Businesses selling “basic” stuff are supposed to thrive in today’s weird reality.
We always need household items like paper towels, washing detergents, toothpaste, baby powder and shampoo…Not to forget, food.
But the Hong running this Hong Kong giant retailer is sweating to profitably sell these basic stuff.
Dairy Farm International (SGX: D01), or DFI is a USD5.6 billion giant retailer, with a huge brick-and-mortar presence in Asia.
Cold Storage, Giant, 7-Eleven and Guardian. Yep, DFI runs all of them in Singapore.
In Hong Kong, DFI operates Wellcome and Mannings.
Today, it has over 10,000 outlets and employs more than 200,000 staff.
With its massive size, DFI’s sales hit around US$11 billion every year across its grocery, food and beauty and wellness segments.
Yet the market hates this company.
DFI’s shares suffered a 58% correction to USD4.41 per share, about two years ago.
Source: Yahoo! Finance
You could say DFI was one unlucky bird.
First, it was hit by Hong Kong’s political unrest, shutting down many of its retail stores. Then, the Covid-19 outbreak dragged its slowing business further down into the mud.
At first glance, the company may seem to fail at lowering its high operating costs.
Even with its strong sales, DFI’s net earnings have dropped from USD510 million to USD324 million just over the last five years. Its net profit margins averaged a dangerously low 3%, over the same period.
In contrast, even Sheng Siong, a much smaller retailer, makes around 6% to 8% net profit margins.
But that’s not the full story.
Dairy Farm’s Growth Has Problems
The fact is, there’s a huge problem DFI is truly struggling with. And that spells out a much bigger and darker issue. Especially if we, as long-term investors don’t realize it.
In short: DFI simply doesn’t understand its own customers.
Let me give you a concrete example.
According to the Straits Times in 2013, DFI rebranded all of its 57 Shop ‘N’ Save to Giant to focus on “mid-market” customers. The re-branding strategy is “part of a company’s plans to create better brand focus and maximise efficiency and sustainability”.
Sadly, that didn’t work out.
Then, DFI actively pushed for hypermarkets in Singapore. But you see, people here never exactly liked hypermarkets.
Remember Carrefour? The second biggest retailer in the world, shut its doors in 2012 here.
Today, there’s only five Giant hypermarkets left in Singapore. The most recent closure was Giant’s Vivocity outlet in 2019.
Here’s the thing. It’s so easy to buy your daily necessities in Singapore and Hong Kong. These days, supermarkets and shops are just about walking distance from your house.
As far as I know, hypermarkets like Carrefour serve people better when the location is less accessible. That’s why Costco and Walmart, with their strong distribution network could do so well in huge places like the US.
Even DFI’s Group Chief Executive admits it.
He wrote back in 2019: ‘‘having used stronger consumer insights and intelligence to analyze our customer offering and product selection, we have decided no longer to build Hypermarkets… it is clear that this format has struggled to deliver effective returns…”
When it comes to investing, we want to buy capital-efficient businesses. This means the company must have a high return on invested capital (ROIC).
ROIC is simply a measure of a company’s profitability.
DFI’s ROIC sank from 42% to 6.5% over the past nine years.
Even then, its e-commerce initiatives to turnaround the company were slow.
Watson Singapore, one of its closest peers, already has a mobile app which actively pushes promotions to its customers. Meanwhile, DFI only relaunched its e-commerce platform in early 2020.
There will be some time for DFI online platforms to gain traction.
The No.1 Question for Income Investors Today — Is Dairy Farm’s Dividends Worth It?
The only bright spot left for investors is DFI’s ample dividend payouts.
So far, DFI paid dividends of around USD0.22 per share, on average, over the last nine years.
Source: Company’s Annual Report
Then again, this is a business struggling to manage its high costs, has suffered poor profitability and doesn’t seem to know its customers well. In my opinion, I fear whether its dividends are even sustainable.
While DFI’s shares are stuck at the bargain level, its 4.8% dividend yield might seem attractive for yield-seeking investors.
But, in my opinion, in a highly competitive retail market, its business situation is not going to improve anytime soon.
For now, as a long-term investor growing my wealth, I wouldn’t put my money with DFI.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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