Our objective at 22seven Insights is to equip investment and market analysts with alternative data that helps inform investment decisions. Today, we’re delighted to add Pharmacy Retail to the list of consumer spending categories available to subscribers.
Broadly defined as any purchase by a 22seven user at Clicks, Dis-Chem, Pharmacy @ Spar, MediRite or a long list of other pharmacies and apteeks across the country, the retail pharmacy market is more concentrated than any other category we track. Just two companies account for ~90% of 22seven user spending in this category.
This might raise a red flag for growth within the relevant listed companies, but at another level, the idiosyncrasies of this category could mean that 22seven’s view of the level of market share is overrepresented. However, as we’ll demonstrate later, market trends within this category and our depth of data both offer rich insights.
The key difference in the Retail Pharmacy category is that the customer is not always the one paying: medical aids and insurers often fund a customer’s medicine purchases from a pharmacy. The retailer reports this transaction as a sale but the transaction doesn’t appear on a user’s bank statement.
As a result, 22seven’s ability to track the rate of sales growth at pharmacies is compromised. This is evident in the correlation between growth in 22seven user spending at Clicks and Dis-Chem, for example, and the companies’ reported sales growth. Compared to the high correlation for major grocery retailers, correlation in the retail pharmacy sector is poor.
Correlation between Insights’ estimate of user spending growth and retailers’ reported interim sales growth
Instead, our data is more reliable in tracking the retail performance of sub-categories within these pharmaceutical groups. As the next chart shows, growth in 22seven user spending at Clicks correlates more strongly in sub-categories where customers typically pay themselves – such as Beauty, Personal Care and General Merchandise – than in categories where medical aids or insurers are more likely to pay for the products.
Correlation between Insights’ estimate of user spending growth and Clicks’ category growth
Finally, it is our observation that Clicks and Dis-Chem have a much larger offering of non-dispensary retail categories, on average, than other pharmacies. Therefore, the relative contribution from these ‘front shop’ categories, where customers pay directly, may also play a role in explaining Clicks and Dis-Chem's exaggerated level of spending share in the data.
When we look at market share trends, however, Insights’ data offers a unique view of a large sample of customer spending decisions at these two retailers, on products that represent at least 70% of Clicks and Dis-Chem’s reported sales. In this note, we describe some of the key trends over the past few years.
You play high, I play low
Market analysts will be aware that the retail pharmacy industry is 20+ years into a period of consolidation. Catalysed by amendments in 2003 that allowed corporate ownership of pharmacies for the first time, many health and beauty retailers began opening in-store dispensaries, often within malls, and acquiring independent pharmacies. Some independent pharmacies established groups or other structures to amass scale to compete against the retail juggernauts.
Based on the analysis of 22seven user spending, and taking into account the caveat regarding spend versus sales, our data reflects a retail pharmacy market that consists of two very large retailers – Clicks and Dis-Chem – and a long list of individual pharmacies or smaller chains that we’ve grouped into the category, ‘Other’.
These Other pharmacies include chains like Pharmacy @ Spar, Shoprite’s Medirite, Dis-Chem-tied The Local Choice, and Alphapharm etc. Relative to Clicks and Dis-Chem, the number of transactions at each is too small to show these chains separately, although we can do this on client request. Spending in Other also includes transactions at a sizable number of independent pharmacies.
In 3Q23, Clicks and Dis-Chem accounted for 89% of all user spending at retail pharmacies, with Dis-Chem (44.9%) attracting slightly more spend than Clicks (43.9%). On reported numbers, Clicks is actually a bigger business: ~10% larger than Dis-Chem based on total retail sales and ~23% on non-dispensary sales.
22seven users' share of spending at retailer pharmacies in 3Q23
Our data reflects this relationship among lower-income shoppers. As the table below shows, spending share at Clicks is larger than Dis-Chem’s among users earning less than R15k pm, while Dis-Chem attracts more share from higher-earning customers.
Spending share by income bracket in 3Q23
When we evaluate changes in market share over the past two years, we find that both Clicks and Dis-Chem have done better in the segments where the other is more dominant: Clicks gaining in the higher-income market, for example, and Dis-Chem gaining among lower-income users. In general, pharmacies in the Other category have been shedding spending share.
