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2018 marked the 50th birthday of the founding of Clicks by visionary retailer, Jack Goldin, who opened the first store in August 1968 in the Cape Town city centre.
Clicks’ unwavering commitment to offering consumers affordable, everyday value over the past five decades has seen Clicks becoming increasingly relevant in South Africa’s retail landscape. Today Clicks is the country’s leading health and beauty retailer and leading pharmacy chain, as voted by shoppers in the annual Sunday Times/The Sowetan survey for the past 10 years.
Clicks was conceived as a drugstore but owing to restrictive legislation preventing corporate ownership of pharmacies, it took 36 years before Jack Goldin’s founding vision was realised. After opening the country’s first-ever corporate retail pharmacy in 2004, Clicks opened its 500th pharmacy in April this year.
We celebrated our anniversary by supporting 50 charitable causes in local communities across the country. During our birthday month 16 schools received reusable sanitary pads to the value of R1 million as part of the group’s Girls on the Go programme to reduce absenteeism among schoolgirls. We also supported 34 charitable projects with toiletries and basic essentials, and upgraded facilities at a community primary school which adjoins our head office in Woodstock, Cape Town.
“Over 5 800 employees shared in a payout of
R1.3 billion from our broad-based share ownership plan”
Our birthday year coincided with the vesting of the first 50% of the group’s broad-based employee share ownership plan (ESOP) when over 5 800 employees shared in a payout of R1.3 billion. 86% of the beneficiaries of the scheme are black employees and 65% female. The second and final payout under this scheme will be made in 2019.
In our 50th year the group’s operating profit exceeded R2 billion for the first time. It has also been a record year for cash generation and capital investment. Consistent financial performance and growth in shareholder value over several years culminated in Clicks Group being elevated to the FTSE/JSE Top 40 Index in June this year.
The group continued its strong growth momentum and delivered another resilient financial and operational performance for the year, despite facing increasing headwinds across multiple fronts in the second half of the year.
Consumer spending came under further pressure as the increase in the value-added tax rate from 14% to 15% and significant increases in fuel costs reduced disposable income and negatively impacted consumer sentiment. In addition, selling price inflation declined to almost zero in the second half which meant that turnover growth was dependent on achieving volume growth. Finally, the lower incidence of colds and flu compared to the winter of 2017 depressed medicine sales.
Retail health and beauty sales, including Clicks and the franchise brands of The Body Shop, GNC and Claire’s, increased by 11.7%. Sales in comparable stores grew by 6.2%, with selling price inflation of only 1.1%, as volume growth accelerated to 5.1%.
Our founding customer promise of value continues to underpin the Clicks performance through competitive pricing and value promotions. Front shop sales growth was driven by promotions in the current constrained consumer economy, with promotional sales in Clicks increasing by 14.7% and accounting for 35% of the turnover in Clicks.
Strong sales growth, together with the expansion of the store and pharmacy network, contributed to Clicks gaining market share in all merchandise categories. Front shop health market share increased to 30.8% and retail pharmacy market share to 23.3%. In the beauty category, skincare market share grew to 36.1% and haircare to 28.2%.
“Value continues to underpin the Clicks performance
through competitive pricing and value promotions”
Our pharmaceutical distributor UPD also performed well. Turnover increased by 8.4%, market share grew from 25.6% to 26.0% and the business gained three new distribution contracts. UPD maintained its operating margin at 2.7% despite the low increase of 1.26% granted in the single exit price (SEP) of medicine in 2018 compared to 7.5% in the previous year.
Overall group turnover for the year increased by 9.1% to R29.2 billion. The financial performance is outlined in the chief financial officer’s report, and the trading performance of Clicks and UPD is covered is covered in Clicks and UPD.
The group has made pleasing progress over the past year in delivering on its strategy of creating sustainable long-term shareholder value through a retail-led health, beauty and wellness offering. The strategy is underpinned by the strategic objectives and targets of Clicks and UPD which are reviewed annually by the board and management.
