Why this investment firm bought into one of South Africa’s largest natural health retailers

A Wellness Warehouse outlet in Cape Town, South Africa.

A Wellness Warehouse outlet in Cape Town, South Africa.

Pan-African private equity firm EXEO Capital recently invested in South African-based Maia Group, through its food and agribusiness fund, Agri-Vie Fund II. Maia Group is a holding company focused on consumer health businesses and includes Wellness Warehouse and True Health Holdings. Wellness Warehouse is a natural health, food, beauty and homecare retailer, while True Health Holdings is a manufacturer, wholesaler and distributor to the broader natural healthcare market.

How we made it in Africa spoke to Avril Stassen, senior partner at EXEO Capital, about the motivation for the transaction, the growth opportunities in the wellness market and the impact of Covid-19 on brick-and-mortar retail in South Africa.

Explain the motivation for EXEO Capital’s investment in South Africa’s natural health and wellness industry.

The focus of our Agri-Vie Fund II is on food and agriculture in the broadest sense of the word; health and wellness has always been a core investment theme for the fund.

Despite South Africa’s challenging macroeconomic picture, the consumer health sector continues to grow at a rate much higher than GDP – probably eight to 10 times faster over the last five years or so. It is also a sector that has good margins and the potential for a decent return on investment.

In our search for investment prospects in the health and wellness space, we were presented with an opportunity to partner with Maia Group’s management team to buy out another private equity fund that reached the end of its investment horizon.

What are your growth plans for Maia Group’s two businesses: Wellness Warehouse and True Health Holdings?

Wellness Warehouse is a well-known retail outlet with a footprint of around 40 stores in South Africa. It provides a range of products in the natural health, natural foods and natural beauty segments. It has grown quite strongly over the last 10 years. We intend to roll out more stores and build online sales, currently a relatively small component of the business.

True Health Holdings is a manufacturer, wholesaler and distributor of a wide range of natural food and natural health products. Some of these are stocked in Wellness Warehouse stores but they are also sold to other independent health shops as well as some of the larger, national pharmacy chains. We plan to use True Health as a platform for a buy-and-build strategy to expand the manufacturing side and to grow the wholesale and distribution divisions.

Natural health and wellness products are typically sold at premium prices. South Africa’s lacklustre economy and growing unemployment must surely limit the addressable market?

The total consumer health market in South Africa was about R1.3 billion (about $91 million) in 2019 and has probably grown by about 10% since then. The perception that consumer health is for only top income earners is not justified. People are spending more on vitamin supplements and allocating a bigger part of their budget towards preventative healthcare, with a focus on natural products. Due to Covid-19, preventative healthcare has become an even higher priority for consumers.

In the case of Wellness Warehouse, it is true it is aimed at a more premium end of the market with the products slightly more expensive than brands you find at general retailers. However, considering how the business has expanded in recent years, we believe there is a lot of room for growth.

How has Covid-19 impacted brick-and-mortar retail in South Africa?

The footfall in large regional malls has declined while visits to smaller convenience centres and strip malls have picked up. Instead of going to the large shopping malls, consumers are rather shopping at local strip malls and lifestyle centres. We are seeing evidence of this in how the various Wellness Warehouse stores are trading.

Brick-and-mortar stores will always be important for us because there is an element of discovery that our customer base wants to have in terms of the physical shopping experience. While some consumers order the same products month after month, they also want to discover new things and the best way to do that is in a physical environment. For now, though, our focus is on convenience centres and strip malls to grow the footprint.

Right now, it is a buyer’s market which means there are lots of empty spaces in malls and it is a good time to be signing leases and securing retail space.

Describe the potential hurdles that could impact EXEO’s growth ambitions for Maia Group.

The obvious one is that this category has attracted attention from large chains such as Dis-Chem and Clicks, which continue to allocate more shelf space to natural health. Competition from larger retail groups will remain strong.

We also face risk in terms of our buy-and-build strategy for True Health Holdings. Its successful execution is dependent on us finding good investment opportunities. Bolt-on acquisitions have a fair degree of risk. We may face competition from other potential buyers which could slow the process or push up the price we pay for those acquisitions.

A further risk is related to foreign exchange. Wellness Warehouse imports many of its products. Unfavourable movement in the South African rand/US dollar exchange rate could, therefore, negatively impact profitability.

What would be a likely exit avenue for the business?

Wellness Warehouse has a unique offering as a specialist health and wellness chain. We believe it could be an attractive acquisition for another retailer wanting to enter this space.

A second exit option is to another private equity fund. We know private equity funds currently have a lot of dry powder and are looking for investment opportunities.