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Turnover: R 21.400bnTrading Profit: R 1.200bnTrading Margin: 5.61%
Stores: 136Employees: 18,000
Listed: No
 
Dischem

INTRODUCTION

About Dis-Chem Pharmacies

Dis-Chem has been South Africa’s first choice in pharmacies since 1978, with our linked dispensaries, family clinics, wound care clinics, and comprehensive self-medication centres. As a leading specialist in beauty, healthy food, sports supplements, health, and well-being, we offer the widest ranges in these categories and expert advice.

More about Dischem Pharmacies 

CEO REPORT

Overview

We celebrated Dis-Chem’s 40th anniversary in the last financial year. When Lynette and I opened our first pharmacy in the south of Johannesburg in 1978, we could never have imagined that DisChem would grow to the size that it has become, enabling direct employment for more than 18000 people and serving customers in 150 stores across southern Africa.

40 years later, our ethos of caring is as strong as ever, which is evident in our passion for customer satisfaction, earning us numerous awards over the years. Equally pleasing, is that our growth and success over the years has allowed us to contribute beyond our shareholder, employee and customer base, to members of disadvantaged communities who benefit from the work of the DisChem Foundation that was established in 2006, including the Food Garden that helps to feed thousands of people.

Our collective achievements, hard work and commitment have made Dis-Chem one of South Africa’s most loved brands, as our 4.8m loyalty members will attest. South Africa’s successful national election has culminated in the formation of a more streamlined cabinet which, maybe hopefully, aims to introduce policies that will enhance job creation and provide more clarity on investment and business policy. This is imperative for all of us to proceed with our respective growth and development activities with far greater confidence and to position Dis-Chem for the next upswing in the economy.

Group performance

I am very pleased with DisChem’s performance for the year ended 28 February 2019. We have reported positive results with improved market share across all our core categories, despite the ongoing economic pressure that our customers are continuing to experience. Dis-Chem’s market share gains, which are the largest we have seen in the last three years, were driven by our everyday low-price strategy and deep cut promotions, our trusted instore service, the availability of choice and our continued focus on exclusive brands and private labels. All of these factors make us a preferred destination for cost-conscious consumers searching for value offerings.

We experienced a strike during the year, which lasted five months and which had a marked impact on the Group’s performance. I must commend our management team and all employees for their efforts during the strike. All stores operated with minimal disruption and customers continued to receive our renowned service and quality. Management’s focus remains on developing a productive relationship with our employees, improving wholesale productivity levels and cost efficiency as well as optimising the levels of stock holdings, which the strike necessitated We have achieved our store roll-out plan of adding 20 stores or more annually, and this remains on track for future years.

Earnings attributable to shareholders and headline earnings both grew by 7.4%, while earnings per share and headline earnings per share increased 7.4% to 85.4 cents. Group turnover grew by 10% to R21.4 billion, with a 9.7% increase in our retail turnover to R19.6 billion and a 11.2% increase in our wholesale turnover to R14.5 billion. Cost efficiency is a major focus for us and having wholesale operations that are more geographically aligned with our core retail store base, as well as the independent pharmacy market we serve, should lead to additional cost containment in the next financial period.

Operating and Regulatory Environment

The SEP prescribed by the Department of Health for regulated drugs negatively affected comparable store revenue and selling price inflation following the 1.26% SEP increase, which was effective 1 March 2018. SEP affects approximately a third of our retail sale. However, the most recently gazetted increase of
3.78% should deliver some relief in the coming financial year.

Considering the consolidation theme playing out in the retail pharmacy industry, space growth using the appropriate store format remains and will continue to remain a fundamental driver of Group growth. There are restrictions on retail licences that inhibit pharmacies from opening anywhere. We are pleased that we have licences for all sites in which we have situated new stores.

Industrial Action

The Group was the target of a national strike by a group of employees belonging to the National Union of Public Service and Allied Workers (NUPSAW) that started on 16 November 2018. A total of 2 300 employees, the majority from our wholesale operations, took part in the protected strike. At the start of the industrial action, less than 13% of our employees were registered as NUPSAW members. This continues to fall and is currently below 10%. The union’s demands included a minimum wage of R12 500 across the board, an annual increase of 12.5% (guaranteed for the next three years) for all employees and a guaranteed annual bonus. Following discussions with the CCMA, an additional demand was made to take back all employees that had transgressed picketing rules, had damaged company property and/or attacked fellow employees and damaged their possessions. The decision is still pending regarding the out of their appeal.

The industrial action came to an end on 10 of April 2019, with NUPSAW withdrawing all demands and employees returning to work. NUPSAW agreed to re-instate the original organisational rights agreement signed with Dis-Chem in January 2018 that it broke, namely that it would only be entitled to engage in collective bargaining once the threshold of 50% plus 1 member in the workplace has been met. We agreed to pay pro-rata bonuses to all eligible employees who were not paid their bonus for the year ending 2018. From 2019 onwards, the bonus policy will no longer apply a forfeiture of the bonus payment in relation to those employees who have valid final written warnings on file.

