Chief executive's report

Trading performance

Retail trading conditions became increasingly challenging during the year, with the second half being particularly tough as the group faced the high base set in 2010. This included the vibrant trading period around the FIFA 2010 World Cup when retailers benefited from the influx of tourists as well as the extended mid-year school holidays.

Selling price inflation continued to decline during the year and fell to zero in the last few months of the year, averaging only 1.6% for the period. As inflation averaged 5.4% in the previous year, this reduced turnover growth by almost four percentage points.

In the prevailing economic climate consumers have remained cautious and value driven.

Group turnover for the year increased to R14.1 billion, with retail turnover up 10.9% to R10.8 billion. The Clicks chain reported strong growth in turnover of 13.0% as the brand showed real sales volume growth and continued to gain share of the increasingly competitive healthcare market.

In the other retail businesses, Musica experienced a slow second half and turnover for the year was down 5.9% as the decline in the CD and DVD markets accelerated. Musica remains the country’s leading entertainment retailer and showed good growth in the newer merchandise categories of gaming, technology and accessories. The Body Shop’s operating profit increased by 3.5% despite the brand reporting price deflation of 6.6%.

The performance of UPD, the group’s pharmaceutical wholesaler, was negatively impacted by no single exit price (SEP) increase being granted by the Department of Health (DoH) for 2011 and the continued reduction in the independent pharmacy sector. UPD increased turnover by 4.2%, impacted by lower inflation owing to the lack of an SEP increase and the faster growth in sales of lower value generic medicines. Despite the challenging conditions UPD entrenched its market-leading position and increased its share of the private pharmaceutical wholesale market from 22.7% to 23.1%.

The group’s operating margin expanded from 6.2% to 6.6% through the excellent performance of Clicks which increased its margin by 80 basis points to 7.7%.

The group’s performance is covered in the Chief Financial Officer’s Report and in the Operational Reviews.

Group strategy

The group’s strategy is to be pre-eminent in health and beauty retailing, and healthcare supply and pharmacy management, through Clicks and UPD. The directors believe the strategy remains sound, gives the group competitive advantage and will ensure sustainable growth in the health and beauty retailing and supply markets.

Clicks has again been independently rated as the country’s leading health and beauty retailer. The chain opened its 400th store as 31 new outlets were added during the past year, and is on track to expand its store base to 500 in the medium term. Clicks increased its healthcare market share and while the chain experienced real volume growth in beauty merchandise, customers trading down to lower priced ranges resulted in small declines in skincare and cosmetics value market share. Private label and exclusive brands are core to the Clicks growth strategy and accounted for 18.2% of total Clicks sales and 24.2% of front shop sales. The Clicks ClubCard membership base grew to 3.4 million, slightly short of the targeted 3.5 million, and the Clicks BabyClub was launched during the year.

In healthcare supply and pharmacy management, Clicks has the largest retail pharmacy footprint and extended its network to 283 with the opening of a further 32 dispensaries. Retail pharmacy market share has grown to 15.4%. UPD experienced a more difficult year as detailed above. While the application for an export licence was declined, which is a decision we are now challenging, UPD was awarded distribution agency contracts totalling R600 million of notional turnover late in the financial year which will commence in 2012. UPD remains the market leader and the country’s only full-range national pharmaceutical wholesaler.

The material issues which could impact on the performance and sustainability of the business are outlined here.

The group has published medium-term financial targets since 2007 and these targets are reviewed annually based on performance and the outlook for the following three years. More recently the group has published operating targets relating to the strategic objectives and for the first time this year has disclosed targets for the strategic enablers to demonstrate the sustainability of the business. The performance against these targets is detailed in the Group Strategy and Targets report.

Healthcare regulation

Dispensing fee regulations were finally implemented by the DoH in late 2010, setting a maximum dispensing fee which may be charged by retail pharmacists.

The four-tier fee structure adopted by the DoH provides a fair return to pharmacists and has created more certainty in the pharmacy sector after several years of instability. A maximum dispensing fee ensures that consumers are not exploited while still allowing pharmacies the flexibility to discount and charge lower fees to customers.

While the new pricing structure enables Clicks to increase pricing and margin, we have continued to price aggressively at levels well below the maximum to build volume and gain market share.

We have consistently called for the capping of logistics fees that can be earned by pharmaceutical wholesalers and therefore welcomed the DoH’s proposed regulations to limit maximum logistics fees. While we support the construct of a four-tier fee model based on drug prices, the proposed fee levels are not viable and at this low level would dilute UPD’s margin and erode profit.

Management has constructively engaged with the DoH and is confident that a fair solution will be reached. However, the capping of fees will accelerate the much-needed consolidation of the pharmaceutical supply chain. We believe that as the market leader this will benefit UPD.

Role of pharmacy in NHI

Government’s proposed national health insurance (NHI) scheme plans to provide access to healthcare for an estimated 42 million South Africans not covered by private health insurance.

