Dis-Chem Pharmacies has announced that it has entered into an agreement where it will acquire 100% of the issued share capital in and shareholder claims of specialist destination baby retailer Baby City. Dis-Chem will pay a purchase consideration of R430 million upon closure.

Baby City was founded in 1992 in Durban and operates a network of 33 stores nationwide. It sells a comprehensive range of branded baby products at reasonable “Everyday Low Prices”. The company focuses primarily on first-time parents and offers a complete baby shopping experience. Michel Aronoff, who conceptualised and strategised Baby City’s direction, will continue to serve as managing director of Baby City and current staff will be retained.

Dis-Chem’s CFO Rui Morais says the characteristics of the baby product sector align with those of the pharmacy sector. Both sectors are extremely resilient with perpetual new entrants – the baby sector sees approximately 900 000 new babies annually. “Our current offering is very focused on the FMCG and basic essentials categories which are extremely sensitive to price and promotion.  To deliver both a destination baby experience to the first time parent and allow growth into the more specialised baby categories such as baby gear (prams, car seats, swings, bouncers and other nursery equipment), clothing, developmental toys, amongst other categories, we required a standalone baby destination store network whose brand positioning aligned with our own brand.”

Both brands share destination store status, consumer-driven offerings underpinned by an “Everyday Low Price” strategy and unmatched stock range, service focussed customer experience and were both built around an entrepreneurial culture.

Both management teams believe that the similarities of the brands and their positioning in their respective sectors will allow the identified synergies to be extracted quickly and efficiently.

Dis-Chem believes there is strong potential to significantly grow the Baby City footprint by approximately 30 further sites.  Leading on from this, the inclusion of an in-store Dis-Chem branded clinic will enhance Baby City retail stores.  The clinics will offer ante and post-natal clinic services aimed at babies and toddlers. These services will enhance the destination store status of the brand and in turn allow the Dis-Chem clinic infrastructure within its own stores, which currently offer these services, to handle the growth it is seeing in primary care clinics services volume.

Baby City is currently without a loyalty offering.  Extending the Dis-Chem loyalty and partner offering, currently compromising 4,5 million members and numerous value-enhancing partners, to Baby City customers will drive increased shopper frequency and bigger customer baskets.  The combined loyalty offering will also ensure the ability to successfully capture the transition of the first-time parent in the Baby City environment to the baby maintenance shopper in the Dis-Chem environment. Added to this is the ability for Dis-Chem to extend private label brands into the Baby City stores, opening the opportunity for gross margin expansion in the Baby City business.

Operationally the Baby City retail stores will be integrated into Dis-Chem’s current supply chain and serviced by CJ Distribution. Dis-Chem’s recent, focussed Return on Invested Capital (“ROIC”) strategy has unlocked additional supplier terms which will enhance the commercial return of these incremental supply chain volumes.

“There are clear opportunities to harness synergies across both brands. The brands and industries have very similar characteristics allowing for efficient synergy extraction. Baby City benefits from very strong brand equity amongst South African consumers, specifically from first time parents which is core to our vision of creating a further enhanced baby destination store and experience.  We are excited about the return enhancing nature of the transaction,” says Morais.

“The acquisition is a great cultural fit and has been a target of ours for many years. The brands and businesses were built with similar philosophies ensuring management team alignment as we take steps to unlock the value we see in the Baby City brand,” says Ivan Saltzman, Dis- Chem’s CEO.

Michel Aronoff, managing director of Baby City, says both organisations share the same ethos and passion inherent in family-founded and run businesses. “Our trajectory echoes Dis-Chem’s history and growth and we are confident that our shared philosophy of customer-focused quality and service will translate into solid growth for Baby City as part of the Dis-Chem stable.”