"The second half of 2000 will remain difficult for Dairy Farm as it maintains its price position in the continuing price war in Hong Kong and as it invests in improved systems and stores at Franklins. This investment strategy is necessary to secure the longer-term performance of the Group and achieve its goal of becoming the leading food and drugstore retailer in the Asia-Pacific Region."
Simon Keswick, Chairman
PERFORMANCE
Dairy Farm International Holdings Limited today announced that the Group's performance in the first half of 2000 has been dominated by difficult operating conditions in its two largest businesses. In Hong Kong, the food retail industry has been engaged in a deep and prolonged price war and, in Australia, Franklins has experienced a decline in sales at a time when the company is investing in repositioning its business.
As a consequence, despite good performances from the Group's other businesses, Dairy Farm made a loss after tax of US$51 million in the first six months. The directors believe that it is in shareholders' interests to maintain the Group's capital investment programme and have therefore decided not to declare an interim dividend. The desirability of the payment of a dividend at the year-end will be reviewed in the light of results in the second half and the prospects for 2001.
OPERATIONS
Turning to the operations, the Chairman, Simon Keswick, said that Wellcome Hong Kong's operations have been heavily impacted by the price war which began in August 1999 and has continued into 2000. Wellcome has responded vigorously to this aggressive competition, and its overall market share has been maintained. Whilst there are some positive signs, with margins rising gradually since Chinese New Year, price erosion in Hong Kong remains a significant factor. The course of the price war is unpredictable, and its effects will continue to be felt into 2001. In the medium term there will be continued pressure on margins and expenses, together with sluggish sales growth, due to the expansion of food retail space over recent years.
Franklins' strategy since 1996 has been to upgrade its €˜fresh' food offering whilst maintaining its traditional discount appeal. Repositioning the brand in the competitive Australian market has proved a demanding task, and an increase in the competitive activity has put sales under pressure in the first half. Franklins is targeting the rebuilding of sales through the continuation of its €˜fresh' strategy and the introduction of improved supply chain systems. In parallel, the cost base is being managed through the centralisation of back office functions, improved shrink control and store level labour productivity enhancements. Whilst these initiatives will deliver benefit, the financial performance of Franklins is not expected to reach acceptable levels before 2002.
Dairy Farm's other businesses are performing at or above expectations. The first half performance from supermarkets in Southeast Asia has been excellent. Of particular significance has been the successful integration of last year's acquisitions of the Giant chain in Malaysia and the Tops stores in Singapore. In New Zealand, Woolworths' results improved compared to the first half of 1999, and the restaurant joint venture, Maxim's, produced a strong performance as its Hong Kong market recovered. The Mannings and Guardian drugstore businesses also continued to do well.
Dairy Farm's e-commerce initiatives are progressing on a number of fronts. The Group continues to enhance its internet-based direct delivery business in Hong Kong, New Zealand and Singapore, and is also leveraging its network by introducing e-commerce-related initiatives into its 7-Eleven convenience store chain.
OUTLOOK
In conclusion, Simon Keswick said, "The second half of 2000 will remain difficult for Dairy Farm as it maintains its price position in the continuing price war in Hong Kong and as it invests in improved systems and stores at Franklins. This investment strategy is necessary to secure the longer-term performance of the Group and achieve its goal of becoming the leading food and drugstore retailer in the Asia-Pacific Region."