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Sheng Siong will need bigger footprint to fend off fresh competition

JUDGING from the headlines - and the flood of orders - the launch of Amazon Prime Now was probably one of the most eagerly anticipated events last week. But with the US retail giant joining the fray, will this spell bad news for local supermarket chain Sheng Siong?

Amazon opened its (digital) doors on July 27 to much fanfare, offering an initial collection of 20,000 items and a promise to deliver in two hours. In comparison, the average supermarket stocks about 50,000 items, market watchers say. Amazon also struggled initially with teething problems, and was forced to stop taking orders on the first and second days of launch as it was overwhelmed by demand.

The high margins of the supermarket business in Singapore have no doubt attracted competitors such as Amazon, notes Smartkarma Insight Provider Viki W.K. Li. Singapore is also seen as the gateway to the potential growth of the Asean market.

"Returns of supermarkets/hypermarkets in Hong Kong and Singapore are extraordinarily high as both markets have operated in comfortable oligopolies," says Ms Li in a recent report, adding that both markets are ripe for disruption. In comparison, stiff competition in other markets such as the US has already led to thinner margins.

For the near term, Sheng Siong is likely to be safe, say DBS Group Research analysts Alfie Yeo and Andy Sim, given that the online grocery retail market is small at less than 2 per cent of grocery retail sales.

"Sheng Siong's target customers are not the tech-savvy millennials who are open to buying from online channels," Mr Yeo and Mr Sim added, noting that Sheng Siong could eventually become an attractive takeover target for online retailers.

Some industry watchers expect e-grocers such as RedMart and honestbee to be the ones to bear the brunt from Amazon's entry. When compared to grocers with physical stores, Amazon's prices are more in line with Cold Storage than Sheng Siong, UOB Kay Hian analysts Nicholas Leow and Andrew Chow point out.

However, this doesn't mean that brick-and-mortar retailers would escape completely unscathed. As the third-largest player here, Sheng Siong could come under margin pressure if heavyweights such as NTUC FairPrice and Dairy Farm - which operates Cold Storage and Giant - decide to slash prices.

"We think the online threat is real, and note that Sheng Siong has not invested much to build up its own online delivery infrastructure," says CIMB analyst Jonathan Seow. "While it is too early to say, we think traditional retailers could embark on a price war as part of a market share protection strategy."

Still, the group appears to be focusing on its competitive edge of fresh products to retain customers, as opposed to expanding in the e-commerce space for now, say analysts. Sheng Siong's online sales account for under one per cent of its total sales.

For the second quarter, the supermarket chain posted a 6.1 per cent year-on-year rise in net profit to S$16.1 million on the back of higher revenue and improved margins. Revenue rose 6.8 per cent to S$201.52 million, driven by contributions from new stores and same store sales growth as consumer sentiment improved. Margins hit a high of 26.6 per cent, up from 26.1 per cent, on the back of lower input costs, higher level of supplier rebates and a better fresh food mix.

Limited margin upside

But there are challenges to overcome. The upside to gross margin expansion may now be limited since its existing distribution centre is running close to full capacity and an upcoming extension would only bump up capacity by 10 per cent, reckons RHB analyst Juliana Cai.

Meanwhile, Sheng Siong is closing two big stores in the second and third quarters - one at The Verge and one in Woodlands - and did not open any new stores in the first half of the year.

But it does plan to open two smaller stores spanning a total of 16,000 square feet in the second half and a store in Kunming, China will open in September. If it is successful in Kunming, this could pave the way for a bigger footprint in China and an alternate source of revenue.

Given the pipeline of about a dozen new supermarket units up for bid in the coming months, Sheng Siong does have room to grow in Singapore but it will need to be careful not to eat into sales by opening too close to existing stores. Here, there is scope to open new stores in areas such as Serangoon, Hougang and Sengkang, where the group has a smaller presence, analysts say.

And with the threat of a potential price war looming, Sheng Siong would need these new stores if it wants to keep growth buoyant in the near-term.