Dairy Farm Group CEO says restructure will take five years

Dairy Farm Group has warned shareholders that its restructure will take five years to complete.

“There are few ‘quick fixes’ and no ‘silver bullets’,” CEO Ian McLeod told shareholders in the company’s results filing last week. “Continuous improvement against a deliverable, long-term strategic and operational plan is needed.”

McLeod says the Strategic Review launched soon after his arrival has created a three-step process to restore strong profitability to the Hong Kong-listed, multinational retail business: Building a Solid Foundation, Delivering Consistently Well, and Driving the Dairy Farm Difference.

“We began the urgent work required to assess and address the significant issues faced by the group, especially those within our food business, to support the changing demands of the customers. While the Strategic Review also highlighted opportunities to improve performance in other parts of the group, the food business is clearly the one requiring the greatest level of focus and short-term action,” he said.

“It is very clear that the level of change necessary to deliver the required improvements will take at least five years to deliver in a sustainable way.”

Phase one is now underway with the first step to bring in the right leadership talent with the capability and determination to deliver significant and meaningful transformational change. Seven of the 10-strong leadership team are new to the business, and two have revised responsibilities.

McLeod said they have already begun to instil the right functional discipline, efficiency and business capabilities to deliver on the turnaround plan.

A key finding from the Strategic Review was that the company was organised and deployed as multiple business units by banner, country or format – or all of those.

“While allowing for locally based decision-making, our way of working was to act as a series of small businesses, without shared learning, quality functional specialism, or the consistency of scale and expertise one might expect from one of Asia’s largest retailers. Our businesses have now been centralised into two core trading divisions, covering North Asia and Southeast Asia,” said McLeod.

No more hypermarkets

“As new leaders have joined, we have begun to address key areas where we have fallen behind, most notably in store format development and digital expansion. As an example, having used stronger consumer insights and intelligence to analyse our customer offering and product selection, we have decided no longer to build hypermarkets. While some of these stores remain successful and continue to show growth, it is clear that this format has struggled to deliver effective returns across the food retail industry in Southeast Asia and needs to be reshaped.

“We are now introducing pilot stores, redefining space allocation and trialling new innovations in our formats, to place greater emphasis on fresh food, demographic range optimisation and, where relevant, even repurposing the space altogether.”

One of the group’s hypermarkets in Indonesia is being repurposed as an Ikea this year, with the prospect of this conversion offering an opportunity to accelerate the expansion of Ikea in that market, while also addressing an underperforming food store.

“While we have strengthened our digital capability to better respond to expanding opportunities in e-commerce, we are starting from a very low base and are playing catch up,” said McLeod.

Last financial year, Dairy Farm Group took a US$453 million hit from writedowns relating to restructuring costs, but McLeod says this was the down side of an essential shift towards delivering quality service, value and trust to the company’s customers.

Five priorities

The company has set five strategic priorities it says will enable it to grow moving forward:

  • Grow in China.
  • Maintain strength in Hong Kong.
  • Revitalise Southeast Asia.
  • Build capability.
  • Drive digital innovation.

Grow in China: “China is one of the largest and fastest growing consumer markets in the world, and one where convenience, health and brand trust represent encouraging market potential for our businesses there. While we have been represented in China for more than 25 years with 7-Eleven and 14 years with Mannings, our scale of growth has not fulfilled its potential. With both businesses centred in Guangdong province, which is home to 100 million people, we should be able to pool resources and grow these businesses more successfully.

“By more effective definition of range, space, store size and location, we believe there are opportunities for both businesses to achieve stronger growth in scale in the coming years. We have developed a strong and growing relationship with Yonghui, which continues to impress, and we anticipate further shared learning and idea generation between the two businesses going forward. We also continue to develop relationships with China’s technology companies, with a series of trials taking place to better understand the changes in customer expectations as regards the use of technology in this market and beyond.”

Maintain strength in Hong Kong: “We are in the fortunate position that, within our home market of Hong Kong, we have a series of very strong brands with a track record of effective performance. Each of Wellcome, Mannings, 7-Eleven and Ikea have high brand presence, strong brand awareness with consumers and importantly, high degrees of brand trust.

“We have the further benefit of our long-standing relationship with Maxim’s, which continues to be a thriving business with effective presence in each area of the market and a growing portfolio of renowned international brands such as Starbucks, Genki Sushi, The Cheesecake Factory and the recently added Shake Shack, which has exceeded all performance expectations.

“Mannings had an exceptional year in 2018, but Wellcome’s performance disappointed. While the underlying business remains strong, substantial cost rises, particularly on rents, have had a material effect on year-on-year profitability. As a result of the Strategic Review, we will reconsider our approach to opening new space, where we open it, and seek to deliver greater range clarity by demographic across the Wellcome portfolio of retail brands.

