IF ever a prescription with nauseating side effects was written, then the ‘drugstore’ strategy at specialist retailer New Clicks is such a bitter pill.

It was in mid-2003 that Woodstock-based Nu-Clicks outlined plans for the implementation of its healthcare strategy “in response to the far-reaching changes to legislation governing pharmacy ownership.”

At that time group leader (Nu-Clicks disposed of executive titles some time ago) Trevor Honneysett said New Clicks has invested considerable energy and resources in recent years to position the group for the dawning of the healthcare revolution.

“Our strategy was formulated around the spirit of the National Drug Policy and it is encouraging that our plans were so closely aligned with the legislative changes gazetted last month.”

“Clicks was originally conceived as a drugstore but owing to the regulations governing pharmacy ownership it has operated as a drugstore without the drugs.”

What’s more, Honney-sett said Nu-Clicks healthcare interests were expected to generate a sustainable income stream in the medium to long term. And that Nu-Clicks planned to spend around R100 million over the next three to four years in converting stores to accommodate pharmacy dispensaries.

Now on paper Nu-Clicks’ decision to take a pharmaceutical tack certainly had merit, and looked like a concept that could easily be integrated at flagship chain Clicks. In fact, observers were muttering that Clicks had taken the first steps to becoming the Boots (a well known UK ‘drugstore’ retailer) of Southern Africa.

The Clicks store of the future would essentially cater primarily for the needs of woman. – focusing on health, beauty and lifestyle goods with the added dimension of healthcare in-store.

In reality the Clicks store of the future is looking anything but a picture of health. What used to be one of the country’s most profitable retail concepts is now showing distinct signs of strain as the pharmacy plans prove burdensome.

Recent interim results from Nu-Clicks were bruised by a shock 28% decline in operating profit from Clicks Stores (including the pharmacy interests) from R177.5m to R128m. That’s nearly R50m less on a year-on-year basis from what was not too long ago regarded as a premier Cape Town retail brand and by far the biggest business component of the Nu-Clicks group.

Nu-Clicks directors (or team leaders!) explained that Clicks was hampered by an attributable loss of R38m in the pharmacy interests. This loss stemmed from turnover growth from pharmacy interests being “slightly below expectations” and higher than budgeted stock shrinkage and increased expenses.

Nu-Clicks’ interim results showed expenditure markedly higher at R965m and operating expenditure inflated to R963m. Increased expenditure basically negated the 36% turnover growth achieved by Clicks to R2.3bn in the interim period, and asks serious questions about the cost of chasing new pharmacy business.

Nu-Clicks indicated the pharmacy losses were mainly in the smaller and non-integrated pharmacies and could “largely be ascribed to the reduction in margin from the low dispensing fee prescribed by the medicine pricing regulations”.

Interestingly when the contribution from the pharmacy operations is excluded, the core Clicks brand increased turnover by just 8.4%. What’s more, trading margins in Clicks declined owing to the lower than budgeted turnover growth, higher than expected shrinkage, as well as the change in the margin mix with the introduction of lower margin dispensary and healthcare products and slower sales of high margin imported lifestyle merchandise.

What is worth debating is the relative under-performance of Clicks compared to other retailers that are seemingly thriving under economic conditions conducive to consumer discretionary spending.

The big issue is whether Nu-Clicks leadership have been/are being sufficiently distracted by the regulatory and operational complexities of the pharmacy business to the detriment of the group’s core retail brand.

Certainly Clicks is looking a lot shabbier than its specialist retail counterparts, and a further loss of focus at Clicks could put the Nu-Clicks group under immense pressure.

This concern is also shared by Nu-Clicks’ group leaders, who have already indicated that addressing problems at Clicks is a main priority.

The official word is: “Areas of under-performance in Clicks have been identified by the new management team under the leadership of Michael Harvey and strategies are being implemented to address each of these issues. However, it will take time before the full benefit of these actions is reflected in the performance of the brand.”

Clearly Nu-Clicks is not likely to abandon its pharmacy prescription anytime soon. But it does seem there have been some differences of opinion at group leadership level with the resignations of FD Peter Green (who initially spearheaded the pharmacy strategy) and Clicks boss Laura Bryant.

Nu-Clicks’ share price is showing the market is concerned about the viability of the pharmacy business – understandable since the market dislikes businesses where government policy effectively regulates trading margins.

Honneysett noted recently that the pharmacy model is proving successful in the large Clicks stores where dispensaries have been introduced - reflected in higher front shop turnover through increased footfall.

“The group is continuing to implement its pharmacy plans and has to date integrated 37 stores. A further 23 are expected to be operational by the end of the financial year.”

Honneysett said the legislative uncertainty in the pharmacy sector continues and the group has continued to follow the legal process in order to obtain a more equitable arrangement for retail pharmacy.

“We await the outcome of the Constitutional Court hearing which took place in mid-March.”

During that period the group adopted the R26/26% dispensing fee in order to meet competitive pressures.

Honneysett maintains that the performance of the integrated Clicks/pharmacy stores supports the pharmacy business model that both front and back shop sales will increase once a dispensary is introduced into a Clicks store.

“The integration process is being accelerated and the long-term aim of the group is to open a dispensary in most Clicks stores.”

The big challenge for Clicks is to ensure that the pharmacy business (which clearly is driving turnover) is banked profitably. But dispensing margins – especially as the pharmacy business grows in relation to the traditional ‘home, health, beauty’ sales – are a worrying factor.

Some retailers do have loss leaders (products discounted to near unprofitable levels) to ensure increased footfall and the knock on effect of those extra patrons buying other ‘higher margin’ products. For instance Pick ‘n Pay has long had plans to sell discounted fuel as a loss leader.

But Clicks, which is already showing margin strain, cannot afford to have pharmacy sales functioning a loss leader for too long.

It is possible that Clicks’ pharmacy strategy is well ahead of the curve, meaning that the real potential in the long term is being clouded by the current operational hitches and regulatory squeezes. But the sooner there are glimmers of viability at the pharmacy interests the better.

In that regard the full year financial results for Nu-Clicks to end August this year – especially the performance of the core Clicks brand - will be most interesting to peruse.