South African health and beauty retailer New Clicks Holdings is forging ahead with its plans to include pharmacy dispensaries in many of its Clicks stores in the new year, as well as expanding its Hyperpharm brand, despite the current legal and regulatory uncertainties surrounding medicine pricing and pharmacy fees.
This emerges clearly from the company’s recently released 2004 annual report, where group leader Trevor Honneysett writes: “We acknowledge that the unknown elements in the macro environment have caused the group some temporary setbacks. However, this does not detract from the (pharmacy) strategy, and we remain resolute to implement our plans, and accelerate them where possible.”
Based on its limited experience so far adopting the government’s new medicine-pricing regulations, Honneysett says, New Clicks has opted to curtail the development of its planned smaller-format pharmacies — because of their lower profitability — and focus on adding dispensaries to existing and new Clicks stores.
For its financial year to the end of August 2004, New Clicks was able to convert 21 of its Purchase Milton & Associates (PM&A) pharmacies to Clicks-brand pharmacies and stores. This included the opening of dispensaries in three large-format Clicks stores.
Based on three months of actual trading within the converted stores, the government’s new pricing regulations had “undoubtedly” resulted in a reduction in gross profit in the dispensary services, admitted Honneysett.
However, for the three large Clicks stores, the addition of dispensaries had lifted footfall through the stores, resulting in improved turnover, which in turn lowered the group’s costs (in terms of employment and occupancy) relative to turnover.
“Based on the stores that had been converted by the financial year-end, the prospects for increased turnover in both the front shop and dispensary are positive,” he writes. “This model is expected to result in a significant uplift in profit.”
Apart from its 21 Clicks-branded pharmacies, the group also has 12 Hyperpharm stores trading in Gauteng and 47 still trading under the PM&A banner, for a total of 80 pharmacy stores.
Sales for the six months to the end of August 2004 amounted to R523,2-million and the pharmacy operation posted an operating loss of R5,5-million, severely hampered by the new medicine-pricing regulations introduced in August, which capped dispensing fees at R26 for sales of more than R100 or 26% of sales of less than R100.
By December this year, New Clicks plans to have 90 pharmacies — 64 conventional Clicks stores with dispensaries, eight smaller Clicks with dispensaries, 12 Clicks pharmacy stores and six Hyperpharm stores. This calls for dispensaries being incorporated into an additional 61 Clicks stores over the next 12 months.
Whether the company will be able to accomplish its goals in 2005 depends on the speed with which the Department of Health grants the conversion of existing pharmacy licences and new licences, as well as the final outcome of the current wrangle over medicine pricing and dispensing fees.
In December, South Africa’s Supreme Court of Appeal ruled to set aside the government’s medicine-pricing regulations, creating a legal void in the pharmacy industry. The government has said it plans to appeal the ruling to the Constitutional Court.
“There is still wide-scale uncertainty around legislation and the fee structure that can be charged by pharmacists,” says Honneysett. “This remains the biggest challenge to the group’s pharmacy aspirations. As the business moves away from a traditional pharmacy network and transforms into a retail chain store, sales and profitability are expected to increase strongly.” — I-Net Bridge