“Ikea benefitted from a full year of operation by a fourth store opened in the last quarter of 2017, which cemented our leading position within the home furnishings market in Hong Kong. While we have faced some cost offsets with currency fluctuations on cost of goods and new startup costs, we are very confident about our underlying position for Ikea and its growth potential not only in Hong Kong but also in the other markets where we operate the franchise.

“We will also drive further innovation with a planned relaunch of e-commerce and building on the recent experience of a pop-up Christmas store in Hong Kong.

Revitalise Southeast Asia: “We have some serious problems in our food business that require radical solutions and actions. This will necessitate a fundamental re-engineering of our food offer and our customer proposition plus significant rationalisation of space and of our general merchandise offer, converting hypermarkets to large food format stores over time.

“In Southeast Asia our core issue rests within our Giant brand and particularly hypermarkets in Malaysia, Indonesia and Singapore. We have significantly underinvested in these hypermarkets in the past and they now need a course correction to reshape and resize our offering, to ensure it is fit for purpose to meet the demands of modern-day consumers and keep pace with the rising middle class.

“We have already begun the process of redesigning our proposition in fresh and grocery and we have pilot propositions already on the ground. Our Malaysian pilot is a redefined hypermarket where we have halved the general merchandise range size and achieved double-digit sales growth. We are also putting more emphasis on fresh food, investing in value on grocery and streamlining general merchandise and apparel to optimise our range and space by category. In another pilot conversion, general merchandise has been reduced by a third while fresh space has been increased by more than 70 per cent.

“While it remains very early days for the pilots being developed in each key market of Indonesia, Malaysia and Singapore, we have been encouraged by their early performance. The predominant challenges rest within mass-market hypermarkets and supermarkets where locations have been lacking in investment for years, or were simply built in the wrong place, or the competitive landscape has changed. These fundamental retail errors are now being addressed head on.

“Encouragingly, our upscale stores within these markets are showing signs of recovery as we raise operating standards of quality, freshness, availability and even hygiene. That said, the challenge that we face in right-sizing our food business in Southeast Asia is substantial and will take considerable time to achieve.

“Our Guardian Health and Beauty business remains a significant opportunity for us in Southeast Asia. Countries which were demonstrating trading difficulties a couple of years ago are beginning to grow, if not thrive, under new leadership and we will more aggressively invest in the expansion and format development of our health and beauty business in the region.”

Build capability: McLeod says the new management team has brought increased experience and capability “absolutely key” to the success of the work ahead.

“Embedding their knowledge and expertise right across the group is now the priority. With around 200 years of retail and consumer experience collectively across the leadership team we now have the ability to drive the considerable changes necessary to not only improve Dairy Farm’s performance, but to transform the business to a modern-day retailer focused on delivering what customers want, where and how they want it.”

The new team is supported by more than 30 new senior management appointments across the group, “adding further experience and energy to the transformation effort”.

Drive digital innovation: “Retail is seeing rapid change and Dairy Farm has been slow in responding to the pace of digital change. We have significantly underinvested in digital (people and technology) and as a result are behind the curve. Last year, we began to change this.”

Two new roles have been created: chief digital officer and chief technology officer, both people taking up their appointments in the last quarter of last year.

“They have already begun to review all our current ad-hoc programmes and initiatives, to reset and reshape our group approach to a badly needed IT infrastructure upgrade and accelerate our core SAP system rollout, as well as carrying out a review of our digital priorities within each business and region. We have made some improvements in developing our digital offer, with numerous initiatives and pilot schemes now in place, as well as developing partnerships with key Chinese technology companies. The reality, though, is that our digital capability is in its infancy; something we believe is vital that we change.”

Writedowns

Dairy Farm Group’s $453 million hit in last year’s results comprise a write down for goodwill associated with the Giant business across the region, along with impairing underperforming assets, booking onerous lease provisions relating to underperforming stores, writing off poor-quality stock, and incurring various business correction costs. McLeod said this allows the company to build for the future and draw a line under the weakness of the past.

Most of the $453 million comprised non-cash items, with the net cash impact estimated at less than $50 million.

However, this amount was partially offset by a gain from the exchange of Dairy Farm Group’s food business in the Philippines for a share in Robinsons Retail and the exit of its Giant hypermarket in Vietnam which was taken over by Auchan. An an impairment of goodwill was realised relating to Rose Pharmacy in the Philippines while taking full ownership of this business.

Elsewhere, there were gains on the sale of several food properties which the company did not consider strategic assets to own moving forward.

These positive factors reduced the overall impact of non-trading items to $332 million for the year.

Comments

Comment Manually

I have read and agree to the Terms and Conditions and Privacy Policy.

x

SUBSCRIBE
FREE NEWS BRIEFS Get breaking news delivered

Privacy Preference Center