Weak performances in Singapore and Indonesia eroded underlying profits in multinational retailer Dairy Farm Group’s food division last year.
Last week, Dairy Farm reported a 5 per cent overall increase in sales on a constant currency basis, but a 14 per cent decline in underlying profit due to the “challenging” operating environment across Asia. Sales totalled US$11.137 billion, profit fell from $509 million to $424 million.
Dairy Farm’s interests span convenience stores, hypermarkets, supermarkets, fast food restaurants, cafes, pharmacies, beauty stores and Ikea franchises. While all divisions reported mixed results by markets, it was the core food division where the gaps seemed widest.
CEO Graham Allan said Wellcome supermarkets and 7-Eleven convenience stores in Hong Kong traded well, and Wellcome Taiwan also delivered encouraging results with its targeted focus on upscale customers.
In Hong Kong, despite a competitive trading environment and declining Mainland visitor traffic, Wellcome achieved gains in both sales and market share, he said.
“In the face of steep increases in rental costs, profitability remained strong due to sales growth and prudent management of other costs. In 2015, the group acquired and successfully integrated the San Miu supermarket business in Macau, which delivered a higher than expected profit contribution.”
Food (excluding the Yonghui China business in which Dairy Farm acquired a 19.99 per cent stake during the year) reported US$8.2 billion in sales, a decrease of 2 per cent, while operating profit declined by 21 per cent to US$236 million principally driven by disappointing results for supermarkets and hypermarkets in Singapore and Indonesia.
In Mainland China, 7-Eleven showed further improvement despite the market slowdown. But in Singapore, “further margin erosion resulted from higher labour costs and rents, soft consumer sentiment, a weaker Singapore dollar” and intense competition in the supermarket sector.
“Operating profit was significantly lower than in 2014, mainly due to lower margins from Cold Storage’s price campaigns, a store rationalisation program and operational challenges. In a difficult segment, Giant ended the year with improvement in both sales and profits.”
Allan says in 2016, the group will optimise its product offer with improved fresh items and ready-to-eat meals, with the aim of growing market share, boosting stock management capability and fine tuning brand positioning.”
In Malaysia, the introduction of GST in April and weak consumer confidence dampened retail spending and profitability.
“Post-GST consumer apprehension, currency weakness, lower subsidies and political uncertainty brought consumer sentiment to its lowest point in 10 years and negatively impacted sales in the remainder of the year.
“Nevertheless, improved retail execution, assortment enhancements and tactical investments in margin to improve price perception have helped to maintain sales in a soft market,” said Allan.
“In the Philippines, the upscale and community supermarkets reported sales growth, while hypermarket sales were slightly positive. The group opened three new Rustan’s and three new Wellcome stores, and ended the year with 56 outlets. Enhancing the quality and breadth of the fresh offer, embracing more impactful merchandising and display practices and building corporate brands are central to the group’s plans for 2016.”
In Indonesia, profitability declined significantly as a result of higher labour costs, price investments to drive customer traffic and changes associated with more rigorous stock management, Allan said. While its Giant supermarkets there enjoyed a better year and produced double digit sales growth, and its larger Giant hypermarkets also grew, Hero supermarkets sales were steady.
“While overall margins improved, partly due to excellent growth in fresh food, earnings suffered from increases in labour costs, stock clearance activities and store rationalisation.”
Results from PT Hero were also depressed by 12 per cent with the weakening rupiah affecting the outcome on translation. Hero, majority owned by Dairy Farm Group, has sold the majority of its Starmart convenience stores and will close the remaining ones.
And in Vietnam, Giant achieved strong like-for-like sales with increases in both customer traffic and basket size.
“Facing strong competition from new entrants and existing players, the group repositioned its fresh strategy with lower prices and a wider product offer to grow market share.”
Operating profit in the convenience store division of the broader food business dropped by 12 per cent to US$64 million.
Allan said in Mainland China, 7-Eleven saw a pleasing increase in sales and profits over the previous year, with like-for-like sales growth and store network expansion. Despite signs of an economic slowdown in China, profitability improved. Ready-to-eat was the leading category in terms of sales and contribution and this category will continue to be a major area of focus in 2016.
“In Hong Kong, the group achieved excellent like-for-like growth and gained market share across most categories. Rapidly escalating operating costs, especially store labour and rental expenses, crimped profit growth. Sales momentum in Macau slowed during the second half of the year due to an increase in cigarette taxes in July and reductions in tourist numbers from Mainland China,” he reported.
In Singapore, 7-Eleven’s results were impacted by lower sales from the tourist segment, by lower liquor sales partly due to new regulations curtailing late night alcohol sales, and by increased store labour costs and operating costs in the Distribution Centre.
“Major initiatives for the coming year will focus on strengthening the ready-to-eat supply chain.”