Change in spending share by retailer and income bracket over two years to 3Q23
A different formula
The data also shows that Clicks and Dis-Chem accumulate their market share in slightly different ways. Consider the R15-25k pm income bracket, where spending share is most similar across the two groups. Segmenting this market share into three factors highlights the differences. These factors, shown in the next chart, are:
- Number of users
- Transactions per user per month
- Average transaction value
Segmenting spend for users earning R15k–25kpm
From this chart, we can see that Clicks attracts 30% more users each month than Dis-Chem does. These users visit the stores slightly more often (4%), but they spend 26% less per visit. In other words, higher transaction values at Dis-Chem compensate for fewer customers and a lower purchase frequency. These trends are similar in other income brackets.
The key challenge for the retail pharmacies in the Other category is that they attract so few customers. For example, relative to Dis-Chem, these pharmacies attract just 43% of the number of customers that Dis-Chem does. Those customers shop 13% less often and spend 27% less each visit.
Thinking about growth
Our data might present an imperfect view of the entire retail pharmacy market, skewed towards the non-dispensary portions of these businesses, but for retailers trading on weighty market multiples, it would be foolish not to consider how this data can be used to evaluate future growth for Clicks and Dis-Chem.
Clicks and Dis-Chem each report market share in their pharmacies of ~24%. It’s possible, therefore, that there may be significant market share to be gained in this category in the future – and associated opportunities for supplier incentives.
But perhaps the differentiated view provided by our analysis is that Clicks and Dis-Chem both have a significant share of everything else sold in their stores. For context, non-dispensary categories account for 72% and 64% of sales at Clicks and Dis-Chem respectively. We estimate this to be worth roughly R41bn in annual sales.
Undoubtedly, Clicks and Dis-Chem are specialists in these non-dispensary categories, many of which are niche, and they have extensive product ranges featuring popular private brands. But it’s also true that most of the non-dispensary products can be purchased elsewhere. Furthermore, these products generally have a long shelf life and they’re often recurring purchases, which makes them perfect for online delivery.
Clicks and Dis-Chem report market share in non-dispensary categories between 20 and 50%. Clicks is most dominant in ‘Skincare’ (43.6%) and Dis-Chem claims 47% of ‘Healthcare and Medical’. We wouldn’t be surprised if the suppliers of these products felt uncomfortable with these levels of market share concentration.
The ‘Baby’ category has the lowest share for each retailer. To our knowledge, every listed retailer, except for Pick n Pay and Spar, has ventured into a standalone Baby format in the past five years.
The challenge for Insight to conduct a more thorough analysis of non-dispensary spending is that each sub-category has a different set of competitors. For example, many apparel retailers compete in Beauty and Skincare, while Takealot and Makro are go-to destinations for purchases in the Small Appliances sub-category.
If we were to pick one group of competing retailers with a product range that most overlaps with Dis-Chem and Clicks, it would be Grocery Retail. Again, however, each grocery retailer defines its competitor set differently: some include pharmacy retailers; others don’t.
This tells us that there isn’t agreement on how grocery retailers target the overlap in product categories like Personal Care, Vitamins and Health, Nutrition, Home Cleaning and Small Appliances.
Should grocery retailers focus more on these categories?
To explore this question further, we looked at how often a 22seven user transacted at a grocery retailer and a pharmacy retailer on the same day during the three months ending September 2023. For instance, what is the likelihood that a Checkers shopper will also shop at Dis-Chem on the same day?
Just as a retailer might evaluate the sales uplift from different combinations of products inside a store, such as whether to put the crisps next to the Coke on a gondola, or alongside a fridge of braai meat, this analysis attempts the same approach by evaluating combinations of purchases between stores. Our thinking is that a customer purchasing from two stores that both sell the same products on the same day suggests that the customer was unsatisfied by at least one of the retailers.
This perspective of shoppers' actual buying behaviour is rare and reveals the growth opportunities for...
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Simon Anderssen
simon.a@22seven.com
+27 84 730 0309
