Retailers and food producers are ramping up their baby product offerings to cater for demand, with Dis-Chem planning to open more Baby City stores.
However, some analysts cautioned that consumers who are under pressure may scale down on spending and as a result retail is not particularly attractive from an investor point of view.
Dis-Chem, which bought Baby City in 2020 for R430m, will open another seven Baby City stores by next year in addition to the two that were opened during the group’s financial year to March 2022. This will take the total number of Baby City stores to 42.
Dis-Chem did not disclose where it would open the new stores as the locations “will be dependent on specific metrics that identify an under-penetrated retail market in terms of baby products and services”, said Dis-Chem CFO Rui Morais.
Expansion by Dis-Chem, the largest retail pharmacy group by dispensary market share, comes at a time when consumers are increasingly cash-strapped due to high interest rates and food and fuel price hikes.
Casparus Treurnicht, portfolio manager and research analyst at Gryphon Asset Management, said: “We are concerned about inflation and the impact it is going to have on local and foreign economies. Consumers will scale down, not only on luxuries but also daily necessities. Expensive baby goods too will be vulnerable. We feel the retail space will increasingly find it hard to print growth figures over the short and medium term. We are not especially excited about retail at the moment, including pharma.”
Sasfin senior equity analyst Alec Abraham said the baby industry “is certainly a hotly contested area, with this category being a focus area for Clicks for some time and even Shoprite entering the fray recently”.
Muneer Ahmed, equity analyst at Denker Capital, said the baby market segment “is an interesting area but also very competitive. So the competitive environment will be challenging.”
He said that while inflationary pressure is a general market concern “this market [retail] is all about who can successfully pass rising costs on to the customer”.
Clicks is also looking to increase its private-label product penetration in categories such as cleaning and baby products as an avenue for growth in an increasingly constrained environment.
We are concerned about inflation and the impact it is going to have on local and foreign economies. Consumers will scale down, not only on luxuries but also daily necessities. Expensive baby goods too will be vulnerable
— Casparus Treurnicht
Food producer RFG, which makes jams and canned fruits, also has a baby food range under the Squish brand, which has been steadily growing market share. The Squish range includes fruit and vegetable purées and pressed juices.
RFG's CEO Pieter Hanekom said the group’s baby business “is growing nicely and is number two in the country. There is demand. Our baby food range is well distributed in all major retailers and pharmaceutical stores [and] we continue to look at new ranges.”
Tiger Brands, owner of baby brand Purity, which includes food, petroleum jelly and aqueous cream products, said this week revenue from that segment grew 6% to R578m in the six months to March driven primarily by price inflation.
“Volumes were sustained by the nutrition portfolio, particularly the jar segment, which was supported by increased in-store activity,” Tiger Brands said in a statement. “Volumes were further supported by the wellbeing segment, with Purity gaining share in essentials such as petroleum jelly and aqueous cream. Operating income increased by 16% to R65m, benefiting from a favourable product mix, optimal promotional activity and tight control of costs.”
Sasfin's Abraham said Dis-Chem’s decision to extend into adjacent areas such as baby care and medical insurance “is opening additional options for growth that it can pursue further as the opportunities develop. In my opinion, with its compelling shopper experience — wide category and product range at everyday low prices — the core growth avenue remains its increased penetration in the retail pharmacy space, with further store openings.”
In addition to Baby City stores, the retailer will also open 16 new Dis-Chem stores by next year. This is in addition to the 12 stores opened during the financial year ending February.
There are now a total of 289 Dis-Chem, Baby City and Medicare stores.
Treurnicht said new stores were the predominant driver of overall revenues while comparable store sales were only growing in the mid-single digits.
“Although there is still growth left in this area of retail, we feel we are nearing the end of the cycle for pharma stocks. I do not place much value on acquisitions as corporates usually overpay for them, which puts pressure on shareholder returns,” he said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.