Dairy Farm feels at home in Asia

Since 1997, Dairy Farm has been repositioning itself to accomplish three things. To focus on retailing in Asia Pacific. Not to waste its time on lost causes. And to prepare itself for the competition by upgrading stores and improving its support services. What is Dairy Farm's current position?
Elsevier Food International, Vol. 6, Number 4, November 2003
Pascal Kuipers

On 23 February 2003, Ron Floto, CEO of Hong Kong-based retailer Dairy Farm, presented the company's 2002 final results. Five of his slides were titled 'Changing Profile of Dairy Farm', showing the retailer's change between 1997 and 2002. During this period, Dairy Farm changed in a geographical sense. Dairy Farm currently focuses on Asia, whereas back in 1997 it was represented in Asia as well as in Europe and Australasia.
Change also happened in Dairy Farm's business channels. In 1997, supermarkets still accounted for 85 per cent of sales, but five years later this dominance was reduced to 48 per cent. Currently, Dairy Farm is much more of a multi-channel business with a larger share of restaurants/food service, convenience stores, drugstores and hypermarkets. Finally, change can be quantified: divestitures reduced Dairy Farm's sales level dramatically from US$12.7 billion in 1997 to US$4 billion five years later. Cutting sales by two-thirds, however, did not result in a similar reduction of profits. Profit after tax fell only slightly from US$1l6 million in 1997 to US$102 million in 2002. Obviously the management treated the patient well, as Dairy Farm's return on assets increased from 11 per cent in 1997 to 23 per cent in 2002.

Specialising in Asia

Dairy Farm intends to triple the number of Giant Hypermarkets by 2005.

Was Dairy Farm indeed in such an unhealthy state in 1997? "In 1997 we took stock of our strengths and weaknesses and assessed the threats to our success," says Floto. "The conclusion was obvious: we had great knowledge of Asia-Pacific and with the exception of Australia we were doing very well. We also took a hard look at the competition that was coming to Asia from Europe. With the full backing of our major shareholder Jardines, we began repositioning ourselves to accomplish three things: focus on retailing in Asia Pacific; not waste our time on lost causes; and prepare ourselves for the competition by upgrading stores and becoming more efficient in our support services."
"We wised up to the difficulties of operating so far from our home base with little local knowledge and expertise to flourish," says Simon Keswick, chairman of Dairy Farm and member of the family who owns its parent company, Jardine Matheson Holdings Ltd. Keswick illustrates Dairy Farm's ambitious and exotic expansion plans of the late 1980s: "Our strategy was first to go discounting in Australia, followed by New Zealand and then we proposed to go discounting in Europe. First in the UK and then in the sunshine states around the Mediterranean and potentially Portugal, the South of France, Greece, North Africa, etc." What materialised from these ambitions away from Dairy Farm's Asian home base were operations in Australia (in 1979 Dairy Farm acquired the Franklins discount chain), the UK (in 1987 Dairy Farm acquired 25 per cent of UK retailer Kwik Save), New Zealand (Woolworths acquisition, 1990) and Spain (Simago acquisition, 1990). Currently, all these operations as well as Dairy Farm's supermarket operation in Japan (between 1995 and 1997) have been divested. "Dairy Farm is not a large retailer by world standards and it became clear that operating a very geographically diverse business in widely different cultures was a very challenging undertaking," says chief executive Flota. "Our greatest disappointment was not being able to turnaround Franklins in Australia. However, we concluded that even after a lot of cash and effort we would be a lacklustre third place in a slow growth market. The answer was painful but obvious. The next logical step was to sell Woolworths in New Zealand if we received a compelling offer. We were indeed successful there, but even in New Zealand other retailers were ultimately the more logical owners of the business because they could gain economies of scale that were not available to us. We were able to exit the New Zealand market at a very good profit, completing our strategy of specialising in retailing in Asia."

