Why Dis-Chem is spending hundreds of millions to disrupt itself
· Citizen
Pharmacy retailer Dis-Chem invested over R300 million last year in its innovation hub, X, bigly labs, with it expecting to generate returns greater than this number in the coming financial year.
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CEO Rui Morais describes this investment – and the entire point of X, bigly labs – as forcing an “internal disruption”.
He says one needs to ask “yourself the honest question around what’s happening in South African retail and look at the grocers – specifically the largest grocer [the Shoprite Group]”.
He says one can “either stay safe and you become irrelevant over time and there’s lots of examples in South African retail [where] that’s happened, or you go through a process of internal disruption to stay relevant and to ultimately benefit from that”.
Short-term profit hit
Morais adds that if Dis-Chem had stayed safe and not made this investment over the last year, it would’ve delivered “excellent earnings growth” with its core retail business growing “north of 20%”.
However, because of its investment in the ecosystem (X, bigly labs and Dis-Chem Life, as well as the costs incurred in retiring its previous benefit points programme), it reported an 11.5% decline in retail profit.
He explains that the majority of the expenditure in its innovation unit is in people.
This means that “probably 70% of the total investment will be through the income statement, which is indicative of what happened this year”.
X, bigly labs is the retailer’s way to catch up in areas that have been underinvested in over time.
“It’s forced us as an organisation to change the ways of working and it’s effectively led to internal disruption, which is tough, but is important for the sustainability of the business and the relevance of the business in the way that retail stacks up over the next three to five years.”
Digital growth ambitions
The ambitions Dis-Chem has around e-commerce over the next five years need to be significant, says Morais.
“I think in South African retail today, if you don’t believe that the penetration of digital into your total sales number is not anything north of 30% over a five-year period, you would be wrong.
“The investment that needs to be made to establish yourself as someone who can cater to that level of penetration in a way that doesn’t compromise the economics that you see from your physical space, is essentially what we’re going through at the moment.”
Group’s structure
Part of this disruption is a reorganisation of how the group is structured.
Morais says what’s been inherited was a “founder-led, cross-functional leadership structure”, which didn’t allow for clear lines of accountability.
The “redefinition of the operating model of the business” will ensure this, plus also adapt and establish new ways of working with X, bigly labs.
According to Morais, one of the most interesting things the group has seen by allowing X, bigly labs to control certain elements across the business “is the pace at which an innovation unit like that moves and how it forces the rest of the business to adapt”.
Restructuring under Section 189A
Because of the scale of the reorganisation, it’s classified legally as a ‘large-scale restructuring’, which necessitates a Section 189A process, which Morais describes as “quite a blunt instrument to facilitate what is very much a growth story”.
The group expects the process to be concluded within six months, and 545 employees are affected.
Effectively, what it wants to do is to relocate those 545 individuals into verticals that make sense, which “allow those people to be the best versions of themselves, the best version of the skill set that they have and ultimately deliver the best value for the company”.
It also plans to create an additional 203 jobs in areas of underinvestment, specifically in marketing and IT.
Key innovations
The two major products to have emerged from X, bigly labs to date are the design and rollout of its reimagined Better Rewards loyalty programme, and the Store of the Future concept.
The latter is described by Morais as “the mechanism that we see as a group to reduce the cost of care and open up value in the South African consumer wallet”.
This new design – it is testing the format at Melrose Arch in Johannesburg – “not only delivers a reimagined space but changes the ways of working to disrupt how we think about clinic and pharmacy”.
Both of these are on track to deliver the returns that Morais has stated the group expects. The unit is also building a new mobile app that mirrors physical in-store presence. The consumer app will launch later this year.
This article was republished from Moneyweb. Read the original here.