Alibaba and Walmart report strong Q2

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Our blog this week rounds up the latest retail news, including recent Q2 results from Walmart and Alibaba, and a focus on M&A activity in Asia-Pacific. China’s Alibaba trumped analysts’ expectations with a 42% year-on-year jump in quarterly revenues to Rmb114.92bn (US$16.3bn), contrasting with its rival Tencent which one day earlier disappointed the market by falling short with a more modest quarterly growth (though Tencent did report a 26% year-on-year increase in profit).

Alibaba’s CEO, Daniel Zhang, said the company “had a great quarter, expanding our user base to 674mn annual active consumers, and demonstrating our superior user experience. We will continue to expand our customer base, increase operating efficiency and deliver robust growth. With strong cashflow from our core e-commerce business, we will continue to invest in technology and bring digital transformation to millions of businesses globally.” 

Alibaba is also reportedly looking to acquire Kaola’s cross-border online shopping platform from rival NetEase, according to two people familiar with the matter, as China’s highly competitive US$2tn e-commerce market takes early steps towards consolidation.  

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Meanwhile, Walmart has raised its outlook for the USA and said US consumers were in “solid” financial health as it shrugged off the Trump administration’s trade war with Beijing and turmoil elsewhere in bricks-and-mortar retail. Walmart revenues rose by 1.8% in fiscal Q2 2020 to US$130bn (+2.9% on a constant currency basis). USA sales were US$85.2bn (+2.9%) and the retailer noted that it is gaining market share in key categories, including health & wellness; e-commerce sales grew by 37%. International sales fell by 1.1% to US$29.1bn (+3.3% excluding currency impacts). Strength in Mexican subsidiary Walmex and China were offset by softness in UK and Canada. 

In Brazil, No.1 drugstore chain RaiaDrogasil (RD) reported better than expected results, seeing its national share rise to 13% in Q2 2019 (up 1.6% vs Q2 2018). Another drugstore chain quickly gaining share in Brazil is Farmarcas, which looks set to become the No.4 ranked chain by end-2019 after reporting even stronger results than RD, putting pressure on established players Drogaria DPSP and Pague Menos.

As for M&A activity:

• In Japan, drugstore operator Cocokara Fine is pursuing a merger with rival Matsumotokiyoshi in a deal that could create a market leader with sales of around ¥1tn (US$9.4bn)

• Amazon, which is looking to boost its bricks & mortar presence in the fast-growing Indian market, is reportedly in advanced talks to acquire up to 10% of Future Retail, the country’s No.2 retailer

• AS Watson (an affiliate of CK Hutchison Holdings) is in talks with potential partners in UAE with a view to introducing its health & beauty stores there

Take a look at the evolution of Pharmacy and Pharmacy Point-of-Care in the Distribution chapter in our new report, Nicholas Hall’s New Paradigms for CHC 2019: Over the Horizon, written by Nicholas himself! Other chapters will include Healthcare Trends, Regulation, Digital engagement amongst many others. Nicholas will also unveil the 15 “Infinity Zones” he has identified as being crucial to the future growth of the industry. You can upgrade your purchase to include a customised in-house presentation or webinar with Nicholas for an additional GB£10,000. To find out more or to pre-order your copy, please contact melissa.lee@NicholasHall.com.

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RB 2.0: E-commerce a key focus

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With CEO Rakesh Kapoor retiring at the end of the year, and ambitious plans for RB 2.0 to be implemented within the next year, this is without doubt a transformational time for RB. Nicholas Hall believes RB 2.0 will lead to the “end-point of divesting the Hygiene Home business, and with the company quickly moving on to v3.0 and a major merger. I can think of at least four CHC companies that may want to be associated with RB v3.0, not all of whom could be considered equals, but who would be attracted by a cashless transaction and the benefits of scale.” 

RB released its full year results last week, with net revenue in 2018 up by 3% on a like-for-like basis, while Health grew by 2%. Within Health, the OTC segment rose by 5%, driven by innovations (Nurofen 24-hour patch, Strepsils flurbiprofen spray) and strong regional performances (Lemsip in UK, Luftal in Brazil, Moov in India and Tempra in Mexico). As part of its RB 2.0 mission, the company is planning to “supercharge” innovation even further, focusing on new categories (i.e. the launch of brain health supplement Neuriva later in H1 2019), new consumers and new channels (i.e. MegaRed and Move Free in e-commerce outlets in China).

