As coronavirus strikes, Clicks is staying home

In a world where coronavirus is the term du jour, health retail and pharma are set to see considerable shifts in consumption patterns. What does this change mean for Clicks, the pharmaceutical merchant and distributor, which has stood out amongst a class of struggling retailers because of strategic missteps against a backdrop of a sluggish domestic economy?

Given the heightened sensitivity around health as a result of the current crisis, this industry that is rarely looked at in detail beyond a “big pharma making the world ill for their gain”, is a sector set to attract much investor interest.

“This moment of accepting praise for our results is rather bittersweet, as we look at the world around us at this time,” said Vikesh Ramsunder, chief executive officer of the retailer, which put out its six-month earnings earlier this week.

While the retailer continues to report growth in double digits, the sharp deterioration in SA’s economic prospects as a result of the pandemic may mean a marked change in the retailer’s growth strategy, which over the past five years has outperformed its rivals.

Over the past five years, Clicks shares have gained some 142{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}, compared to a JSE All Share Index that is down almost 17{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. Its closest and most direct competitor Dis-Chem, listed in November 2016, has seen its stock fall 0.3{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in that time. Pick ‘n Pay, which has been heralded as the turnaround story amongst all retailers, has seen its stock rise only 9.2{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} by comparison.

“The success of Clicks is based on a multi-faceted strategy,” says Nolwandle Mthombeni, analyst at Mergence Investment Managers.

“This includes customer loyalty through the rewards programme, strong distribution business through UPD, market share gains through acquisitions in the pharmacy industry and margin expansion through increase in private labelling,” she added.

This includes customer loyalty through the rewards programme, strong distribution through UPD, market share gains through both organic and acquisitions in pharmacy industry and margin expansion through increase in white label, she added.

“They have been delivering in this all at the same time without dropping the ball and still have a strong balance sheet.”

It’s a strategy that has been centered on domestic expansion and not seeking a beachhead in foreign and predominantly developed markets that has been a theme of fellow Cape Town-based retailers such as Truworths and Woolworths.

Instead, Clicks has increased their brick and mortar store footprint with a key focus on increasing its presence in the peri-urban areas and building stores in townships. They are in almost all South African townships at present, bar Khayelitsha in its home province.

Clicks grew its retail store footprint to 721 with 17 stores opening in the past six months and another 38 planned for this financial year. Their pharmacies increased to 572 with plans to open 40 more in the current fiscal year.

“Our strategy and brand are resilient in terms of UPD and Clicks, and over the years, we have proven that we can adapt to a number of changes in the business landscape and in the country, and that is what we remain committed to as we approach the second half of the year,” Ramsunder commented on their strategic approach to their business and local expansion going forward.

In light of a stagnant South African economy and Covid-19, it seems interesting that Clicks would still seek to continue with the physical expansion of their store and pharmacy network, whilst other retailers seem to shift their focus online.

Both Ramsunder and the company’s chief financial officer, Michael Fleming, were markedly unwilling to share the numbers of what their online sales contribute to their bottom line on an analyst call this week, but they did indicate that it is a key area of growth for their business and their “fastest growing store.”

Clicks has been trading online for about three years, but Ramsunder is quick to point out that online dynamics in SA were still very different to the rest of the world and will still see a lag in uptake. The Clicks Group takes a far more targeted omni-channel direction for the time being.

Despite his reservations, the pandemic has fed into changes in consumer buying patterns with fewer people purchasing items in store. Its convenience stores are faring better during the lockdown period than, in what the chief executive referred to, as “destination malls” such as Sandton City, highlighting concerns about their future in a post coronavirus world.

Changing consumer habits coupled with a struggling SA economy that hasn’t breached the 2{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} growth mark for almost five years were already contributing to a slump in foot traffic and increasing tenant vacancies before the pandemic.

The focus on bricks and mortar fits into the group’s key strategy of 50{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of the country’s population living within a five-kilometre radius of Clicks pharmacy.

Having a pharmaceutical distributor in UPD, with the related warehousing capacity allowing the group room to manoeuvre during the lockdown for inventory management, has been challenging.

When it came to preparedness for supply chain impacts when the coronavirus entered our shores, Ramsunder was proud to note that they “prepared for Covid-19 when it hit China and not when it was announced in South Africa”. This ensured that they placed and received orders in advance and had sufficient inventory, especially of domestic and hygiene products.

These product ranges will still be impacted in the coming months, he added, as manufacturers begin production again and return to supplying the market.

While supplies may run low as suppliers ramp up manufacturing as lockdown regulations ease, Ramsunder says the retailer is in a position where they can proactively manage supply disruptions. Though he also notes that in the first half of the year, “load shedding was the biggest disruption to the business.

As we listen to the whispers of divestments, business rescue and the like across the business landscape at the moment, it is with interest that we look at Clicks speaking resolutely on expansion and continuing with their planned store and pharmacy rollouts in the latter part the year.

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