Clicks opened a record 41 new stores and expanded the chain to 663 stores, with 33 stores outside of South Africa. The store opening programme was accelerated beyond the targeted 25 to 30 stores owing to opportunities arising for new space in existing shopping centres.
“Digital technology provides new ways to engage with ClubCard customers,
including the Clicks mobile app”
The Clicks online store further enhances the convenience of the brand and in its second year of operation generated sales equivalent to a medium-sized store. Our data analytics indicate that the online spend from our ClubCard customers is incremental to their in-store spend, while the popularity of the “click and collect” service is driving additional spend in stores.
Clicks is the country’s largest retail pharmacy chain and expanded the network to 510 as a net 37 pharmacies were opened. While the goal remains to operate a pharmacy in every Clicks store, there are currently 71 Clicks stores still to get a pharmacy. This excludes stores where we do not plan to open a pharmacy, being the non-South African stores, the Netcare hospitals and stores identified to be closed.
Private label, exclusive and international franchise brands ensure Clicks provides a differentiated product offer to customers and reinforce our value proposition. Sales of private label products accounted for 22% of total sales in Clicks, with front shop sales at 28.2% and pharmacy at 5.6%.
ClubCard increased active membership by over 800 000 to 7.8 million, with the loyalty programme comprising 77.2% of Clicks’ sales. The basket spend continues to be twice that of a non-ClubCard shopper and over R440 million was paid to customers in cashback this year. Importantly, digital technology provides new ways to engage with ClubCard customers, including the Clicks mobile app which is a virtual ClubCard.
Clicks has continued to invest in improving the quality of customer care to ensure shoppers are served by friendly and knowledgeable staff. This includes our dedicated pharmacy teams, our 1 400 beauty advisers and we plan to appoint 700 wellness assistants in our stores in the new year. Evidence of our investment in customer care is the reduction in the pharmacy staff turnover to 15%, which provides greater stability and continuity in our pharmacies.
UPD provides an efficient healthcare supply chain for Clicks which accounts for 54.5% of UPD’s wholesale turnover. The continued success of the strategy of developing the bulk distribution business in tandem with the fine wholesaling business has seen UPD’s total managed turnover increase by 8.9% to R17.9 billion. The business increased its bulk distribution portfolio to 23 clients by gaining three new contracts during the year while a further contract was secured early in the new financial year.
Our extensive store network and highly integrated supply chain provide competitive advantages which we aim to maintain by investing approximately R2 billion over the next three years.
In South Africa the war for talent is ongoing and the group invests in attracting and retaining scarce retail and healthcare skills which are in high demand locally and internationally. In the past year R125 million was invested in the training and development of over 6 000 of our people.
This investment, together with other initiatives to motivate, reward and retain staff, contributed to the group being recognised as the Top Employer in the retail sector by the Top Employers Institute.
The ESOP was introduced to allow employees to share in the long-term growth of the Clicks Group. In addition to the R1.3 billion paid to beneficiaries earlier this year, participants in the scheme have received dividends totalling R35.4 million since the inception of the scheme. Extending equity ownership to employees has also enabled the group to accelerate transformation and build on the progress that has been made across all the other pillars of BBBEE. Clicks has been consistently rated as a top empowered retailer and a top gender-empowered company.
“Extending equity ownership through the employee share scheme has also
enabled the group to accelerate transformation”
The ESOP has been complemented by learnerships and graduate development programmes across several retail disciplines, as well as our in-house Pharmacy Healthcare Academy which trains pharmacy assistants.
The New Clicks Foundation will receive R100 million from the Employee Share Ownership Trust over a two-year period which will enable Clicks to grant 100 bursaries each year to ensure a sustainable pipeline of pharmacists entering the profession.
Refer to the creating value through good citizenship report for further detail on our investment in our people.
Pharmacy can play a leading role in delivering government’s healthcare agenda of increasing access to affordable medicine as the country prepares for the implementation of the National Health Insurance (NHI).
Private sector pharmacy offers a low-cost way of delivering improved access to quality primary care through a network of over 2 500 community pharmacies across the country. Unfortunately current regulation is impeding progress and several regulatory hurdles need to be removed.
