Why Dairy Farm's Giant outlets may be knocked off by minimarts' appeal

Tight competition in Malaysia, Singapore.

According to CIMB, Dairy Farm's 1H performance was affected by weakness in Malaysia and Singapore. It noted that the company faces intense competition in Malaysia, where it predominately operates the hypermarket format under the Giant banner.

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Supermarkets/hypermarkets‟ sales remained on track as turnover grew 11.7% yoy. The premium banners (i.e. Cold Storage in Singapore and Hero in Indonesia) continued to do well in most markets. However, the mass-market performance had been patchy – solid in Hong Kong, but not in Malaysia and Singapore.

This has resulted in an 18.5% yoy drop in EBIT. Part of the sharp decline was also due the overstatement of supplier income in 1H12.

Over the past few years, there has been an explosion of outlets due to fierce expansion by local players. The local players, namely, 99 Speedmart, Mydin and EconSave, are mainly supermarket and minimart-operators.

Their outlets are similar to Indonesia‟s Alfamart and Indomaret that have virtually cornered the market, with a combined chain of some 8,000 neighbourhood minimarts across the archipelago.

In comparison, 99 Speedmart has around 450 outlets; Mydin has over 70; and EconSave has some 30. Dairy Farm operates 73 Cold Storage/Giant supermarkets in Malaysia.

What‟s more, there appears to be a global trend of waning appeal among consumers for hypermarkets over the past few years; while the prominence of minimarts has risen.

Although minimarts might not carry as much in terms of variety of products, consumers have found value in minimarts for their convenient top-up shopping (and implied lower traveling costs).

As a result, Giant Malaysia has experienced several years of weak like-for-like sales growth and seen its market positioning as a price-competitive,
mass-market grocery retailer eroded.

To regain its market share, Dairy Farm is investing in „margin points‟ to snare its customers back. With a new management team at the helm, Giant Malaysia is improving its offer to drive retail sales (i.e. more fresh products at competitive prices, re-align products whose prices have crept up over time and re-fresh general merchandise offers).

Consequently, sales have been responding but margins still need time to recover. Management opines that as demand-supply rebalance and retailers rationalise, margins could improve in 1-2 years.

Otherwise, management is cognisant of a tougher operating landscape; and that margins might not return to the more lucrative levels as enjoyed over the past years.

To complement its Giant hypermarkets, Dairy Farm has also opened its first two minimarts under the banner “G EKSPRES” in June. “G EKSPRES” is operated under a 50-50 JV with a local partner.

The JV has a license to open up to 500 outlets. Each outlet will have a maximum area of 500 sqm. We expect to see a ramp-up in minimart openings in the coming years.

That said, Dairy Farm remains focused on its hypermarket business, with the opening of three more hypermarkets in Malaysia since the start of the year. In Indonesia, the group added another four hypermarkets.