Chief executive's report

Trading impact of Covid‑19

Covid‑19 caused significant disruption to our business in the second half of the year, particularly when restrictions were imposed on the sale of certain product categories in the early stages of the lockdown. Clicks remained committed to fair pricing throughout and ensured that prices on essential hygiene products and personal protective equipment were not increased.

The pandemic has transformed the way in which consumers engage and behave, reflected in the changing customer shopping patterns we have experienced in response to lockdown restrictions. Consumers chose to shop closer to home and shop less frequently. Many stayed home and shopped online to reduce the risk of contracting Covid‑19, opting for the convenience of home delivery. This contributed to the Clicks online store showing growth of 361% for the second half, making it our largest and fastest-growing store.

The convenience of the Clicks store network was also a distinct advantage during the crisis. As 74% of our stores are located in convenience and neighbourhood shopping centres, this largely negated the significant slowdown in foot traffic at destination malls across the country.

We have also seen a structural shift in shopping preferences, with vitamins and supplements in high demand as customers focused on preventative healthcare to boost immunity levels. The large number of South Africans working from home during this time created an increased demand for household appliances and electrical beauty products. Conversely, the lack of social interaction, restricted travel and the requirement to wear face masks led to lower pharmacy and beauty sales.

Clicks stores were restricted to shorter trading hours and limited to selling only essential products in the first five weeks of lockdown. The other retail brand stores all closed from the start of the lockdown and reopened as restrictions were gradually lifted.

UPD’s business to the private hospital and independent pharmacy channels grew strongly due to increased demand for medicines and healthcare products during the pandemic.

Resilient trading performance

The performance of the past year, and particularly in the second half during the Covid‑19 crisis, has again demonstrated the defensive nature of the group’s core health and beauty markets. In this environment group turnover for the year increased by 9.6% to R34.4 billion.

Retail health and beauty sales, including Clicks and the international franchise brands GNC, The Body Shop and Claire’s, increased by 8.4%, driven by competitive everyday pricing, differentiated product ranges, the Clicks ClubCard, new stores and online sales.

Healthcare, comprising pharmacy and front shop health, is a defensive category and accounts for 55% of total sales. Front shop health sales increased by 19.7% while pharmacy growth of only 3.2% was impacted by the low prevalence of colds and flu during the winter season due to the restrictive nature of the lockdown.

Promotional sales continue to account for an increasing proportion of customer spend, growing by 14.7% and comprising 40.2% of turnover in Clicks.

The strong health and beauty sales performance translated into market share gains across most core categories. Front shop health market share increased to 32.2% (2019: 31.4%) and the baby category grew to 19.7% (2019: 17.0%). Pharmacy market share declined marginally to 23.8% (2019: 24.1%) as consumers chose home deliveries from independent pharmacies to avoid shopping malls. In the beauty category, skincare market share increased to 39.2% (2019: 37.6%) and haircare to 30.3% (2019: 29.6%).

Clicks was voted as the coolest health and beauty brand in the Sunday Times Generation Next Awards for 2020 while the Clicks ClubCard was rated as the best loyalty programme in the South African Loyalty Awards for 2020.

UPD grew wholesale turnover by 17.0%, gaining new private hospital and buying group contracts. Business to the private hospital and independent pharmacy channels grew strongly and this contributed to UPD increasing its market share from 27.0% to 29.4% at August 2020.

The group’s financial performance is covered in the chief financial officer’s report, and the trading performance of Clicks and UPD is covered in the business review section.

Delivering on our strategy

The group’s strategy was consistently applied over the past year and was not impacted by the Covid‑19 challenges. Our strategy continues to be supported by favourable market dynamics which should ensure sustained organic growth. The group’s strategic objectives and the drivers of longer-term growth are outlined in the group strategy report.

The retail strategy is focused on the three pillars of convenience, differentiation and personalisation, supported by our value offering, and pleasing progress has been made across all these areas in the past year.

Clicks opened 39 stores to expand its retail footprint to 743 stores.The store opening programme was again accelerated beyond the targeted 25 to 30 stores owing to opportunities for new space becoming available in existing shopping centres. As the Clicks brand already has a presence in 97% of destination malls across the country, our strategy in recent years has been to expand into convenience shopping centres.

Covid‑19 has been a catalyst for online retail sales growth globally. Clicks’ online sales increased by 191% for the year off a relatively low base. The investment made in our online and digital capability over the past four years enabled Clicks to manage the increased demand, and ensure an efficient and convenient service to customers. While online accounts for only 1% of front shop sales, we expect this to grow to between 5% to 10% of the brand’s sales within the next 10 years.