Our public health agenda is as follows:
An estimated 5 million people in formal employment cannot afford medical cover and need access to funded primary healthcare to reduce pressure on state facilities. The Council of Medical Schemes has been appallingly slow in developing a standardised, low-cost medical scheme option focused on primary healthcare.
Clicks Group has taken the lead on this front and will be offering low-cost primary health insurance to over 9 200 lower-income earning employees who are not currently covered by a medical aid, from January 2019. The scheme will be 100% company-funded at an annual cost of approximately R31 million.
We encourage other companies to fund healthcare benefits for employees. Collectively, corporate South Africa can play a meaningful role in reducing the pressure on the overburdened state healthcare system.
Pharmacists are required to undergo a two-year part-time training course in primary care drug therapy to prescribe essential medicines without a doctor’s prescription. Currently only one tertiary institution is accredited to offer this training. To increase the number of prescribing pharmacists in the short term it is imperative that the SA Pharmacy Council provide accreditation to additional institutions as a matter of urgency and that the Department of Health expands the number of facilities available for the practical component of this course. In the medium term, this training course should be incorporated into the pharmacy degree curriculum.
We believe access can be increased in several ways:
Retail pharmacy provides a convenient network for state patients to collect chronic medicines, which would relieve the pressure on overburdened state facilities. Clicks has partnered with the Department of Health and over 400 pharmacies are registered as collection points for state chronic medicine parcels.
The SA Health Products Regulatory Authority (SAHPRA), formerly the Medicines Control Council, remains ineffective and their inability to register generic medicines and reduce the current backlog in applications continues to inhibit access to affordable medicines.
In last year’s integrated report we outlined the challenges facing the group in relation to the regulation of health supplements under the Medicines Act, which requires all supplements to be registered through SAHPRA.
We remain firm in our belief that health supplements should be regulated under food law as they are not medicines as defined by the Medicines Act. It is interesting that the SA Revenue Service classifies health supplements as foodstuffs, which highlights the conflicted views within these state agencies.
“Over 400 Clicks pharmacies are registered as collection points
for state chronic medicine parcels”
The current regulatory regime is stifling innovation and limiting customer choice. Regrettably, our engagement together with the Association of Natural Health Products (ANHP) has not had the desired outcome.
The ANHP launched proceedings in the High Court earlier this year to challenge the inclusion of health supplements in the regulatory regime of the Medicines Act. The basis of the litigation is that the definition of medicines should refer to substances with actual or claimed therapeutic effect. If this contention is accepted by the court, the regulation of nutritional supplements would be outside the power of the Minister of Health and the regulations should then be set aside. Judgment in the case is not expected before mid-2019.
The current pressures on consumer spending are unlikely to abate in the months ahead and the retail trading environment will therefore remain challenging.
Selling price inflation is expected to remain low in the first half of the new financial year and the SEP increase for 2019 is likely to be only marginally higher than 2018. The group will therefore continue to operate in a constrained environment.
The group’s health and beauty markets and business model are resilient. The business continues to trade well in these challenging economic conditions and management is confident of maintaining sales momentum and sustaining volume growth in the year ahead.
Over the past 13 years I have been privileged to lead a great company and a great team of highly motivated, energetic and talented people.
Thank you to our chairman, David Nurek, for his unwavering support and counsel during my tenure as CEO, and to my fellow directors for sharing their wealth of knowledge and experience.
My group executive colleagues, Michael Fleming, Bertina Engelbrecht and Vikesh Ramsunder, lead by example and I thank them for the role that they have played in ensuring the success and sustainability of the group.
To our 15 000 people at head office, stores and distribution centres across the country, thank you for making us the country’s first-choice health and beauty retailer.
My successor, Vikesh Ramsunder, has a proven leadership track record and depth of experience. His appointment confirms the strength and quality of our internal talent. He has been developed as my successor over several years and is highly respected both by employees and external stakeholders of the group. I wish Vikesh every success as he assumes the leadership of the group and know the company is in great hands.
David Kneale
Chief executive officer