We believe retail pharmacy should be an integral part of broader access to healthcare in the country, not just in the context of the NHI, and therefore welcome government’s focus on primary healthcare in the NHI proposals. We have also been encouraged by the willingness of the DoH to engage and seek input from the private sector.

Pharmacists are ideally positioned to provide more accessible basic primary healthcare services and advice. However, pharmacists with the appropriate training need to be authorised to prescribe from the essential drug list to reduce the cost of patient care and to alleviate pressure on a healthcare system which is already under pressure. In this regard we support the proposals of the SA Pharmacy Council to introduce “authorised pharmacist prescribers”.

One of the challenges facing government in making healthcare more accessible is the need to increase the number of healthcare practitioners in the country. Clicks recognises the need for a sustainable increase in the number of graduates from pharmacy schools and is working closely with universities to find ways to increase capacity. At the same time the group is increasing the number of bursaries granted to trainee pharmacists, growing the number of pharmacy interns employed in the group and increasing the number of pharmacy assistants trained through the in-house Pharmacy Healthcare Academy.

In the short term, one of government’s key healthcare priorities is to reduce infant and maternal mortality. Clicks is well positioned to partner with government in baby immunisation programmes through its national network of in-store dispensaries and clinics. We have submitted proposals to both national and provincial government to provide these services. Clicks demonstrated its capability to mobilise large-scale projects when it successfully partnered with the DoH in last year’s national HIV counselling and testing campaign.

Clicks has also established the Helping Hand Trust and through its pharmacies across the country is offering free clinic services to mothers whose babies were born in state hospitals and who do not have medical insurance.

Investing in our people

The group recognises that the war for talent is ongoing and extends beyond remuneration. Encouraging progress has been made in developing a performance-driven organisational culture and this is reflected in the improving employee satisfaction index, steadily declining employee turnover and the ongoing transformation in the group. Employee turnover has declined from 23.4% in 2007 to 19.4% in 2011.

A broad-based employee share ownership programme (ESOP) was implemented during the year to enable the group to attract and retain scarce and critical skills, and allow employees to share in the long-term growth and success of the group. Through the scheme, 10% of the group’s issued shares have been placed in the Clicks Group Employee Share Ownership Trust for allocation to all full-time permanent employees.

Pharmacists, longer serving employees and senior black employees received a 15% higher share allocation. Senior executives currently participating in the group’s long-term incentive scheme do not participate in the ESOP.

Through the scheme 7 965 employees have become shareholders in the Clicks Group, with many owning shares for the first time. 71% of the new shareholders are black staff and 63% are women. Pharmacists comprise almost 5% of the beneficiaries.

Talent management and succession planning processes are embedded across the group. Through the talent management process the group aims to identify and develop high-potential candidates. Succession management plans have been approved for all management positions, including senior store managers, and this is reviewed annually by the board.

A retention scheme has been in place in the group for the past two years and is aimed at employees who are critical to the group’s strategic talent and succession plans. This includes high-potential employees, black staff and employees with scarce and critical skills. There are currently 30 employees participating in the scheme, of which 43% are black and 37% are women.

Learning and development is a priority and over 4 300 employees participated in training programmes this year, with the focus on management development, internal transformation and pharmacist training. The Pharmacy Healthcare Academy, which is registered with the SA Pharmacy Council, plays a critical role in addressing the pharmacy skills shortage challenge and during the year over 400 learners were trained through the academy.

Transformation

The group recognises that transformation and empowerment are critical to the sustainability of the business. Our commitment to transformation is demonstrated through the continued progress in the BBBEE rating which has improved from level 7 in 2007 to level 3 in 2011.

The allocation of shares to over 5 500 black staff through the ESOP has accelerated transformation at ownership level.

Employment equity continues to improve with black staff representing 84.8% (2010: 84.7%) and women 63.0% (2010: 62.7%) of all employees. Black staff accounted for 80% of new appointments in the year. Attracting and retaining senior black talent remains a challenge and black staff currently represent 20.4% (2010: 17.8%) of senior and top management. Women comprise 35.5% (2010: 34.7%) of the group’s senior leadership.

In the past year R47 million was invested in learning and development, R34 million was committed to enterprise development and R9 million invested in social development projects.

A transformation report has been included in the integrated report for the first time this year to provide stakeholders with an insight into our transformation progress and priorities.

Appreciation

During the year we said farewell to our chief financial officer, Keith Warburton, and we again thank him for his enormous contribution over the past five years and wish him well. Keith’s successor, Michael Fleming, joined the group in February 2011 and has been a most welcome addition to the management team.

In closing I thank our chairman, David Nurek, for his leadership and guidance, as well as our non-executive directors and my colleagues on the group executive for their support. Thank you to our people throughout the country who have performed well in a challenging year and I look forward to their continued commitment in 2012.

Thank you to our customers for making us their first choice in health and beauty retailing and supply.

 

David Kneale
Chief Executive Officer