niche with its smaller-format Clicks drugstore model (health, home and beauty).

There are 34 Dis-Chem pharmacies in the chain and the group will turn over about R4bn this financial year, says CEO Ivan Saltzman. A listing is likely in the medium term, he says.

New Clicks, with its national footprint and low-cost dispensing model, is considered Dis-Chem's nearest competitor. It turned over R5,5bn in 2007/2008, with R6bn expected this year (August year end). The retail network of 340 Clicks stores has 150 in-store pharmacies.

A new Dis-Chem branch opened in Bloemfontein last week and another three giant stores, between 1600m² and 2000m², will open this year.

In addition, Saltzman has developed a franchise model with specialists Franchising Plus. This will result in Dis-Chem extending both franchise and joint-venture opportunities to pharmacists.

“We have the brand, the buying power and the retail expertise,” says Saltzman. “Good pharmacists don't always understand retail, and they are being squeezed out as the pharmacy business is dominated by large companies. We would like pharmacies to remain in the hands of pharmacists.” (Legislation now allows nonpharmacists to own pharmacies.)

“It will cost R20m to stock the new pharmacy,” says Franchising Plus director Eric Parker, who helped found Nando's. “Of the R20m, the joint-venture partners will have to raise R3m, and the banks have agreed to provide them with about R7m in finance. Dis-Chem funds the balance.”

The company has had over 250 franchise inquiries, some from neighbouring countries, and 30 candidates have been identified as suitable.

Since Saltzman and his wife, Lynette, founded their first pharmacy in Mondeor in 1978, Dis-Chem has grown into a chain with a reputation for discounted drugs and over-the-counter medicines as well as well-priced toiletries.

Government regulations to fix the prices on drugs have removed some of that competitive advantage. But, ironically, it was in the three years after the single-exit price was implemented, in 2004, that Dis-Chem experienced its fastest growth. “The regulations were successfully challenged in court and many pharmacies reverted to higher prices,” Saltzman explains.

Nedcor Securities analyst Syd Vianello says: “By franchising, Saltzman is not necessarily creating more competition in the pharmacy space. That's because some franchises will be pre-existing pharmacies that will be rebranded and possibly relocated.” But, he says, it may increase competition, with the result that retailers like Pick n Pay and Shoprite may lose market share in beauty and toiletries.

Whether Dis-Chem is cheapest in all categories is debatable. But in certain core ones — nappies, for instance — Dis Chem ensures it remains the cheapest supplier. “This reinforces the price perception, and draws shoppers into the stores,” says Vianello. Once there, shoppers will be tempted by higher-margin items, such as vitamins or performance enhancing supplements.

The retailer is also allocating more space to beauty products and has a broad selection of midtier products from Revlon and L'Oréal. Another thriving aspect of the business is fine fragrances. “Saltzman is importing from overseas wholesalers and bypassing local agents,” says Vianello.

Building is soon to begin on a new R150m, 28000m² central distribution centre. “As the company gets bigger, organised distribution becomes imperative,” he says.

Clicks also has ambitious plans for growth, but Vianello believes there is place in the market for both companies. It is sheer scale that is important: the average Dis-Chem is three times the size of a Clicks. The different models will appeal to different shoppers and different landlords.

Source: Financial Mail

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