Equity alliances just the tonic for Chemist Warehouse

Chemist Warehouse chairman Jack Gance says it will consider more equity alliances with suppliers.

Jack Gance, co-founder and chairman of Chemist Warehouse. Picture: Aaron Francis

Chemist Warehouse co-founder and chairman Jack Gance says the $5 billion group will consider more equity alliances with suppliers where it sees significant sales growth potential after striking a surprise deal to buy a cornerstone shareholding in goats milk infant formula producer Bubs Australia.

The four-year equity deal with Bubs for the sale and promotion of its baby-food products in its stores and online will see Chemist Warehouse emerge with a stake of around 8 per cent in the ASX company and will be its first investment in a listed group.

Bubs will have its 28 products including baby formula, cereals and puree pouches stocked on Chemist Warehouse shelves and online from June 2019.

Chemist Warehouse will provide sales and marketing services for the products, linked to sales performance targets, and in lieu of charging fees for those services will purchase up to 49.4 million shares in Bubs over three years.

Mr Gance, who was ranked number 60 on The Weekend Australian’s inaugural list of Australia’s richest 250 people released last month with an estimated wealth of $1.46 billion, said in an interview that the Bubs deal could be the “beginning of a number of different plays”.

“If we can see a brand which has potential and we can invest in it in return for support, then we see it as being a win-win,’’ he said.

“We won’t do it for the sake of getting equity in a company if we think a product isn’t going to sell. The only thing we have is our retail space. If we fill that up with crap that isn’t going to sell, that isn’t going to grow the business.

“We can make products successful because we can show them in front of our millions of customers. If you are going to make a brand successful, you would rather have equity in the brand.”

He said Chemist Warehouse, which he founded with his partner — the company’s chief executive, Mario Verrocchi — had trialled the Bubs baby range on its online platform ahead of signing the deal and enjoyed “great success”.

“The trouble we have in the stores is that we have limitations what we can put in them. But so far this brand has proven its success,’’ he said.

Asked how much the deal could grow Bub’s sales in the booming infant formula market, especially in China, he replied: “I think it can rival the majors for sure.”

“I have been doing business in China for over 40 years and you hear the stories of people being ripped off, but I have never had that happen to us,’’ he said.

“We sell more Blackmores and Suisse vitamins on TMall Global (a platform of Chinese online shopping behemoth Alibaba) than the actual companies do. The Chinese consumers believe in us.”

Bubs shares closed 8c or 10 per cent higher on Thursday at 87c following news of the deal. They are now closing on their 12-month high of 93c reached in early December. Their issue price was 10c when the company floated in January 2017.

A fortnight ago C2, an investment group partly bankrolled by Alibaba that was established in 2018 to invest in companies capitalising on the consumption growth of the growing Chinese middle class, agreed to take a 15 per cent stake in Bubs.

Over the past two decades Mr Gance and Mr Verrocchi have turned the My Chemist Retail Group, comprising the Chemist Warehouse and My Chemist chains, into one of Australia’s largest retailers.

The average Chemist Warehouse is two or three times bigger than the traditional neighbourhood pharmacy and it has emerged as a category-killer in the $13 billion retail pharmaceutical sector, with more than 300 stores.

In March workers at the company were awarded large pay rises and secured a substantial overhaul of the way management uses labour hire after a two-week strike at the group’s major distribution centres.

The workers secured an immediate 8.75 per cent pay rise and increases of between 18.75 and 22.5 per cent over four years.

Mr Gance said the increase would not push up prices in Chemist Warehouse outlets.

“We are not putting our prices up because we had a hit in two states. We are actually being more efficient and effective as we move forward. It is not going to have a significant effect on our business as a whole,’’ he said.

Chemist Warehouse now has six stores in New Zealand, each of them doing five to 10 times the volume of the average New Zealand ­pharmacy.

Mr Gance said the company planned to have over 20 open there before the end of the calendar year. Hong Kong also remains a focus.

“We rely on a low rent model … I can’t believe the rents they are charging in Hong Kong … so we are still looking,’’ he said, noting that establishing a bricks and mortar store in Hong Kong would allow Chemist Warehouse to access the lucrative daigou market between the former British colony and mainland China. The daigou would buy products off the shelves of a Chemist Warehouse outlet in Hong Kong and take them back to friends and family in China.