Food service: profitable non-core Business
Fifty per cent of Dairy Farm's US$4 billion business (2002) consists of retail operations in North Asia (Hong Kong, mainland China, Taiwan and South Korea). Retailing in South Asia (Singapore, Malaysia, Indonesia and India) accounts for 33 per cent of 2002 sales, while Maxim's, a food service operation in which Dairy Farm holds a 50 per cent share, represents 17 per cent of 2002 sales.
Maxim's comprises restaurants, fast food/catering, a cake shop chain, Starbucks coffee shops, a 50/50 joint venture between Dairy Farm and Starbucks Corporation, and other stores. To support its restaurant and catering operations, Maxim's operates three factories (for cakes and prepared foods), a laundry and a printing plant, says M + M Planet Retail. The same source says that Maxim's had some 335 stores by the end of 2002, all in Hong Kong and three in mainland China. Despite slightly falling sales in 2002, Maxim's increased its profitability by cutting costs. In the first half of 2003, however, Maxim's profits plummeted by 47 per cent due to the SARS outbreak. For the second half of 2003, Dairy Farm expects Maxim's to recover.
Still Maxim's is a very profitable asset, with a 2002 profit share of 30 per cent. Nevertheless, Floto does not consider Maxim's as being Dairy Farm's core business. "Our core businesses are supermarkets, hypermarkets, convenience stores, health and beauty stores and home furnishing stores," he says. "The 50 per cent shareholding in our restaurant associate company Maxim's is a key element of our profit, but it is a business in which we participate strategically rather than day-to-day management."
Supermarkets still represent the lion's share of the business with a 48 per cent sales share in 2002. Historically grown via past acquisitions and joint ventures, Dairy Farm has five different supermarket banners: Wellcome in Hong Kong and Taiwan, Cold Storage in Singapore and Malaysia, Giant in Malaysia, Hero in Indonesia and Foodworld in India. For its fast growing hypermarket format, however, Dairy Farm follows a single brand strategy focused on its Giant hypermarket banner (in Malaysia, Singapore and Indonesia). The same holds true for its C-store operation, where Dairy Farm franchises the 7-Eleven banner in Hong Kong, Southern China and Singapore.
Floto denounces the suggestion that concentrating on one or two supermarket banners across Asia is more efficient. "We have different banners because the businesses were acquired at different times," he says. "They are well known local brands with significant equity. We do not believe there are efficiency benefits to a single retail brand since we have a single corporate product brand 'First Choice' that is carried everywhere and produced centrally. In each country, we have merged the back office functions of logistics, finance, systems, etc. This provides significant economies."

Hypermarket growth plans
Still, in its hypermarket business, Dairy Farm focuses on Giant as a single brand. "The Giant hypermarket channel is the fastest growing format in the Group and is a priority for capital expenditure," says Floto. "We purchased Giant in December 1999 when it had only two Malaysian hypermarkets with annual sales representing two per cent of Group sales. Since the acquisition, we have opened 12 hypermarkets including three in Indonesia and three in Singapore. In the first half of 2003, Giant hypermarket sales accounted for ten per cent of Dairy Farm's total sales."
Last August, M + M Planet Retail quoted Michael Kok, Dairy Farm's regional director for South Asia, who said in a press interview that Dairy Farm intends to triple the number of Giant hypermarkets to 40-45 in Southeast Asia by the end of 2005. By the end of this year, seven hypermarkets are to be added to the current number of 14 in Malaysia, Singapore and Indonesia. With limited options in Singapore, expansion will mostly take place in Malaysia and Indonesia.
Floto does not rule out that Giant hyperrnarkets will also be opened in other Asian countries. "We will continue to expand the Giant network and strengthen its position in Singapore, Indonesia and Malaysia, as well as seeking out opportunities for expansion in other countries." Its Indian joint venture, in which Dairy Farm holds a 49 per cent minority stake, started in June 2001 with the Great Wholesale Club to increase the hypermarket business in India. This resulted in one Giant hypermarket in the Indian town of Hyderabad. According to M + M Planet Retail, the Great Wholesale Club aims at eight Giant hypermarkets in India by March 2005.
Dairy Farm's supermarket business has grown both organically as by acquisitions. "In Taiwan, we have added 39 stores in three separate acquisitions, while we have added 31 stores through organic growth," says Floto. "In Malaysia this year we will be taking over the 34 stores of Ahold's Tops chain, which is much more than we would have added through organic growth." In Indonesia, Hero acquired 22 Tops supermarkets from Ahold and in Taiwan Wellcome expanded its store network in the first half of 2003 with the acquisition and integration of 22 supermarkets. M + M Planet Retail reported last August that in India. Dairy Farm and its Indian joint-venture partner RPG Group plan to add 15 more Foodworld supermarkets to their current 87-strong network by the end of its current financial year.

Emerging markets
Dairy Farm is represented in eight Asian markets.Floto sees additional growth opportunities by entering new markets. "Provided those new markets are, or have the potential to be, of significant size and profitability within a reasonable period," he says. "We have the financial capacity to expand our retail formats in existing markets and to enter new markets in Asia as well. As an example, we have only just entered Korea through a joint venture, and if the right opportunities were available we would also consider markets such as Thailand, the Philippines and Vietnam."
Obviously, the Hong Kong retailer prefers expansion into emerging markets to setting up shop in developed markets. "It is less likely that you would see us enter a highly developed market like Japan, because we do not bring enough competitive advantage." responds Floto. "We were in Japan in 1995 and exited in 1997 because we could not see a path to success in the medium term. However, we did see an opportunity in South Korea where we could enter the health and beauty sector of the market in which we have expertise and which is not yet well developed. This in contrast with the hypermarket sector in Korea, which is already highly developed and contested by some of the world's best retailers. In general though, we expect to do better in emerging markets than in mature markets. We feel that mature markets are generally overstored while emerging markets often are not. Also, we have people picked for their pioneering spirit, which is vital in emerging markets. Lastly, after 118 years in Asia we feel at home here: we like to think we understand the markets and the culture."