HONG KONG'S DAIRY FARM KEEPING ITS COOL

DAVID ORGEL

HONG KONG -- When China takes control of Hong Kong at midnight June 30, the world's food-retailing and manufacturing industries will join the rest of the planet in watching and tracking developments.

But few companies will be more interested than Dairy Farm, the giant food-retailing organization that manages its worldwide retail business from a base here. Dairy Farm runs some 40 retail operations in Asia, Australia, New Zealand and Europe. Its major stated goal is to be the leading food retailer and drug-store operator in the Asia-Pacific region. Its Hong Kong interests include supermarket and other retail ventures, as well as manufacturing and restaurant operations.

However, Dairy Farm isn't worried about the future of its business under Chinese rule and doesn't concur with concerns in some sectors that Hong Kong's economic growth will be hampered. That's the word from Chris Nelson, who has held top spots in Asia for the company for 12 years. He was acting group chief executive from last September until earlier this month.

In an interview with SN, Nelson, who was instrumental in the company's Asian expansion, outlined his views about how the handover of Hong Kong to China after 156 years of British rule might affect area business. He also spoke about growth prospects for the company and the region.

Nelson has long planned to return to the United Kingdom and is accomplishing that this summer. He becomes Dairy Farm's regional director of Europe and will remain on the board. He was succeeeded in the CEO role by Ronald Floto, the U.S. supermarket executive who has held top spots at Kmart, Kash n' Karry Food Stores and Jewel Cos.

"It will be business as usual," said Nelson about Hong Kong's transition of authority to China. "Every place changes over time incrementally, and Hong Kong will continue to do so. But there's no real concern."

Perhaps one of the most notable economic changes for Hong Kong is that numerous companies, including food manufacturers, are shifting their main area bases to China, taking advantage of improved business facilities there, Nelson noted. "What has happened is that the center of gravity is going to shift from Hong Kong to China," he said. "The major manufacturers, the multinationals, would have had a regional Hong Kong office to service China. In most cases, their China office is shifting to Beijing," he said.

Nelson stressed that manufacturers probably need to be building a brand presence in China, although for retailers the imperative is not yet as clear. "Retailers probably need to go in to get experience and understand that marketplace, but I don't think it's an absolute must to be there from day one."

For Dairy Farm's supermarket chain in Hong Kong, called Wellcome Supermarkets, the main challenge will be growth in a mature market. "We see marginal population growth in Hong Kong over the next few years," he said. "More people are coming in from China. Probably more competitors are coming into the marketplace. Carrefour is now in the market. More supermarket space developed by the developers is coming on, so that would continue to make it a competitive marketplace."

The Dairy Farm executive said his company's Asia strategy is bolstered by the growth expectations of the vast region. "There are probably about 80 million chain store consumers in Asia at the moment outside Japan and India, and we see that increasing to 120 million over the next three years. So there's tremendous growth in the number of people becoming consumers for the first time."

In addition to the Wellcome chain, Dairy Farm's Hong Kong businesses include 7-Eleven convenience stores and Mannings drug stores. Dairy Farm also holds 50% of Maxim's Caterers, Hong Kong's largest restaurant chain, and 49% of Nestle Dairy Farm, which manufactures ice cream and dairy products in China and Hong Kong.

Dairy Farm's global growth plans give the practice of micromarketing a new meaning. With operations in 13 highly diverse countries around the world, the company can't rely on cookie-cutter approaches.

"We have to focus on different formats for different markets," Nelson said. "We have in supermarkets everything from small 4,000-square-foot neighborhood stores to 50,000- to 60,000-square-foot stores, the latter in Australia and New Zealand."

Despite the cultural differences in developing countries, the common denominator is that nations new to consumer goods retailing can benefit from Dairy Farm's expertise.

"Global retailing can bring 20 to 30 years of experience," Nelson said. "In Asia there are suddenly consumers who want retailing. It could take local retailers 20 years to learn the tricks on their own. If those retailers had 20 years of experience, there would be no need for the global retailers to come in. Global retailing can bring that20experience in a package. And if you're a smart retailer you can learn the local nuances and give them what they want."

Dairy Farm's parent company, Dairy Farm International Holdings Ltd., is incorporated in Berumda. That company is part of Jardine Matheson Holdings, a multinational corporation also incorporated in Bermuda.

Assessing Dairy Farm's prospects by country, Nelson said the fastest current growth is in Malaysia and Singapore. He outlined Asian food-retailing growth potential in countries including the following:

TAIWAN: "This is a market that continues to grow but is very competitive as hypermarkets now come into the country."

THAILAND: "In my view there's too much retail space here at the moment. The country has 60 million people. Ahold just came in there. Carrefour and Macro are here. I think there's going to be a sort-out in the retail business."

MALAYSIA: "With 18 million people, there will be steady growth. But there's going to be a sort-out with some of the local players."

PHILIPPINES AND INDONESIA: "These are two countries with quite high potential, but they still don't allow foreign investment in retailing."