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In its 2018 results presentation, RB emphasised its “best-in-class digital and e-commerce capability” as a key driver behind RB 2.0 growth, highlighting the specific case of China where the company’s online sales already outweigh “offline” sales thanks to strong partnerships with the likes of Alibaba and JD.com. Innovations such as MegaRed CoQ10, Move Free Ultra and Move Free Advanced have been specially developed for the e-commerce channel in China and the USA. 

In its results, the company also reported that 9% of RB Health sales are generated in the e-commerce channel, which it says ranks second among its consumer healthcare peers, while its operating margin of 28% is way ahead of the consumer healthcare average. RB attributes its success in e-commerce to its FMCG heritage and its strong margins to the relatively high proportion of its portfolio devoted to Consumer Health vs key OTC competitors.

Nicholas Hall’s New Paradigms for CHC 2019: Over the Horizon, our upcoming new Signature Report written by Nicholas, includes a chapter dedicated to reviewing M&A within the CHC industry. Exploring recent transactions, multiples and the buyers and sellers — with predictions of likely future deals — Nicholas also asks whether M&A actually works and examines the role of private equity. An essential read for all players striving to compete in this rapidly-evolving marketplace, for the full table of contents or to pre-order your copy, please contact melissa.lee@NicholasHall.com.

 

East to power global economy in 2019

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According to the latest research from the Economist Intelligence Unit (EIU), several countries in Asia-Pacific, the Middle East and Africa will produce the highest economic growth in 2019, while North America, Europe and even Latin America will lag behind. There are some exceptions to this trend (like Poland and Ireland in Europe, which are forecast to outperform the global economy in 2019) but the general picture shows that the highest GDP growth will be in the east.

Although there are concerns about the economic slowdown in China – see our blog just before Christmas and the recent letter from Apple CEO Tim Cook to investors – the country is expected to remain among the best-performing economies in 2019, with a growth forecast of 6.3%. The EIU revised up slightly its China forecast for 2019, following the agreement reached between the US and China at the G20 to delay planned tariff actions. However, it remains uncertain whether a bilateral trade deal will be reached.

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China’s troubles may actually be providing a boost to neighbouring Asia-Pacific markets, such as Vietnam, which offer an alternative manufacturing location. Also, as we’ve highlighted on the blog previously, several African markets have likewise been boosted by their growing status as manufacturing hubs, notably Kenya. As for India, it is forecast by the EIU to be among the Top 5 fastest-growing economies in 2019, continuing its strong 2018 upturn – according to the latest OTC DASHBOARD data for the MAT Q3 2018 period, India is the fastest-growing OTC market in Asia-Pacific, up 8.8%.

At the other end of the scale, key Latin American markets Venezuela and Argentina are forecast to be among the Top 5 worst-performing economies in 2019, while Mexico and Brazil are also expected to perform below par this year. However, high inflation has helped to boost OTC growth in these markets. As for Europe, several western European markets are forecast to produce low growth, while Japan, Turkey and South Africa are all expected to produce growth in the 0-2% range, with the US performing slightly better.

Join Nicholas Hall and The CHC Training Academy in Vietnam on 28 February. Focusing on the central theme of Winning Together in Consumer Health, this unique workshop will enable you to develop essential skills to succeed in the new era of collaborative partnership approaches between retailer and supplier for strengthening categories together, plus deep insights on key stakeholders. Don’t delay — book your place before 17 January to save with our generous early bird discount! To find out more, please contact elizabeth.bernos@NicholasHall.com

Uncertain economic outlook in 2019

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As well as the ongoing uncertainty over Brexit, another cloud on the economic horizon for 2019 is the health of the US retail sector. According to a report over the weekend by the FT, shares in US retailers are set for their biggest quarterly sell-off since the financial crisis. This follows weak economic data in Asia-Pacific, especially China where retail sales hit a 15-year low in November 2018, and Europe, prompting concerns about a global economic slowdown.

