Dis-Chem looks to Disney to boost custom
But its distribution business was a drag on operating margins
● Pharmacy retailer Dis-Chem is focusing on rewards programmes to retain and grow its customer base as spending remains under pressure in a weak economy.
Dis-Chem, which listed on the JSE in 2016 with 101 stores, has grown aggressively since then. It has 136 stores and will increase its footprint to 151 by the end of February 2019.
Dis-Chem CEO Ivan Saltzman said despite constrained consumer spending, “we believe that Dis-Chem is well positioned in terms of pricing … and selection, to withstand the weak economic environment”.
Wayne McCurrie from FNB Wealth and Investments said the retailer had focused on rolling out stores in areas where it did not have representation, but this would soon come to an end as the market becomes saturated. Dis-Chem’s differentiator and advantage was its “extremely” loyal customer base, he said.
Dis-Chem’s Loyalty Benefits Programme, which enables customers to earn points with each purchase, has 4.3-million members.
Dis-Chem CFO Rui Morais said members of partner loyalty programmes such as Vitality and Legacy Lifestyle spend more in stores, with an average basket size of R405. Dis-Chem loyalty cardholders spend on average R315 a basket and non-loyalty members spend R183.
One of the biggest successes the group has had is with its fuel reward programme, which has helped it gain 22,500 new loyalty members since the programme started in December last year. The partnership with Total has rewarded loyalty members with points on 122-million litres of fuel.
At the heart of Dis-Chem’s growth strategy will be information on 8.2-million customers, which it has gathered through interactions with customers. This will enable it to launch new programmes targeting different demographics.
Its biggest campaign so far, Disney Micro Popz, was launched on Monday. The campaign will reward customers with small plastic Disney characters.
Micro Popz is similar to rewards programmes used by grocery retailers and relies on pester power — a strategy marketers use to target children in the hope they will get their parents to frequent a particular store more often and buy more products.
“As a campaign, we expect it to deliver positive results in the short term, but longer term we believe it will drive market share and, importantly, encourage first-time DisChem shoppers,” said Morais.
Dis-Chem has also launched the School Days programme in schools, whereby parents who sign up and spend at Dis-Chem earn points for a bursary towards their children’s education.
Dis-Chem’s share price rose to a peak of R38 in April and is now trading at R28.09.
The group this week reported a 9.4% increase in revenue to R10.5bn and a 12.3% rise in profit after tax.
McCurrie said the interim results were very positive considering the challenges in the market, with consumer spending constrained in a weak economy. Although the shares were expensive, he said, they “were worth their price”.
But Daniel Dias, an Arqaam Capital equity research analyst, said revenue growth was weaker than expected, given the number of stores Dis-Chem opened in the second half of 2018 and will open in early 2019, as well as weak inflation of 1.2% year on year.
Dias also said that Dis-Chem’s shares were fairly priced and the premium at which they were trading was due to the structural growth opportunity the group had in the pharmaceutical retail market and the opportunity it had to grow.
In addition, the group’s distribution business was a drag on operating margins, he said. He added that it remained difficult to quantify the intergroup segment because of limited disclosure.
“Therefore if I go on the basis that all the intergroup transactions are from the wholesale business to the retail business, it seems as if the distribution business may not break even in the medium term.
“So it may continue to be a drag on margins [and] earnings,” he said.
Dis-Chem leases four distribution facilities, which are owned by the company’s former and current management.
Dias cited this as a problem, saying that this could result in potential corporate governance issues.