Chief Executive's Report

Resilient trading performance

Trading conditions in 2015 again proved to be demanding, as we had anticipated, with consumers in the group’s middle income target market under continued financial pressure. The core health and beauty markets in which we trade have proven relatively resilient, highlighting the defensive nature of the group’s business model.

It is pleasing to report that in this constrained spending climate the Clicks Group delivered another good trading performance, with all the group’s retail brands reporting real volume growth.

Group turnover increased by 15.3% to R22.1 billion. Retail sales across Clicks, The Body Shop, GNC and Musica grew by 10.4% and accounted for 67% of group turnover.

The Clicks chain entrenched its leadership position by continuing to gain share of the health and beauty markets. More competitive pricing and an effective promotions strategy to attract value-conscious customers contributed to sales increasing 10.9%. Promotions contributed 29% of sales, confirming Clicks as a value retailer.

The trends towards greater use of generic medicines and the shift to self-medication on which we have commented in the past few years are increasingly evident. Clicks is actively shifting patients to lower-cost generic medication and promoting over-the-counter medicines. Generics now account for 45.4% of sales in Clicks and grew by 19.0% in the past year. As customers become more health and lifestyle conscious they are choosing to self-medicate and Clicks showed double digit growth in front shop medicines, vitamins and supplements.

The Body Shop has a loyal and growing customer base, with over 160 000 Love Your Body loyalty programme cardholders who account for 59% of the brand’s sales. Turnover for the year increased by 12.7% driven mainly by product innovation and new store openings as the brand expanded its store footprint to 50.

GNC showed encouraging sales growth in its first full year in the group. GNC is the world leader in health and wellness supplements, and has a pipeline of 100 new products which will be launched in the new financial year.

Musica gained market share in all product categories and now has over 60% of the country’s CD market and 43% of the DVD market. Sales increased by 2.3%, with double digit growth in gaming and technology.

We recognise that Musica is non-core to the group’s health and beauty strategy. However, we believe the demand for the physical music format will remain for some years to come, as has been proven even in developed economies with high-speed broadband connectivity.

As the downloading of music gains popularity the demand for accessories such as headphones and speakers increases and this is reflected in the strong growth of Musica’s technology category in recent years. Musica remains profitable, delivers a superior return on assets to the group and will continue to grow market share as the “last man standing” in entertainment retail.

UPD benefited from the growth in its preferred supply chain partner distribution contracts and increased turnover by 21.6%. Fine wholesale turnover grew by 7.4% and distribution turnover by 34.6%. UPD’s total managed turnover, which combines wholesale turnover with the turnover managed on behalf of distribution agency clients, increased by R2.7 billion to R15.2 billion.

The trading performance of Clicks and UPD is covered in the operational review. The financial performance is detailed in the chief financial officer’s report.

Delivering on our strategy

Clicks Group’s strategy is to create sustainable long-term shareholder value through a retail-led health, beauty and wellness offering. The strategy has been consistently applied in the year under review and encouraging progress has been made in delivering on this strategy.

Clicks aims to be the customer’s first choice in health and beauty retailing and the chain was independently rated as South Africa’s top health and beauty retailer in The Times/Sowetan Retail Awards for the seventh year. Clicks has the largest pharmacy network in the country and this was extended to 361, with primary care clinics in 157 of these pharmacies. Retail pharmacy market share increased to 18.7%.

Front shop health market share increased to 29.4% while in the beauty category, skincare increased to 26.8% and haircare to 25.4% of the market.

Clicks ClubCard active membership reached 5 million and accounted for 75% of the brand’s sales. Customers have responded positively to the relaunch of ClubCard which enables cash back rewards to be loaded directly onto their loyalty cards.

We continue to differentiate the Clicks offer by being the exclusive southern African partner of global health and beauty brands who are market leaders in their sector. Our range of exclusive brands, The Body Shop and GNC, was extended with the launch of Claire’s, a leading speciality retailer in fashionable jewellery and accessories. Claire’s has over 3 000 stores in 46 countries, targeting young women and girls at affordable prices.

The franchise brands operate either as standalone stores or with capsule ranges in Clicks stores. The Body Shop has 50 stores, with a presence in 86 Clicks stores, and GNC has four stores and ranges available in 257 Clicks stores. Claire’s opened its first store in Cavendish Square in Cape Town in July 2015 and has extended its presence post-year-end to 77 Clicks stores.

UPD, which provides the supply chain channel for Clicks pharmacies, now has market-leading positions in both the pharmaceutical wholesale and bulk distribution markets. Total managed turnover is now R15.2 billion and has shown a four-year compound annual growth rate of 25.1%, highlighting the success of the strategy of developing the distribution business alongside UPD’s traditional fine wholesaling business. UPD manages a portfolio of 22 distribution clients which accounts for 51% of UPD’s total managed turnover.

Investing for growth

The group is committed to investing in stores, distribution facilities, infrastructure and information technology to sustain and grow the business.

Over R1 billion has been reinvested in capital expenditure in the past three years and another year of record investment of R432 million is planned for 2016.

A key focus of our capital investment programme is on expanding and refreshing the store network. In the past year 41 new retail stores were opened, bringing the group’s footprint to 657, including 34 stores in the neighbouring countries of Namibia, Botswana, Swaziland and Lesotho.

