1 Way Dairy Farm International Holdings Ltd Is Fighting Back Against Online Retailers

Dairy Farm International Holdings Ltd  (SGX: D01) has seen its growth stall over the past year.

For 2015, the pan-Asian retailer’s revenue came in flat while underlying net profit fell by 14% amidst tough operating conditions. This could be why shares of the pan-Asian retailer have fallen by around a third since the start of 2015.

In a recent briefing for Dairy Farm’s 2015 earnings, the threat of online retailers was among the questions raised by analysts.

The online menace

To be sure, Dairy Farm has also been working on its own online offerings. Graham Allan, the company’s chief executive, gave a summary of the firm’s online efforts during the briefing:

“I think we have indicated that we will have full online offers for IKEA in the end of year for all of the market which we have the franchise. So, that’s Hong Kong, Taiwan, Macau and Indonesia. So, Hong Kong and Macau will be the first on-stream and that will be available before the end of the month. That, we think, will be highly successful.”

The home furnishing chain IKEA falls under Dairy Farm’s Home Furnishing business segment which recorded US$568 million in revenue in 2015, a 14% increase from 2014. Allan continued:

“We have an existing health and beauty eCommerce offer in Singapore. That was developed as a proof of concept test, designed to provide a prototype on how we would do health and beauty eCommerce elsewhere in Asia. So, using an IT system and developing know-how, particularly fulfillment know-how which is the heartbeat of this, which will have application across the rest of Asia.”

The Health and Beauty segment, which registered US$2.6 billion in revenue in 2015 and growth of 8%, was further along the process. According to Allan, Dairy Farm’s offering in the Health and Beauty space may even be ready for a roll-out in Asia.

To be sure, there are still challenges in the company’s other segment, namely Food (Dairy Farm has four business segments: Food, Health and Beauty, Home Furnishings, and Restaurants). This segment recorded US$8 billion in sales in 2015 but shrank 4% in the year. Allan had mused on the challenges behind the Food segment in the briefing:

“In Food, the positions are more difficult in Food because the margins on Food are a lot finer. Nevertheless, you do see some competitive activity. Actually, different kinds of competitive activity – in full service operators, a bit like the Amazon type all the way through what I would describe as pure concierge services where they don’t really have inventory or a supply chain and they are just offering the last mile fulfillment.

And these are going to be a factor. We are in eCommerce at the moment in Hong Kong and Singapore but really not in a particularly meaningful way. We are still figuring out what the best way is to do Food. It is harder to do Food profitably. There isn’t that much evidence of players around the world making a profit. Some people are achieving quite a lot of sales, but not making a lot of profit in Food. We are trying to figure that out. And we have got some ideas that we are exploring internally.”

The nature of the products within the Health and Beauty segment, which has a longer shelf life and are relatively small, seems to lend itself better for online delivery. Allan believes that online ordering could be a significant part of the Health and Beauty segment for the future. This could be why Dairy Farm has focused its efforts around this segment. To round off his thoughts on eCommerce and Dairy Farm, Allan provided the following comment:

“The one thing that is certain is that in five years’ time, we have be seriously in eCommerce for all of our formats. That we accept. The questions is how we get to that point without thrashing the great economics that we have in our existing business.”

It looks like Dairy Farm has been taking the threat of online retailers very seriously and has been looking for ways to balance this opportunity with what it has today. One thing is for certain, it could well be an interesting five years ahead for the world of online as well as traditional bricks-and-mortar retailing.

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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 Chin Hui Leong owns shares in Dairy Farm International Holdings.