Dairy Farm International Holdings Limited (“Dairy Farm”) is a leading Pan-Asian retailer. The Group, together with its associates and joint ventures, operated over 6,600 outlets across 12 markets, with FY2016 total sales* exceeding US$20bn.
* Total sales include 100% revenue of its associates and joint ventures
Its four divisions include: 1) Food (Supermarkets, Hypermarkets and Convenience Stores); 2) Health and Beauty; 3) Home Furnishings (IKEA businesses); and 4) Restaurants (Maxim’s, a leading Hong Kong restaurant chain).
Dairy Farm is incorporated in Bermuda and has a standard listing on the London Stock Exchange, with secondary listings in Bermuda and Singapore. It is a member of the Jardine Matheson Group.
Key Investment Risks
At 30 Jun-17, Dairy Farm and its associates and joint ventures operated over 6,600 outlets across 12 markets, and employed over 180,000 people.
The Group operates under a number of well-known brands across four divisions, namely Food, Health and Beauty, Home Furnishings, and Restaurants.
Figure 5: Regional Footprint and Principal Brands
Margin gains and store expansion plan to fuel medium-term growth
Dairy Farm is constantly investing to enhance its competitive position, increase customer convenience and adapt to emerging consumer trends. We think that the Group is poised to ride the macro tailwind in Asia’s developing markets.
1. Margin enhancement on the back of (a) better sales mix of higher margin products, and (b) improving economies of scale
a) Increase Fresh participation and moving into upscale market
Figure 6: The better gross margins will lift Core EBIT margin to 4.5% by end-FY18e
Figure 7: Stronger contribution from its Associates and Joint Ventures will prop up another 20bps p.a. at net margin level in FY17-18e
Over the past three years, the Group has integrated Fresh Production Centre and the Dry Distribution Centre in Taiwan (2014); opened three distribution centre hubs in Indonesia (2014); and commenced a new Fresh Food Distribution Centre in Singapore (May-16). These translate to a higher Fresh penetration, which increased by over 20 bps in the FY2013-16.
Management shared that its Fresh participation rate is still lagging behind NTUC Fairprice and Sheng Siong, despite being the second largest retailer in Singapore. Nonetheless, the new 75k sqft fresh food distribution centre in Singapore should level its playing field with NTUC Fairprice and Sheng Siong, and bode well with its plan to increase fresh participation. Management shared that lead time from farm to shelf in Singapore has shorten by 50%. The additional capacity also enables higher value food production – such as processing of fresh products.
We expect the two additional new fresh distribution centres that will commence operations this year – Philippines (opened in May-17) and Malaysia (target to open in 2H17), to further improve Food margins.
We also expect the Group to benefit from its plan to increase its ownership in Rustan’s to 100% with the acquisition of the remaining 34% interest from its joint venture partner.
b) Capitalizing on convenience via Ready-to-Eat products and enhanced service offerings in Convenience Stores
Ready-to-Eat (RTE) food offerings continue to gained traction. Sales of RTE products grew over 10% YoY in FY16, double the rate of overall growth in Convenience Store. It has also revamped store format to incorporate a small dining in or seating area.
To draw higher footfall, it has also introduced enhanced service offers, such as establishing pick-up points and e-lockers services to complement the booming e-commerce industry, as well as cash withdrawal services, bill payment facilities, courier services, and prepaid card top-ups services over the counter.
c) Higher penetration of Corporate Brand in both Food and Health& Beauty segments
Corporate Brand (a.k.a. private labels) not only provide customers alternatives, but also enhance business profitability. The Group has over 10,000 SKUs (stock keeping units) under its Corporate Brands across Food and Health and Beauty segments. However, the penetration rate lags at mid-single digit percentage for Dairy Farm, as compared to mainstream retailers’ 25% to 50%.
This also implies that there is more scope for growth and margin expansion. In particular, its Health and Beauty division in New Markets. In 2016, over 900 new products were launched. More than 450 of these Corporate Brand products were introduced into the developing markets of Vietnam, Cambodia, Indonesia and the Philippines, which recording an impressive 117% sales growth in 2016.
Figure 10: More SKUs and new Corporate brands launched under its grocery segment
d) Strengthening and streamlining supply chain and boosting stock management capability
Establishing advanced infrastructure across the region. These centralized distribution centres could:
Efficient inventory management via technology. Its Group-wide newly implemented SAP merchandising system will reduce handling costs, strengthen key processes in the supply chain and enhance business analytics.
Shortening supply chain via direct sourcing. Leveraging on each other’s operating scale and sharing of know-how, would propel greater synergies and collaboration across the Group as well as with partners.