Dairy Farm

Asian retailer. Owns and runs supermarkets, hypermarkets, health and beauty, and convenience stores.

Slow but steady grower. Over the last five years, sales are up 48% and profits up 70%.

Business Model
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Use cashflow generated from existing operations to set up new retail stores. If it succeeds, keep growing. If it fails, sell off and try again.

Most stores are owned and operated. Stores usually rented through operating lease. Convenience stores may be franchised.

Expanded steadily over the years:



Not sure how many convenience stores are franchised and how many owned.

Balance Sheet:
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Their expansion has usually been through internally generated cashflow. Very conservatively financed: total borrowings almost always less than one years operating cashflow:
The debt above does not account for cash held - most years they were net cash.

Keep in mind their high fixed costs, esp. operating leases, below.

Competitive Advantage:
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For supermarkets/hypermarkets, they have a significant presence in HK, Malsysia, S'pore and Indonesia, but would not have pricing power (like Walmart in the US or Coles/Woolworths in Australia).

HK

• Largest supermarket operator with 276 stores. Closely matched by ParknShop (Hutchinson Wampoa) with approx 280 stores.
• Many other players: Yu Kee Food with 70 stores, DCH food mart with 60 stores, Jusco (AEON) with 10 stores.

M'sia

M'sia market more fragmented. DFI may be the largest, but have many competitors:

• DFI has 69 supermarkets, 58 hypermarkets.
• Carrefour: 22 hypermarkets, 5 supermarkets
• Jusco (AEON): 25 stores (09 AR)
  
• TheStore: 58 supermarkets, 5 hypermarkets
• Tesco: 34 stores, probably hypermarkets

S'pore
DFI is first or second largest (95 supermarkets, 7 hypermarkets) vying with NTUC (100 supermarkets) with a few competitors:

• Sheng Siong: 23 supermarkets and hypermarkets
• Carrefour: 2 hypermarkets

Taiwain:
Seem to be a smaller player, running smaller stores open 24hr. No hypermarkets.

• DFI has 299 supermarkets
• Carrefour: 64 hypermarkets
• Article: http://thelostswede.com/?p=33

Indonesia:
2nd largest, far behind Carrefour. This 07 report gives the 5 largest chains:

• Matahari: 53 foodmart, 11 hypermarts (for sale, Wallmart?)
  
• Carrefour: 66 hypermarkets, 14 supermarkets
• PT Hero, now owned by DFI: 113 supermarkets, 35 hypermarkets
• Alfa, now owned by carrefour: who may be forced to divest
• Superindi (Delhiaze): 66 stores

Cyclical
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How much of their gross margin (in 09: 2117m) is taken up by fixed costs?

• Employee costs: 627m (~ 29%)
• Operating lease: 515m (~ 25%)
• Depreciation and amortization: 147m (~ 7%)
• 423m PBT (~ 20%)
  
• The other 400m (~ 20%) don't know

First 3 items are fixed costs (~ 60% of gross margin). Any slowdown in sales could have a large impact and swing their profits into losses.

How did they fare in the 08 recession? (The recession started with 2Q08 being the first quarter of negative growth in SG and HK):

Topline: No slowdown in sales, and gross margins did not fall:

Bottom line. This time break up by segment:

Can see:

• Increasing operating profits throughout the recession.
• C-Stores profits dropped even after the recession. Mgt said this was due to China restrictions on selling tobacco.
  

But, sales and profits were helped by the opening of new stores. Trying to estimate on a per store basis for their different segments:

• Supermarkets/hypermarkets are combined, I'm taking one hypermarket to equal 4 supermarkets.
• Did not exclude stores opened less then a year - not available. Could skew the results lower for stores opened halfway through the year.

We get:
Due to seasonality, show the YoY % change (e.g.: compare 2H08 with 2H07):


We can see:

• SSS for H n B is unaffected by recession. However profit was.
  
• C-stores most affected: biggest plunge in SSS and profit on 2H08.
  
• Supermarket/Hypermarket are still affected, but by less. Seems not all goods they sell are non-discretionary.
  

Comparing with the Operating Profit chart, we can see that even though sales/profits dropped on a per store basis during the recession, they were opened enough new stores to increase the overall numbers.