Clicks effective supplement

"Pharmacies are a big driver of footfall into our stores," says Clicks MD Mike Harvey. "They are the key factor differentiating Clicks from its major competitors, the supermarket chains."

Reinforcing pharmacies as a draw card is aggressive pricing of regulated medicines. "Clicks' average mark-up on regulated medicines is about 17% compared with a maximum permitted 30%," says Investec Asset Management analyst Dianne Laas.

Clicks' expansion of in-store pharmacies has been as aggressive as its pricing. It opened 15 in the six months to February 2011; 86 of its 266 pharmacies are less than two years old.

Food retailers have also latched on to pharmacies as a draw card: Shoprite leads the field with 113 MediRite in-store pharmacies. Pick n Pay has 18 in-store pharmacies and one standalone, while Spar has launched a pharmacy strategy for its members. Also looking for a slice of the action is unlisted Dis-Chem, which has 60 pharmacies, 35 of them in Gauteng.

Harvey is not fazed by competition. Supermarkets do not provide the right atmosphere for pharmacies, he says, pointing to the dominance of specialist chains on which the Clicks model is built, such as Alliance Boots in the UK. "Retail giant Walmart has captured a mere 5% share of the US pharmacy market," he says.

While praising Dis-Chem CEO Ivan Saltzman as a "great businessman" and solid competitor, Harvey points out that the Dis-Chem model is built on a large-store format which limits the scope for expansion. The Clicks model, he adds, allows for a range of store sizes - from 360m² to 1200m² - which makes for flexibility when siting new stores and enables Clicks to offer convenience. "People do not want to travel more than 5km to a pharmacy."

Competition aside, Harvey sees room for growth for all corporate pharmacy sector players. He says the independent pharmacies' market share is falling but is still at about 60%, roughly the share that corporate pharmacy groups hold in the US and UK. "We [corporate pharmacies] have volume and a front-shop profit maker on our side," says Harvey.

Clicks claimed a 14.5% share of the retail pharmacy market at the end of February, up from 12.2% a year earlier, while of its 3,3m ClubCard holders, 2m are on its pharmacy database. Harvey puts the combined market share of Clicks, MediRite and Dis-Chem at 30%-35%.

The biggest challenge to growth is availability of pharmacists, says Harvey. Clicks is tackling the problem at source by providing bursaries and guaranteed employment to students and support to universities.

Despite the challenge, Clicks' growth strategy is on track. "We aim to add between 20 and 30 pharmacies each year," says Harvey. The number of Clicks stores will rise from 382 at the end of February to 400 in July, he says, and the number of in-store pharmacies will be about 300 by year-end.

Clicks' expansion and the boost pharmacies are adding to its market share in its key health and beauty product markets sets the scene for it to sustain a cracking growth pace despite tough trading conditions. In its financial year to August 2011, management guidance indicates a 20% rise in headline EPS, to about 255c, while analysts polled by INet look to a 38% rise in 2011/2012.

Clicks' potential and high-quality earnings generated by a cash-only business model justify its premium rating and make it a top choice for investors looking for retail sector exposure.

Source: Financial Mail