How 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.

In an earlier article, I wrote about the things Dairy Farm’s management had shared in the briefing regarding the company’s online retail efforts in the Health and Beauty segment and more. For perspective, Dairy Farm has four business segments, namely Food, Health and Beauty, Home Furnishing, and Restaurants.

In this article, I would like to talk about the pan-Asian retailer’s effort in blending the online and offline world through ideas such as click-and-collect.

Here’s what Graham Allan, Dairy Farm’s chief executive, had to say in the earnings briefing about the things the company has learnt from the Health and Beauty segment’s eCommerce offering:

“We have learned a whole bunch. So, when we first started our offer was mainly a delivery offer. We don’t think of quality of the click-and-collect offer was good enough. But given that we would ideally drive people to click-and-collect, so that they would come into the store to collect the products.

We already have some, but we will have do more to enhance the click-and-collect offer. So, consumers will have a choice on whether it is delivery or whether it is click-and-collect.”

The click-and-collect model is being used by U.S retailers such as Home Depot. In fiscal 2015 (year ended 31 January 2016), the home improvement chain reported that 40% of its online orders were from click-and-collect. Hence, there is anecdotal proof that the click-and-collect model can be beneficial for traditional brick-and-mortar retail companies.

But before anyone gets too excited about the prospects of online delivery or click-and–collect for Dairy Farm, we should also note that the online ordering model is yet to be profitable. Allan provided his take on this matter:

“At the moment, we are subsidising that business. We are losing money on the delivery business. But we are getting a lot of learning from it. We have seen a significant pick-up in the volumes, we have learnt a lot about the kind of range that we have to offer. In fact, the range is broader than what is available at the store because we don’t have the physical limitations of the store. Our fulfillment is gradually improving but the cost of fulfillment is still relatively high.

So, we have to think of a way on how we make that businesses over time – how we give ourselves line of sight towards ultimate profitability.

What we are not saying is that those businesses have to be profitable today. We gotta figure out how they might become profitable in the future. We are planning to take that Singapore model and apply that across other markets in 2016. For competitive reasons, I am not going to spell out which markets they are.”

Dairy Farm is looking to roll out its Health and Beauty eCommerce model to its other markets. Allan had earlier stressed the importance of having the right business model before expansion, so it is possible Dairy Farm may at least have “line of sight” on how its eCommerce offering can be profitable in the future.

As mentioned in my previous article (here it is again), Dairy Farm is looking for eCommerce to be a substantial part of all its business segments within the next five years.

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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.