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Dis-Chem interims: H1 results up; market share increases

Retail results affected by dispensary cost hikes in the ‘most important part’ of the business, says CFO Rui Morais.

NOMPU SIZIBA: Dis-Chem reported their half-year profits up 2.5%. They say that all their divisions managed to increase market share, and my colleague Prinesha Naidoo spoke to the chief financial officer earlier.

PRINESHA NAIDOO: Dis-Chem’s interim results reflect a tale of two divisions. Its consumer sales and retail division accounts for more than 90% of revenue posted, with a 9.8% increase in revenue to R9.6 billion. At the same time its wholesale division grew revenue by 15.1% to R7.4 billion. But it incurred an operating loss of R46 million.

Dis-Chem chief financial officer Rui Morais joins us on the line with more. Rui, thanks for joining us.

RUI MORAIS: Not a problem.

PRINESHA NAIDOO: Let’s start off with the retail division whose results do appear solid amid the circumstances. Dis-Chem did note, though, that there were tough trading conditions and linked them to the increase in fuel prices and also that one percentage point increase in value-added tax. To what extent has this strained consumer environment weighed on the business?

RUI MORAIS: I think, as you’ve pointed out, the consumer is constrained. The fuel price increases, the Vat increase – certainly in what we would be in that space, being the retail pharmacy space – has resulted in lower volumes and smaller baskets, indicative of a value-conscious consumer. That’s played out in our retail numbers. In terms of managing that, we look to ensure that we grow market share because what’s affecting us is affecting all industries in retail. And dominant market-share growth is obviously important as it affects some of the other metrics and your ability to extract benefits from trade terms with suppliers, etc.

So our focus is to grow space, and with space comes top-line growth and market share. That’s the way we approach it.

PRINESHA NAIDOO: Dis-Chem has also said that its retail results were negatively impacted by a 1.26% increase in the single exit price [SEP] prescribed by the Department of Health. Can you explain to us a bit about how this price works, and also why it weighed on results?

RUI MORAIS: Inherently that is the price inflation in our dispensary category, which is close on 37% of our business. If you think about just that as a concept of price inflation, it’s difficult to counter cost inflation in that sense – so lease costs, the costs of pharmacists with volume growth, and a small 1.26% price inflation.

That price inflation is gazetted by the Department of Health. It’s formulary-driven, so it takes currency movements into account, it takes CPI movements into account. But in an environment where you get such low price inflation it places pressure on operating margins of that specific category. It also then places pressure on top-line growth. We do expect, going forward, to see slightly higher SEP increases, which is obviously positive for the group, but [brings along] very difficult circumstances in the dispensary category in this financial year.

PRINESHA NAIDOO: And we see that because the dispensary-category revenue lagged growth in the front-of-shop revenue. At the same time, with the single exit price, I’m just trying to wrap my head around this, because that 1.26% increase was also largely in line with the selling price inflation of 1.2% which was also recorded, and consumers already say that medicine charges are too high.

RUI MORAIS: Sure. In terms of the role we play in reducing healthcare costs to the consumer, that plays out in our dispensing fees. So, together with medical insurance, we continue to provide services at reduced costs. That is our participation in reducing healthcare costs to the individual. The reference you made earlier to our price inflation across the group is just the result of competitive pricing in the other front-of-shop categories. So especially in the personal care and baby space, where we see the food retailers being very competitive on price, and obviously our strategy being an everyday low-price strategy, that means that we need to max to ensure that we maintain volume. So, as a group, correctly so, the SEP price increase of 1.26% was complemented by similar price increase in the front-shop products, which is really driven by competitive pricing.

PRINESHA NAIDOO: And if we move on to that wholesale division now, there was an operating loss that we mentioned. What was that attributable to?

RUI MORAIS: The whole selling division is really a function of leverage. We’ve invested in an enormous amount of space over the past 24 months. Compared to the prior period, we’ve added another 13 500 square metres of space. We now have an infrastructure that is geographically across the country, and as previously we are servicing our network, which is a national network, from a single facility in Midrand. So, as we made the investment in the KwaZulu-Natal and the Cape Town facilities, obviously that comes with fixed costs, and that wholesale business is leverageable. It really supports our growth as we increase the number of stores in doing that, because a lot of the wholesale supply is internal. So in our wholesale supply to our retail stores you’ll see the leverage and profitability impact on the wholesale business. In short, the wholesale business has capacity, and that capacity will be taken up by retail stores and we’ll add to our retail business.

RUI MORAIS: But despite your efforts on the wholesale front, there are some things that are out of your control, and one of these things is potential labour unrest, which does pose a threat to that business. Just talk us through these labour relations. Who is threatening to go on strike? Is this unique to Dis-Chem, and how is it going to impact the business?

RUI MORAIS: Sure. I think it’s a common strategy that has representation in our Midrand facility, our biggest distribution facility. We had given them organisational rights and a certain level of representation of the workforce. They are not at those levels yet, and they’ve asked to negotiate on the wages. The request on wages – we can’t afford it, and that’s considering a process that we’ve gone over the past three or four years, when we’ve invested in our low earners. Relative to the government’s gazetted minimum wage, we are a lot higher than the government gazetted minimum wage, and their request is just commercially unviable.

So we are in talks with them, but that risk exists until we deal with this issue, which is potentially concentrated to the distribution business.

PRINESHA NAIDOO: And the wage request I’m assuming is above an inflation increase?

RUI MORAIS: Yes, it’s way above an inflation increase. Our last payroll cycle investment in our lower earners was already way above an inflationary increase, which is the reason why we are above the gazetted minimum wage. But their request was exorbitant in being way above inflation and the gazetted minimum wage.

PRINESHA NAIDOO: So how do you see this playing out, and to what extent is it going to affect the product delivery to stores and to consumers?

RUI MORAIS: In terms of playing out, we are obviously close to the union, and we are close to the process, so we will ensure that the retail part of the business has sufficient stock to provide retail sales to the consumer, so as to not adversely affect the consumer from a retail perspective. If there is a strike, it will obviously affect the supply of wholesale into retail, but retail is sufficiently stocked to deal with that. And we will adapt to that as and when developments in this process happen.

PRINESHA NAIDOO: Sufficiently stocked, especially in terms of medication and chronic medication?

RUI MORAIS: Correct, yes. That would be our focus area considering it’s the most important part of our business.

PRINESHA NAIDOO: That’s good to hear, Rui. Another positive sign coming through is that Dis-Chem does see consumer confidence improving. Tell us more about that, and just how positive you are about it.

RUI MORAIS: We’ve seen it in our September numbers. Post our reporting period in the six weeks that we reported up until the end of October we’ve seen a slight improvement after an incredibly tough July month, and difficult first two weeks in August. Indications are that consumers tend to believe there is an improvement, but generally I think the consumer is constrained. They are value-conscious. So it’s a slight improvement, but we don’t expect it to materially influence our numbers going forward for the remainder of the financial year.

PRINESHA NAIDOO: Rui, that’s where we will leave things. Thank you so much for joining us.

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