Clicks is the country’s largest retail pharmacy chain and expanded the network to 585 following the opening of 40 pharmacies. The expanding footprint supports our convenience strategy and makes the healthcare offer even more accessible, with 50% of the country’s population now living within six kilometres of a Clicks pharmacy.

Through private label and exclusive brands Clicks offers an extensive range of trusted quality, great value products which are a significant alternative to a branded product.

Sales grew by 12.3% and the contribution from private label and exclusive products increased from 22% to 23% of total sales, with the goal to increase this to 25% of total sales.

2020 marked the 25th anniversary of the launch of the iconic Clicks ClubCard, which is one of the most popular loyalty programmes in the country. Over the past five years more than R2 billion has been paid out to loyalty members in cashback rewards. ClubCard’s active membership increased by over 500 000 to 8.6 million in the past year and accounted for 78.2% of the brand’s sales. The Clicks mobile app, which incorporates the digital ClubCard, has been downloaded by 1.1 million customers.

UPD is the country’s leading pharmaceutical wholesaler and is a significant service provider in the distribution agency business, with a portfolio of 30 clients. UPD’s total managed turnover, which combines wholesale and bulk distribution, increased by 11.7% to R23.6 billion as the business gained two distribution contracts. Clicks and the private hospital groups account for 83% of UPD’s wholesale turnover, supporting the long-term sustainability of the business.

Our extensive store network and integrated supply chain provide competitive advantages which we aim to maintain through the continued investment of over R2 billion in the next three years.

Commitment to ESG and transformation

The group has continued to adopt environmental, social and governance (ESG) practices to contribute to sustainable transformation and societal change.

As outlined by the chairman in his report, the group was again included in the FTSE4Good Index Series, recognising companies with strong ESG practices measured against global standards. In the index ratings the group far outperformed the sector and industry averages which include major international healthcare companies.

Clicks Group FTSE4Good Index Series Ratings

On the environmental front, Clicks was one of the founding signatories of the SA Plastics Pact in 2020 and we are unwavering in our focus on reducing the negative impact of plastic on the environment. As customers are becoming increasingly aware of the environmental impact of the products they consume, Clicks introduced the My Earth range of eco-friendly products, aligning to the group’s sustainability strategy.

As a proudly South African company we are committed to supporting local suppliers, with only 7% of our products being imported directly. Currently over R1.5 billion of products are procured from black-owned businesses and R1 billion from female-owned enterprises. We plan to increase sales of local supplier haircare products by 130% over the next three years.

Our workforce is highly diverse, with 93% black staff and 64% female employees. The group invested R140 million in the training and development of employees, even in a year where training was challenging owing to the need for social distancing. The company funds 100% of the cost of primary health insurance for over 9 000 employees not covered by a medical aid, at an annual cost of R34.3 million. These factors have contributed to the group again being recognised as the top employer in the retail sector in South Africa for the fourth consecutive year by the Top Employer Institute.

The group also committed to supporting those most vulnerable during the pandemic. Clicks donated 10 000 flu vaccines to the Western Cape Department of Health and Department of Social Development in support of frontline public healthcare workers. Community support included extending the free primary care clinic services offered to Clicks customers with no medical cover to five days a week from the normal one day.

In the past year bursaries were awarded to 112 pharmacy students as part of Clicks’ role in building the skills base for the industry.

Refer to the creating value through good citizenship report for further detail on the group’s ESG focus areas.

Outlook

As we face the reality of living with Covid‑19 restrictions until a vaccine is developed and widely available, the country remains at risk of a second wave of infections. This could result in renewed lockdown restrictions as are currently being experienced in certain countries.

The consumer environment in South Africa is expected to be constrained in the year ahead. The continuing impact of Covid‑19 and the socio-economic challenges arising from the lockdown, particularly the expected widespread job losses, will make the months ahead extremely challenging.

As mentioned in the chairman’s report, the start of the new financial year was disrupted by protest action across the Clicks store network during the second week of September. This was in response to an offensive TRESemmé haircare advertisement featured on the Clicks digital platform. While it is too early to quantify any reputational damage from the incident, customer trading patterns returned to normal during the month of October.

Our business has traded well in weak consumer markets over an extended period and adapted to the new market dynamics arising out of the Covid‑19 crisis. The group has a robust balance sheet and generates strong cash flows, and we are confident of continued value creation for our shareholders.

Appreciation

Thank you to our chairman, David Nurek, and our non-executive directors for their support and counsel in dealing with the challenges over the past year.

My fellow executive directors Michael Fleming and Bertina Engelbrecht, together with the executive committees in Clicks and UPD, have shown outstanding leadership in managing the business through these difficult times.

Our people at head office, stores and distribution centres have demonstrated incredible resilience and I thank them once again for their support through the most difficult trading conditions we have ever experienced.

Vikesh Ramsunder

Chief executive officer