In the year ahead the group will open 33 retail stores and refurbish 60 stores. Our store refurbishment programme ensures that stores remain modern and appealing to customers, and that trading densities are optimised.

Investing in our people

Attracting and retaining talent for our core business needs is one of the material issues confronting the group and is critical to our ongoing success.

The employee share ownership scheme introduced four years ago allows our people to share in the long-term growth and success of the business. Over 7 900 employees are now shareholders and dividends totalling R15.7 million have been paid to participants in the scheme. This is also a mechanism to attract and retain scarce talent while accelerating transformation, with black staff accounting for 87% of the employee shareholders and women 64%.

The group also invests in retaining high-potential employees, black staff and employees with scarce and critical skills. Currently 51 employees participate in this retention scheme. Since the inception of the scheme in 2009 the group has been successful in retaining 80% of the participants.

As the largest employer of pharmacy staff in the private sector the group is actively building capacity to assist in addressing the critical shortage of pharmacists. In the past year Clicks invested in bursaries for 82 pharmacy students, provided 49 pharmacy internships and trained over 320 learners through the in-house Healthcare Academy for pharmacy assistants.

Clicks’ standing as an employer of choice in the pharmacy profession is also resulting in the group attracting an increasing number of graduates from all pharmacy schools.

Our ongoing investment has resulted in a steady decline in the turnover of pharmacists to 22% in 2015 from 37% in 2012. The increasing pipeline of pharmacists is also enabling Clicks to accelerate the pace of its pharmacy opening programme.

The group has invested R49 million in skills development over the past year, training over 4 000 employees.

Leadership appointments

Following the resignation of Keith Warburton as chief operating officer of the Clicks chain in early 2015, we promoted executives internally to head our two major business units.

Vikesh Ramsunder, the managing director of UPD, was promoted to head the Clicks chain. Vikesh has gained extensive experience in both Clicks and UPD in his 22 years with the group. During his tenure as head of UPD he was responsible for growing the bulk distribution business into a significant player in the market while maintaining UPD’s market leadership in pharmaceutical wholesaling.

Vikash Singh, head of operations and distribution at UPD, was appointed as managing director of UPD. He too has an impressive track record of delivery in both Clicks and UPD over the past decade.

These internal appointments reflect the quality of the group’s talent and succession planning process, and the benefits of investing in our people.

Growth opportunities and outlook

The anticipated growth in the country’s health and beauty markets creates opportunities for sustained organic growth, supporting the investment case outlined by the chairman in his report.

The corporate pharmacy market is expected to continue to expand and benefit from the longer-term decline of the independent pharmacy sector. Corporate pharmacy comprises over 50% of the market in the USA and United Kingdom and we believe South Africa has the potential to reach similar levels. Corporate pharmacy has only been operating in South Africa for just over a decade and still accounts for less than 40% of the retail pharmacy market today.

South Africa’s healthcare market is expected to show long-term real growth as an increasing proportion of the population enters the private healthcare market.

The introduction of low cost benefit options for medical schemes for lower income earners would also stimulate growth, although the proposed introduction of such options was recently withdrawn by the Council for Medical Schemes.

Increasing life expectancy and improving living standards are creating a growing market for health and beauty products. Higher living standards are contributing to steady growth in the country’s middle class population which is also expanding the universe of formal retail shoppers. This is evident in the increasing number of South Africans in the LSM 6 to 10 categories, the Clicks target market, which has grown from 48% in 2008 to 61% of the population in 2015.

Shifting population demographics and increasing urbanisation will also benefit formal retail.

The group has a portfolio of strong, market-leading brands which have the capacity to capitalise on these growth opportunities and increase market share over the medium term.

Clicks is well positioned in these growing markets with its extensive store footprint offering convenience to customers. In the longer term Clicks is targeting to reach 600 stores in South Africa, with a pharmacy in every store. Expansion outside of South Africa is not a strategic imperative owing to the extensive opportunities in the local market.

Private label and exclusive brands offer differentiated ranges at higher margins and Clicks is targeting to reach 25% of sales from these products.

As a health and beauty retail group we face competition on several fronts, including independent and corporate pharmacy, food and general merchandise retailers.

The directors believe the group’s retail-led strategy remains relevant in the current environment, offers competitive advantage and should ensure sustainable growth. The strategy will continue to be supported by the investment for long-term sustainable growth, as outlined above.

In the short term we do not expect consumer spending to improve and this means that the retail trading environment will remain constrained in the 2016 financial year. UPD is expected to face a demanding year owing to the ongoing margin pressure from the faster growth in generic medicines, while there are no significant distribution contracts coming up for tender in 2016.

The directors are confident of the group’s ability to continue to generate cash and to achieve its medium-term financial targets.

Appreciation

Thank you to our chairman, David Nurek, and the non-executive directors for their insight, guidance and counsel. My colleagues on the group executive, Michael Fleming, Bertina Engelbrecht and Vikesh Ramsunder, lead by example and I thank them for their valuable support.

Thanks to our people at head office, stores and distribution centres across the country for their contribution to the group’s success over the past year.

Our customers continue to make us their first choice health and beauty retailer, and we look forward to their continued support.

David Kneale
Chief executive officer