Tariffs, and the threat of tariffs, have been one factor. Some US retailers are reportedly now having to offload surplus stock at a heavy discount, after accelerating imports in recent months to avoid planned higher tariffs (which are now on hold), while the fall in industrial output in China is partly linked to US tariffs that have been imposed. Also, concerns have resurfaced among investors about the ability of bricks & mortar retailers to navigate the e-commerce revolution. As a result, shares in various US retailers have fallen sharply, from high-end to mass market chains, like Target (down 23%).

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Amazon shares have also declined this quarter, though the e-commerce giant still looks on course to disrupt pharmaceutical distribution and reimbursement in 2019, a fact that hasn’t eluded many top pharma executives. J&J CEO, Alex Gorsky, in an interview with Fortune, said: “We have conversations at all levels going on with Amazon. I think Jeff (Bezos) and as importantly Amazon is a very innovative organisation, and they see this as an opportunity to make a difference. Just as we are partnering with them today in areas of our consumer products, we’ll look forward to partnering with them in the future in some of these other areas as well.”

Pfizer Chairman & CEO Ian Read also said late last year: “Any system of distribution that can cut costs and get a wide availability of products to patients is something that the whole industry would be interested in.” This disruption to pharma distribution, allied with the current economic uncertainty, looks set to make for a volatile year in 2019. According to Nicholas Hall, the “Big Beasts of Big Pharma are right. Amazon and Alibaba are today the most powerful disruptors of the healthcare industry. Some brand marketers will embrace this change, most will not … until it’s too late.” 

Nicholas Hall’s New Paradigms for CHC 2019: Over the Horizon, our upcoming new Signature Report written by Nicholas, focuses on a range of important issues surrounding the CHC Market, including Innovation, Success Factors, Digital Engagement, Competition and much more. It is an essential read for all players striving to compete in this rapidly evolving marketplace. To find out more or to place your order, please contact melissa.lee@NicholasHall.com

Alibaba buys in to “digital silk road” vision

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According to a report in the FT over the weekend, Chinese e-commerce retailer Alibaba is close to agreeing a deal with Russian internet company, Mail.ru, and sovereign wealth fund, Russian Direct Investment Fund, to form a joint-venture e-commerce company.

As highlighted in our earlier blog on Chinese investment in Africa, there is a clear vision from China and Chinese companies to invest in the physical infrastructure for a new silk road (Beijing’s Belt & Road Initiative) connecting Asia, the Middle East and Europe, and this latest news on a China-Russia e-commerce tie-up underlines the appetite for a digital silk road too.

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In October 2017, the Russian Government approved a Ministry of Health bill to allow the online purchase and home delivery of OTCs, which came into force in January 2018. As a result, Mail.ru announced the launch of its online pharmacy in April 2018. At present, established western e-commerce giants like Amazon are largely absent from Russia, giving Alibaba the freedom to chart new territory in a market of 147mn consumers at an opportune time.

As the FT article points out, Alibaba is also fighting back against Amazon in certain markets, like Indonesia, where the US retail giant has stolen a march. For example, Alibaba has invested heavily in two e-commerce companies, Tokopedia and Lazada, both of which market goods, including healthcare products, across southeast Asia.

Explore the digital landscape at Nicholas Hall’s upcoming OTC.NewDirections Executive Conference. Other topics on the agenda include Medical Device Regulations, Medical Cannabis, Switch and Smart Probiotics. This will be an inspiring day on 12 September in London, focusing on Where Innovation Meets Regulation. For details of the full agenda or to reserve your place contact elizabeth.bernos@NicholasHall.com

OTC e-commerce: China

The rise of e-commerce, especially in key markets like the USA and China, as well as certain European countries such as Germany and the UK, continues to alter the dynamics of the consumer healthcare market and this is a trend we plan to monitor ever more closely here at OTC DASHBOARD over the coming years.

In addition, regulators across the world are still getting to grips with the issue. The China Food & Drug Administration has said that it is welcoming comments until 12th March 2018 on a draft regulation entitled Provisions for Supervision & Administration of Online Drug Sales. This stipulates that online sellers of medicines must be licensed pharmaceutical manufacturers, wholesalers or retailers. Manufacturers and wholesalers must not sell medicines to individual consumers and retailers must not sell Rx or controlled medicines online (legalising the online sale of Rx drugs has previously been considered in China).