The industrial action which started before Black Friday and Christmas of 2018 had both a direct and indirect impact on our financial performance, with total costs adding up to R75 million. This included R50.4 million of additional direct costs, primarily in increased security at certain targeted stores and our head office, relocating vulnerable employees to other premises and legal fees.

Other major direct cost contributors included having to employ and train temporary staff in our distribution centres as well as our inability to invoice logistic fees as certain suppliers had to deliver inventory straight to stores and not through our distribution centres. Indirect costs were estimated at between R17.3 million and R21 million. Retail revenue growth in December (the most impacted retail trading month) was only 6.2% with comparable store revenue at -2.5%, which was well below our expectations but was however in line with or above other retail. In addition, our primary external customer facility in Delmas was significantly impacted over the period of the industrial action, reporting growth of negative 0.58% against wholesale external growth of 5% delivered in the first half of the financial year.

We opened 20 new stores, including flagship stores in Sandton, Eastgate and Gateway as well as our first store in Botswana. Collectively, these new stores added R647 million to revenue, while the 21 stores opened in the previous financial year contributed an additional R1,4 billion. The Dis-Chem brand’s positioning and strength, the maturing of our store base and the addition of new stores, supported by
our successful promotions, especially the Micropopz! campaign, partially offset the economic and labour challenges that we experienced in the last four months of the financial year.

Strategy and business model

The Group aims to continue growing market share across all categories by focusing on customer relationships and on the positioning and alignment of the Dis-Chem brand. We strive to maintain category leadership by being close to consumer preferences and trends. Other than the significant and tremendous
work taking place inside the stores, we are also enhancing our systems, distribution processes as well as products and services to improve market share and continue to build customer acceptance. The ongoing strategic initiatives will, we believe, result in enhanced profitability and returns in future years.

Dis-Chem’s strategy will continue to align to our dispensary-led footfall to generate revenue from the
front shop. The destination format drives very superior trading densities and customer loyalty. Being a non-discretionary pharmacy business, the group combines defensiveness with high-growth expansion opportunities. We acknowledge the importance of driving volume growth and managing costs in our mature space, ensuring that we maintain and improve our retail operating margins. We continue to focus on driving dispensary volumes, the core of our business.

With chronic medication a significant contributor to total dispensary sales and volumes, we are focusing
on strategies to increase patient adherence rates and customer retention. This includes the use of adherence technology. Besides the commercial benefits, the technology provides the ability to monitor non-adherence and to prompt patients to persist with therapy for health reasons. It also enables the provision of disease education through electronic means and the prediction of disease and progression rates, using AI to create customer health profiles based on transactional data.

Our aim is to manage all chronic patients through their preferred channel.

Looking ahead

We remain very confident about our offering and we will, therefore, continue adding retail stores. Five stores have been opened since the beginning of March 2019 and an additional 17 store openings are planned through to February 2020. In-store enhancements will also remain a feature to ensure an ever-improving shopping experience, coupled with a more streamlined distribution channel, competitive pricing, and quality products.

We expect that the consumer will remain under pressure, despite the slight rise in consumer confidence in the second quarter of 2019. As was the case previously, the resilient markets in which the Group operates together with our brand positioning will offer a certain amount of protection against the weak environment.
I believe we are well-positioned to benefit from consumers’ additional disposable income, which should eventuate when South Africa’s economy stabilises.

Appreciation and conclusion

I wish to express my appreciation to the entire Dis-Chem family that have been unstinting in their efforts and contributions during the year. Considering the challenging year, particularly as a result of the depressed economy and the strike, the entire team has made a significant contribution, which has ultimately resulted in our pleasing performance over the last year. My appreciation is also directed toward the Board of Directors for their combined support, guidance, and stewardship. Their invaluable input is serving to make a better, stronger and more robust Group.

Lynette and I remain very proud of what has been built over the last 40 years and we are excited and invigorated as the Dis-Chem story will continue well into the future with our enlarged management
team.






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CHAIRMAN'S REPORT

Over 40 years Dis-Chem has grown steadily, albeit at a slower pace during economic down cycles. Now in its third year of being a JSE listed company, with its complex requirements and regulations, the Dis-Chem business model continues delivering true to form. The 20 new stores added during the reporting period and a further 22 outlets planned for 2019/20 are ample proof of our robust business health. Dis-Chem’s resilience was confirmed by a labour strike over the peak December season that reduced earnings
for the group and striking employees but did not impact the core sustainability of the business. All parties involved in the strike should take its lessons to heart.

Dis-Chem differs from most multi-outlet businesses in that it grew organically in line with the founders’ unwavering focus on community needs. In 2007, our community mission was housed in the Dis-Chem
Foundation specifically set up for this purpose. Our ‘pharmacy first’ Dis-Chem model anchors every Dis-Chem outlet to comprehensively stocked, pharmacist-led dispensaries, supported by wellness clinics staffed by qualified medical personnel.

