Southeast Asian grocery business mars Dairy Farm International’s bottom line

Poor trading by Dairy Farm International’s Southeast Asian grocery business hit the company’s bottom line last year, with underlying profit falling 13 per cent.

But every other one of the company’s divisions traded strongly throughout the year, according to the results just released.

Full-year profit was US$403 million, after allowing for $64 million of costs relating to business restructuring. Sales by Dairy Farm’s wholly-owned subsidiaries totalled $11.3 billion, largely unchanged from 2016’s $11.2 billion. But total sales, including 100 per cent of associates and joint ventures, at $21.8 billion were up 7 per cent year on year, reflecting strong growth at both supermarket operator Yonghui and cafe-restaurant operator Maxim’s, which owns the Starbucks business in Hong Kong, Vietnam, Cambodia and now Singapore.

“After a disappointing year… for our food businesses in Southeast Asia, actions are being taken to improve their long-term performance,” explained chairman Simon Keswick. “All of the group’s other formats and markets are trading well and growth opportunities are being pursued, in Mainland China and elsewhere.”

In Dairy Farm’s food division, sales were down and profits were “significantly lower” than in 2016, primarily due to poor performances in the supermarket and hypermarket businesses in Malaysia, Singapore and Indonesia.

“A number of underperforming stores are being closed and prices lowered to clear or write off discontinued and slow moving stock.

“In Hong Kong, sales were more resilient, although profits were marginally down due to increasing rents and labour costs. Positive sales growth seen in the Philippines reflected the ongoing investments being made to improve the business,” said Keswick.

Elsewhere in the company there was brighter news.

The convenience store format (including 7-Eleven in Hong Kong and Singapore) produced increased sales and profit. “In part, this reflected a consumer shift to more convenient retail formats, as well as a positive reception to the service and range enhancements introduced for customers,” said Keswick.

The convenience stores division reported $2 billion in sales, an increase of 4 per cent over the previous year – but operating profit surged 16 per cent to $85 million.

In the health and beauty division, (led by Guardian and Mannings), sales and profit were higher, principally due to strong performances in Hong Kong, Macau and Indonesia, together with improvements in Mainland China.

Keswick said this was led by an increasing focus on the beauty category and the continued development of the division’s house brands.

The home furnishings division (Ikea in Hong Kong, Taiwan and Indonesia) recorded higher sales and trading profit, but the reported profit declined, mainly due to costs associated with the opening of the fourth Ikea Hong Kong store in October. Sales and profits increased in Taiwan and Indonesia and there was solid growth in the e-commerce business.

Maxim’s enjoyed good sales growth and profit expansion during the year, in large part due to strong performances from its branded products, particularly mooncakes, and its business in Mainland China. The company also acquired the Starbucks Singapore business last year.

The group’s 19.99 per cent-owned associate in Mainland China, Yonghui Superstores, opened a net 292 new stores last year, which underpinned a 19 per cent growth in revenue. Ongoing supply chain optimisation and shrinkage improvement resulted in improved margins, which together with better capital use, led to a 45 per cent growth in profit.

Convenience focus

Keswick said Dairy Farm International will focus on increasing its convenience store operations in the year ahead through expansion and enhancement of the store network. New smaller-store formats are being piloted in some markets.

The group will also continue to develop its e-commerce presence, focusing on a number of initiatives in its home furnishings, food, and health and beauty operations introduced last year.

Dairy Farm International added a net 633 stores last year. At year end, it had 7181 stores in operation in 11 countries and territories, including its interest in 779 Yonghui stores in mainland China and 1210 Maxim’s stores.

Besides the Starbucks Singapore deal, Maxim’s also acquired the existing businesses and franchises of Genki Sushi in Singapore and Malaysia. It opened its first The Cheesecake Factory in Hong Kong in May, which Keswick said is trading well, and this year will introduce American casual restaurant format Shake Shack in Hong Kong and Macau.

In the Philippines, Rustan became a wholly-owned subsidiary following the acquisition of the remaining 34 per cent interest from the group’s joint venture partner.

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