The discount pharmacy chain plans to move into ecommerce

In 1978, with as little as R10 000 for capital investment, Ivan Saltzman and his wife Lynette opened their first discount pharmacy chain, in Mondeor, South of Johannesburg. After 31 years of hard work. Dis-Chem is now one of the most successful privately owned pharmacy retail groups in South Africa, with plans to enter the e-commerce sphere and expand its outlets.

It’s all or nothing when it comes to selecting a Dis-Chem franchisee, says Saltzman, who was speaking at the FNB Franchise Leadership Summit on Wednesday. Choosing suitable candidates is a constant struggle, but ultimately contributes to the company’s success, he says.
“Candidates wanting a quick return on their investment are not an option. One could almost say that we want them to put in everything they have,” And with start-up costs of up to R18m, franchisees do not necessarily have such large amounts of capital available, which is why the franchise model makes provision for them to own up to 49%, and dividends to eventually pay back the start-up costs.

Capital is not the only prerequisite when selecting a franchisee though. “There is no cookie-cutter or recipe to run a Dis-Chem, but the person would have to be very retail oriented, with previous retail experience in order to understand the dedication and detail required. Of the 14 franchises, only about five are pharmacists,” says Saltzman.
One could ask, if finding suitable franchisees is such a headache, why franchise? “We implemented the franchise scheme about three years ago, wanting to speed up the roll out of stores and attract better management through the partnership/ownership combination. Extracting value from the distribution centre also played a large role as distribution is key to being profitable. We are currently in the process of doubling the distribution centres ,” says Saltzman.

Dis-Chem started the franchise process by doing a demographic study of South Africa, and worked out a joint-venture partnership model that would be financially viable, between the company and owner or manager. “We now often test new ideas with franchisees in reaction to market conditions as they are usually willing and ready for change.”
Saltzman explains that the model allows for an owner or manager to take care of the daily function of the store, but with a small degree of individualism so that control still lies at head office, and up to 49% of shares to be owned by the franchisee. “The public would not know whether a specific store is a franchise or not,” he says.

It is essential to this franchisor that the shareholder is the operator. Saltzman explains: “If we allowed investors, we could’ve had thousands of stores, but would be working for someone else. The idea here is that the franchisee works for the company, the company retains 51% to make decisions and control surety, operating standards, lease agreements, set cost, set retail, and service out of the distribution centre to retain buying power through a single supplier.”

Current minimum break-even points for Dis-Chem stores are around R5m a month, while many stores manage up to R16m. And if there’s profit, it goes straight back to the franchisee on a free cash-flow principle.

Saltzman admits that this might not be the model of the future, but he is of the opinion having to keep franchisees in the loop with regard to strategy does make for cooler decision making.
The way forward for Dis-Chem includes scouting for partners in outlying areas, and more specifically Namibia and Botswana. It also plans to move into ecommerce to include special-needs products not kept in stores, to Dis-Chem’s already large basket.

“With volume you can always make money, a couple of cents here and there, it all adds up, so it’s volume you’re after,” says Saltzman.

Source: moneyweb.co.za