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Is Dairy Farm Ready To Grow In China?

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With share price gains of more than 500% since 2004, Dairy Farm International Holdings Ltd (SGX: D01) has been one of the best performing shares in Singapore’s market.

On the surface, the company’s described as simply a retailer. However, what is interesting here is that the company actually operates under many different brands and store types. In Singapore, it counts brands such as Giant, Guardian, 7-Eleven, and Cold Storage under its banner.  With a pan-Asian presence, Dairy Farm runs hypermarkets, supermarkets, health and beauty stores, furniture outlets, and even restaurants.

Growing in China

Dairy Farm International has been aggressively expanding in China through store brands such as 7-Eleven, Mannings and even restaurants such as Maxim’s. However, the company has yet to make any meaningful inroads into the hypermarket and supermarket industry in China. That is, until now.

Just last week, Dairy Farm International announced that it plans to acquire a 19.99% interest in Yonghui Superstores Co., Ltd in a US$925 million deal. Yonghui Superstores is a Shanghai-listed hypermarket and supermarket retailer. Dairy Farm International would be buying RMB5.69 billion worth of new shares of Yonghui Superstores at RMB7 each. The investment is still subjected to approval from the authorities and Yonghui Superstores’ shareholders.

Difficulties in China

Having been in the retail industry in Asia for so many years, Dairy Farm International understands the risks of starting new retail stores in China. It’s fair to say that the country seems to hold great potential for growth for retailers given its massive population (some 1.4 billion people) and a transformation in its economy to one driven by consumer spending. But, it also pays to bear in mind that the Chinese market is one of the most competitive in the world. Many other large scale grocery retailers, including Tesco PLC from the UK, have tried and failed despite the massive resources at their disposal. For some perspective, Tesco’s revenue in 2013 clocked in at £63.4 billion, or around S$120 billion.

Foolish Summary

It seems that Dairy Farm International has chosen the safest route to gain access to the Chinese market by partnering with a local company.

In this way, Dairy Farm International can ride on the growth of an established retailer in the country but also limid its downside risks if things do not turn out as planned. In any case, if the deal does through, Dairy Farm would also be working on synergies in a number of areas with Yonghui Superstores, including procurement, private-label product development, fresh food processing, and store development.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above