Our larger outlets are adding beauty and hair salons to the Dis-Chem mix. Behind the scenes, our distribution, wholesale and online platforms complete the equation for creating value for a wide range
of stakeholders. As a result, our Dis-Chem stores are valued community destinations in the traditional
pharmaceutical and healthcare sense, yet enhanced by the discounted pricing, wide inventory and high service standards made possible by our scale, resources, and business model.

Operating environment

Political, economic and regulatory events, in Southern Africa and globally, remain the dominant factors in our operating context. In recent years, South Africa has stumbled from crisis to crisis, with its economy presently unable to generate the jobs and consumer income to lift GDP growth. Fortunately, Dis-Chem plies its business in the healthcare and wellness sectors, which remain vigorous in the current environment.

South Africa’s general election in May 2019 introduced a fresh cabinet under President Ramaphosa, including Dr Zweli Mkhize as the new Minister of Health and Mr Ebrahim Patel as the incoming Minister of
Trade and Industry. We warmly thank their predecessors for their inputs over many years
and welcome the incoming ministers to their portfolios.

Their appointments are too fresh to appraise any shifts in government policy, but I do appreciate the daunting challenges the new incumbents face, given the depressed business environment and the
thorny issues apparent in the national healthcare sector. The previous health minister’s steady push to introduce National Health Insurance (NHI) is having a major impact on private healthcare and its
regulatory framework. A draft NHI bill released in February 2019 for public comment has attracted widespread attention and is presently being evaluated by hospital groups, medical aid funders (MAFs) and organisations representing patients and medical professionals.

In terms of the current NHI draft and negotiations, the Dis-Chem group appears well placed to provide services to the envisaged national health programme. Nevertheless, South Africa’s NHI still has a long road to travel before it can become reality. Our store and distribution growth plans are being impeded by the slowing pace of obtaining regulatory signoffs for products and new facilities.

Inadvertently inhibiting DisChem’s expansion, along with other impacted businesses, also slows the national imperative of creating new jobs and growing GDP. I urge the incoming minister to pay urgent attention to the efficient oversight of healthcare policy and regulation.

Long term sustainability

The Saltzman family instituted societal and environmental responsibility as a core Dis-Chem value many years before regulators introduced the concept to commercial law. We value the symbiotic relationship we’ve created between shareholders, other stakeholders and the natural environment that enables us to optimally serve our communities. Our business mission would not be possible without these entwined
and mutually beneficial relationships.

Even so, management’s first priority is to secure the group’s commercial sustainability as creator of value for shareholders and funding for worthy causes. Dis-Chem’s commercial and social objectives depend on the group remaining consistently profitable.

Information technology (IT) is disrupting many industries by opening up more efficient ways of analysing and servicing our markets. Healthcare in particular – and the overall customer experience - can be enhanced by simplifying and speeding up interactions through appropriate IT. We are introducing new
systems to manage the intricate logistics behind our distribution and wholesaling networks, which must continually prepare for growing delivery volumes and customer expectations.

On the pharmacy side, our customers and the group will benefit from deeper analysis of customer transactional data to create health profiles. We can then more proactively manage their prescriptions to
ensure that therapy regimes are properly completed, which is a major issue in chronic medicine dispensing.

Ethics, leadership, and corporate governance

Since our JSE listing, the board has overseen the implementation of a corporate governance framework based on the recently introduced King IV code. This process involved drawing up and instituting policies for ethical behaviour, internal and external audits, and for handling board and executive matters. This exercise was largely completed during the period under review. The Dis-Chem board appointed during the listing process has remained unchanged for the consequent three years, enabling board members to settle into their roles and establish a productive working relationship.

They have managed the transition from a private to a listed company seamlessly and are continuously invaluable assets to the group’s leadership body. With a stable board and executive team in place, planning for leadership succession and increased board diversity are well advanced.

The single most consequential matter dealt with by the board in the period of review was the labour strike at several of our premises between November 2018 and March 2019. We oversaw the process of finding the eventual negotiated solution that ended the impasse. With the future of South Africa’s economy still at a crossroads at the time of writing this report, I can safely forecast that economic and political events will probably occupy much of the board’s attention in the forthcoming financial year.

Outside of South Africa, the developing ‘trade war’ between China and the US could impact the foreign exchange markets and the costs of importing products and pharmaceuticals into South Africa, placing a further strain on consumer disposable income.

The board will pay close attention to how the executive and their management teams perform against their targets in the current and probably volatile financial year.

Prospects

Looking ahead, this is a particularly difficult time to venture any predictions. South Africa and the world at large have so many issues to tackle, with potential responses that vary so widely. What I can safely predict is that Dis-Chem is as well prepared as any competitor to take on any predicted challenges - or those
that may yet emerge. Having worked alongside Dis-Chem people for many years, and noting with respect the high calibre of the incoming Dis-Chem generation, I have no doubt the DisChem story will continue growing as healthily as always.

I thank all directors, managers and staff members for your outstanding efforts to bring Dis-Chem safely and profitably through another year in the face of steep challenges. Your dedication is the key to making Dis-Chem great.


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SUMMARY

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