• Competitive grocery category
• Online players looking at adding retail stores too
• Fresh business has room to expand

Keen Competition in the Local Grocery Scene

When Amazon confirmed its entrance into Singapore with a grocery segment among other offerings, this inevitably caused further concerns for retailers here, including Sheng Siong Group (SSG). Before Amazon, the supermarkets scene already had prominent online player Redmart, as well as several new online and offline entrants, some smaller in size, while other independent players target sub-segments.

Blurring the Lines Between Online and Offline Formats

While we believe the traditional brick and mortar model for supermarkets is relatively stable for now, having an online platform is an increasingly important avenue for growth ahead. The major supermarket players (SSG, NTUC, Cold Storage) have some form of an online platform but are likely facing challenges given the complexity and differences in supply chain requirements for a traditional model vs. an online model. Several factors including the technology, assortment analysis and order fulfillment rates have to be robust for grocery e-commerce.

We understand that management acknowledges the competition but also the need to optimize their system first, otherwise they risk facing margin erosion and may not be able to achieve desired ROI on automation investments fast enough. On the other hand, e-commerce players are considering the addition of retail stores to complement them, such as Amazon’s latest acquisition of Whole Foods Market. In this aspect, we recall that a Bloomberg article last year reported that Redmart was seeking a buyer and had approached NTUC as well.

Focusing on Fresh and Cost Management

Meanwhile, the fresh produce space is still an advantage for traditional players and SSG’s planned warehouse extension will be providing more cold storage space. In addition, the group has a variable cost structure and continues to look at reducing costs through various ways like automation for efficiency and lowering dependency on manpower, increased direct sourcing and bulk handling to lower input costs.

Notwithstanding the risks of price wars in the grocery category, and keeping in mind existing opportunities for new stores, we have a BUY on the stock with fair value of S$1.04.

Source: OCBC Research - 7 Sept 2017