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The platforms through which online medicines are sold must also adhere to and assist with product recalls where there are safety or quality issues. The regulation also stipulates that the CFDA will develop a national online medicine surveillance system and supply details of violations to provincial authorities, which will investigate and enforce any follow-up action.

Given the popularity of smartphones in China, and the rise of mobile payments and online shopping sites like Tmall (Alibaba) and Taobao and social media platforms like WeChat, it has become ever more difficult for regulators to monitor the online sale of medicines. This also presents a challenge for those trying to gauge the true size of the OTC e-commerce sector in China, but all indications point to this being a fast-growing channel that can no longer be ignored.

Embark on The Evolving Consumer Journey at our 5th Asia-Pacific OTC Conference & OTC Academy Training Workshop! Held in Singapore on 17-18 October 2018, this meeting aims to help guide you through this complex and ever-changing landscape. The half-day workshop will take a look at Inspiring Self-Care. Book before 15 August to take advantage of our early bird rates! Please contact maricar.montero@NicholasHall.com to book your place today or for more information. 

Chinese investment in Africa

One business book from my Christmas list that I’ve just finished reading is The Next Factory of the World: How Chinese Investment Is Reshaping Africa, by McKinsey consultant Irene Yuan Sun. This book highlights in great detail a trend that is noticeable across several industries, including pharmaceuticals – fast-growing investment in Africa by Asia-Pacific marketers. China is leading the way, especially in terms of expanding Africa’s manufacturing base, but there is a wider trend (encompassing OTCs) of companies across Asia-Pacific looking for growth opportunities in Africa.

Irene Yuan Sun’s book highlights two important economic fundamentals:

1) Over the past quarter century, China has gone from generating 2% of global GDP output to 25%
2) Over the next decade, 8 out of the 10 fastest-growing economies are projected to be on the African continent

The author makes the case that, from the start of the Industrial Revolution in Britain in the 18th century, economic prosperity has always followed where new factories are built. Citing the theory of the flying geese paradigm (see video below), the book examines how manufacturing shifts across countries and continents, as labour costs rise and competitiveness falls. Today, it is China that has reached this inflection point and it is Chinese entrepreneurs that are driving business investment in Africa.

Focusing on four countries (Nigeria, Lesotho, Kenya and Ethiopia), the book is structured in two main parts: the first about the reality of these factories being built, and the second about the economic, political and social possibilities. The author points to the irony that, despite high demand across the continent for certain drugs, notably antiretrovirals, Africa’s pharmaceutical firms are small and in some cases on the verge of collapse.

In Ethiopia (population: 100mn), there are just 9 pharmaceutical manufacturers, while Germany (population: 81mn) has nearly a 1,000 pharma manufacturers. With the exception of South Africa, Kenya and Nigeria, most African countries have no more than a handful of manufacturers. Kenya is the standard bearer in East Africa (40 factories, but generally of low quality), while Nigeria has about 40 too, the leading number in West Africa, but again few meet GMP standards.

There are reasons to be positive, however. South Africa, Kenya (national plan to encourage domestic production) and Ethiopia (similar plan) are all taking steps to revive pharma manufacturing in their countries. A few years ago, GSK showed showed interest in building a local manufacturing plant in Ethiopia, but after two years of deliberation the company decided not to go ahead. This is leaving a space that Chinese pharma companies appear more willing to fill. For example, in 2016 Humanwell decided to invest US$80mn in a manufacturing facility near Ethiopia’s capital, Addis Ababa.

Having seen rapid economic transformation in their own country with their own eyes, Chinese entrepreneurs are perhaps better placed to recognise the potential for similar change in Africa.

Next week on the blog, we’ll take a closer look at how several Asia-Pacific OTC marketers are looking to expand their operations across the African continent.

OTC DASHBOARD remains your best port of call for the latest consumer healthcare trends in the Middle East & Africa. In the coming months, we will be updating our reports on 11 countries across the region, including Nigeria and South Africa.