At the rate at which they’re growing, private labels could become a major contributor to beauty and healthcare retailer Clicks’ sales in the near future. House brands or private labels have become a fast-growing phenomenon and a margins enhancer for retailers as consumers become more value driven. The recession has laid the trend bare, when over the past couple of years branded consumer goods producers such as Tiger Brands were reporting declines in sales while retailers were seeing growth in their private labels.
Clicks’ house brand currently constitutes 20% of its sales, which includes both its front shop and dispensary division that’s still largely developing. Otherwise, Clicks’ front shop private label accounted for 25,9% of sales over the six months to February 2011, thanks to a growing product range.
CEO David Kneale says it was the first time Clicks Group [JSE:CLS]
had reached the 25% mark. Shoprite has previously said its house brands contribute around 15% to sales; Pick n Pay’s 10%. General merchandise group Massmart hopes to leverage Walmart’s private label if the intended merger goes through.
Kneale says Clicks plans to achieve a private label contribution of 25% across the board. The front shop could go as far as 30%, as the group expands its product range. In developed markets, private labels account for as high as 30% to 40% of retailers’ sales.
Clicks has evolved into a remarkable story over the past few years. Not so long ago it was considered a “no go area” by some investors. It had lost its edge of the Nineties: its stores looked tired, product offering was dull and the company was battling to keep up with its rising costs. However, the stock is again one of the favourites on the JSE, thanks to a major re-engineering of its business and an overhaul of management.
The group continues to widen the gap between it and its closet rival, Dis-Chem, the unlisted family-controlled business founded by Ivan Saltzman and his wife, Lynette, in 1978. Dis-Chem’s store expansion has been fairly conservative over the years (it has around 40 outlets and doesn’t open more than five a year) while Clicks on average opens 20 a year.
Its R4bn turnover suggests Dis-Chem would need to become more aggressive to come close to Clicks’ R13bn top line, especially now that supermarket chains – such as Shoprite and Pick n Pay – have also ventured into retailing pharmaceuticals.
Over the interim period, Clicks Group posted a 22,2% rise in diluted headline earnings per share to 122,2c, driven by strong performance from the Clicks chain. It expanded its national pharmacy footprint to 266 following the opening of a further 15 in-store dispensaries and opened 13 new stores, to end the period with 382 outlets. The group’s return on equity improved to 55,8% from 46,2% in 2010, and the group declared an interim distribution of 37c/share, an increase of 21,3%. The group remains highly cash generative, with the inflow from operations totalling R396m over its interim period. Clicks returned R450m to shareholders through a combination of share buybacks and distributions.
Makwe Masilela, an analyst at BP Bernstein, says “it’s harvest time” for Clicks investors who endured the restructuring pain under Kneale’s leadership. However, Masilela says its pharmacy distribution business UPD is yet to report a sterling performance, suggesting the group hasn’t got its warehousing systems to function optimally.
Masilela adds Clicks would be better off without its entertainment retail chain Musica. The division has been in long-term decline since people began downloading music and movies. To survive, Musica has had to introduce software, gaming and lifestyle accessories as part of its stock.
Kneale concedes Musica won’t be part of Clicks over the long term but meanwhile the group continues to operate it until it finds a buyer.