David Kneale "Our brands all strengthened
their market positions...
and all recorded market share gains."

Chief executive's report

David Kneale
Chief executive officer

Introduction

The strong performance of New Clicks over the past year reflects the resilience of our brands in an environment of increasing pressure on consumer confidence and spending. As our markets are primarily defensive and our products mainly needs based, we have benefited at a time when the overall retail sector has shown signs of strain.

It is pleasing to report that our brands all strengthened their market positions during the year and all recorded market share gains.

Delivering our strategic objectives

Achieving our medium-term goals of delighting our customers, employing motivated and competent people and improving return on equity will ultimately enable the group to deliver on its strategic objectives. Our confidence in the future is reflected in the investment we made over the past year in achieving these goals.

In delighting our customers we opened 32 new stores across Clicks, Musica and The Body Shop as well as 32 new pharmacies. Several stores were upgraded and relocated to improved trading environments. We also introduced new products and services and have remained price competitive in this environment.

We invested in the development of our motivated and competent people while continuing to make progress towards achieving our transformation target of 100% BEE compliance by 2010.

Improving return on equity (ROE) is our over-arching financial objective and the group exceeded its medium-term target of 30%, increasing the ROE from 24.7% to 32.8% for the year.

Healthcare reform

Regulatory uncertainty continues to prevail in the retail and wholesale pharmaceutical markets. Four years after the Department of Health (DoH) proposed a dispensing fee for retail pharmacy there is still no regulated fee and this needs to be finalised to bring much-needed stability to the pharmacy profession in our country. We confirm our support for the DoH’s proposed four-tier fee structure which we believe will provide a fair return for retail pharmacists.

We also await clarity on the logistics fees for pharmaceutical wholesalers and the benchmarking of drug prices. In determining a fair logistics fee the DoH needs to recognise the vital role being played by wholesalers in providing a safe and efficient supply chain for scheduled medicines.

Allied to this is the need for definitive licencing criteria to be applied for the registration of pharmaceutical wholesalers. The absence of clear guidelines has led to a proliferation of wholesalers in recent years. It is our view that rules need to be applied to only license those wholesalers that comply with the highest standards of medicine holding and handling. This will inevitably result in much-needed consolidation of the medicines supply chain.

The granting of licences to retail pharmacies also needs to be streamlined to shorten the decision-making process.

We would also welcome regulatory reform to improve the medicine registration process. To accelerate the pace at which new, lower cost generic drugs can be brought to market, the authorities need to recognise the internationally accepted safety standards of the patent product rather than replicating this process for each new generic alternative.

New Clicks is actively engaging with the DoH to promote the role of the pharmacist as the gatekeeper to primary healthcare. Pharmacists are ideally positioned to provide more accessible and lower cost health advice, in line with the government’s healthcare objectives. This will help to alleviate pressure on hospitals and doctors while lowering costs to consumers. Pharmacists are highly trained and need to be empowered to prescribe a broader range of scheduled medicines.

Wider participation in health insurance would also further the national healthcare agenda and reduce pressure on state resources.

New Clicks welcomes the appointment of the new health minister, Barbara Hogan, and is encouraged by her pragmatic approach to addressing the country’s healthcare challenges. While a cautious approach has been adopted to legislation, we would urge that changes be made to the regulatory framework to ultimately improve the long-term health of the nation.

Plans for 2009

Our strategic objectives remain unchanged and have only been adapted to reflect the progress made over the past year (refer here).

In 2009 we plan to entrench the positioning of Clicks as a health and beauty specialist. By investing in distribution capability, aggressively rolling out new Clicks pharmacies and integrating the courier pharmacy business Direct Medicines, we will build UPD and Clicks’ pre-eminence in healthcare supply and pharmacy management. Musica is now positioned as an entertainment business and for the first time DVD and gaming are expected to contribute more than 50% of sales.

Capital expenditure of R246 million has been committed for 2009 for investment in systems, stores and facilities. Our store footprint will be expanded by the opening of 20 to 25 Clicks stores, 40 to 50 Clicks pharmacies, six Musica outlets and three stores for The Body Shop.

Confronting challenges

While we are positive on the outlook for 2009 we are also mindful of the challenges facing the group.

The current regulatory framework is inhibiting the ability of Clicks to register private label healthcare products while pharmacy licencing procedures are limiting our capacity to plan effectively.

South Africa faces a scarcity of skills, and this is particularly evident in the pharmacy sector. The shortage of pharmacists is a constraint to the growth of our pharmacy business. We are committed to building capacity to ensure a sustainable pharmacy profession and are working closely with universities to address the issues, as well as advancing the training of pharmacy assistants through our Pharmacy Healthcare Academy.

The trading environment remains challenging. Consumers have, out of necessity, become more discerning and look for value in these times, which is favourable for a value retailer such as Clicks. However, we can only expect to see an uplift in consumer spending once interest rates start to decline and are unlikely to see any benefit from this in the 2009 financial year.

We are expecting selling price inflation to remain in the mid-single-digit range in the year ahead but could be affected by the declining value of the Rand and other potential knock-on effects of the slowdown in the global economy.

In this environment of tighter consumer spending and uncertainty, cost management will be a critical focus area to ensure ongoing returns to shareholders.

Appreciation

Thank you to our chairman, David Nurek, for his guidance and support and to my fellow directors for their independent counsel and active participation in board level debate.

It has been pleasing to see how the collective efforts of our staff in the stores across the country, the distribution centres and at head office are translating into a sustained improvement in performance. Thank you for your contribution and I count on your commitment as we seize the opportunities and face the challenges in 2009.

David Kneale

David Kneale
Chief executive officer