Strong vitamins required
Dis-Chem’s new CEO has his work cut out to realise the chain’s ambitious growth plans and step out of founder Ivan Saltzman’s shadow
Dis-Chem’s phenomenal growth since it opened its first branch 46 years ago has been less about longterm strategy and more about seizing opportunities as they arise, says cofounder Ivan Saltzman, 73, who is about to relinquish his position as CEO.
“We took opportunities when they came and it morphed into this,” he tells the FM. “The bigger it got, the more structured it had to become until we listed in 2016.”
The family-dominated chain is now South Africa’s largest retail pharmacy in terms of market share of schedule 1-6 dispensary drugs, though Clicks has a larger store footprint. Clicks, however, has been around nine years longer.
Saltzman won’t be moving too far into the background his new role as of July will be executive director, focusing on the operational aspects that are his passion.
“It was my intention to carry on working in the fields I love best the trading part in FMCG [fast-moving consumer goods] and growing the business footprint across the nation,” he says. “I enjoy more operational involvement, I want to get out to visit the stores nationwide and keep up relationships with management of the stores and customers.”
CFO Rui Morais, 38, takes over as CEO and his vacant post goes to Julia Pope, the group’s executive head of finance. Saltzman’s wife, Lynette, who co-founded DisChem with him, continues as head of the beauty division and of marketing.
Morais has worked closely with the Saltzmans for more than a decade, initially as an external auditor. But Saltzman’s dominance has given rise to scepticism that he will truly hand the reins to his much younger successor.
The Saltzman family remain the single largest shareholder in the group, which they founded in Mondeor, Joburg, in 1977. Today, they still own about 33% of DisChem (market cap R19.8bn).
Morais believes he will have the executive freedom to be CEO without looking over his shoulder. “Our investment in the health-care ecosystem was a collective view myself and Ivan had, and as such he is supportive of our direction. We also have
an excellent relationship and ultimately his ambitions are aligned as he is the largest shareholder.” Those ambitions include the repositioning of Dis-Chem from pharmacy retailer to integrated health-care provider
which means the company is not only competing head-to-head with Clicks, but will soon run up against medical aid giant Discovery.
For starters, Dis-Chem is offering medical insurance, the proceeds of which are being reinvested into growing distribution channels. Morais and Saltzman want Dis-Chem to be a “health maintenance organisation”, providing insurance for a fixed annual fee, and they have plans to invest further in pharmacies and nursing skills.
Morais says low-cost medical insurance is the single biggest insurance opportunity in South Africa, with 12-million jobholders and their dependants who don’t have medical cover. It’s a sector Discovery is struggling to enter because of regulatory constraints.
“We’re creating an opportunity for more and more South Africans to access private health care,” says Morais. A huge slice of the population is unable to afford private health care as it is now priced but loath to rely on state facilities, which are overstretched at best.
Morais has been instrumental in leading the return on investment focus to enable the group’s ambitious growth plan. “From my perspective, navigating the brand into the health-care system would be my primary responsibility,” he says.
Saltzman, meanwhile, has committed to sell 32.5-million
Dis-Chem shares owned by the family or 3.75% of the company’s stock to
Morais and other senior executives through a 10-year option agreement.
Dis-Chem’s share price performance has been a sore point for many investors since its richly priced IPO in November 2016. The stock peaked at R38.45 in April last year but has since slumped to its present levels of R23 not far off its initial listing price. Over five years the share has delivered a total return including dividends of -16%.
That’s despite reporting double-digit growth in earnings and dividends for the year ended February 2023. Headline earnings per share grew 17.4% while group revenue increased 7.4% to R32.7bn. The dividend was similarly higher, at 46.6c for the year.
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says there were few surprises in the results.
“I think they are telling investors to lower expectations, and rightly so. We have seen instances where investors bought the stock up to ridiculous levels. Having said all of this, the business managed to hang on to, and build on, most of its margins, which was a positive. But the environment remains extremely fragile,” he says.
Saltzman acknowledges his tenure as CEO has not always been plain sailing, but “everything passes”. An outcry erupted last year over a memo he wrote imposing a “moratorium on the appointment of white individuals”, and some consumers boycotted the chain. Dis-Chem took a temporary knock, but trade has bounced back in the past few months.
The group is determined to expand. Its aim when it listed seven years ago with 100 stores was to double this number, which it has done it has 258 retail pharmacies and 54 retail baby stores. And now it wants to double this number in turn.
Whether it will have the market’s support to do so is another matter. Despite its recent share price decline, Dis-Chem trades on a p:e of 20 high relative to other retailers. What’s more, Treurnicht fears that foreigners previously buyers of pricier shares such as Dis-Chem and Clicks have become averse to South African stocks.
“We are possibly the best example of a value trap worldwide and it’s not good.”