Wednesday, September 4, 2013

Sheng Siong : After a period of consolidation, focus back on network expansion (CS)

Singapore Discovery Series:
Sheng Siong Group
After a period of consolidation, focus back on network expansion

● We met with Sheng Siong's management who provided an operational and strategic update on the company. Sheng Siong is the third biggest grocery supermarket chain in Singapore with 33 stores, with main focus on heartland areas around HDB hubs.

● The Group believes its focus on heartland areas and a superior wet groceries is a strategic advantage. To increase margins, the group intends to focus on increasing contribution of high margin wet groceries (30% of sales) and inhouse brands (5% of revenues).

● While the company noted that the Singapore retail business has been free from any sustained price wars, it believes that the key risks to its growth and margins are from any change in demographic trends, rental costs and the difficulty it sees in maintaining labour quality and costs.

● The group targets high single-digit revenue growth over the next two years. It highlighted that its three key medium-term growth drivers are; 1) Target expansion to 50 locations to increase penetration in the next 2-3 years, 2) Build a superior e-commerce platform as a key differentiator and 3) Expand into Malaysia.

Heartland retailer focusing on the growing middle class
Sheng Siong Supermarket, “born and bred” in Singapore, was founded in 1985. Singapore's retail grocery market segment is dominated by three main players – NTUC Fairprice (roughly 120 supermarkets), Dairy Farm (roughly 80 supermarkets – 40 Cold Storage and 40 Giant) and Sheng Siong (33 supermarkets). Sheng Siong targets the growing middle class segment with almost all of its stores located in HDB hubs providing both wet and dry grocery options. After expanding its number of stores aggressively to 33, Sheng Siong has been focusing primarily on consolidating its brand and improving its efficiency since 2011.

Wet groceries and inhouse brands provide high margin growth and increase heartland penetration
Out of Sheng Siong's total revenues by category, 30% are from wet groceries, according to the company. By brands, house brands make up only 5% of total sales. Compared with the group gross margin of 22%, both wet groceries and inhouse brands earn much higher margins, according to the company. Wet groceries remain a key focus of the group – it is increasing capabilities and product range by focusing on its sourcing and supply chain efficiencies. Management believes that a better wet grocery product offering will help Sheng Siong differentiate itself versus competitors, which it believes could be a key leverage in the heartlands.

Demographics, growth and rentals key risks to business
The company has identified the following risks to its business:
1) A slowdown in population growth, income levels or lifestyle changes could be a key risk to grocery spending growth medium term.
2) While competition remains tight, the three key players continue to co-exist without any major price wars and focus on their specific target segments. But management believes that a slowdown in overall spending growth could increase pricing pressure and impact margins.
3) Management highlighted that Sheng Siong leases almost all of its retail spaces. While rental growth is visibly slowing, there is an increasing trend towards owning retail spaces, which could impact the company's asset light strategy.
4) Labour shortage is becoming a risk with 20-30% of employees being non-citizens, according to the company. It noted that tighter immigration could increase staff costs.

Network expansion, increasing market share and e-commerce to provide growth opportunities
Apart from increasing the mix of wet and inhouse products, the group intends to focus on three key areas to drive medium-term growth:
1) Expand the network to 50 locations. With the underpenetrated locations already identified, the group intends to reach its target in the next two to three years, which also helps in improving efficiency.
2) Management believes that e-commerce could be a key differentiator in driving medium-term growth. With lifestyle changes and increasing connectivity, it believes a superior e-commerce offering could be key to sustainable medium-term growth.
3) To drive the next leg of growth, the group also intends to expand into Malaysia over a five-year time frame, where it already has a decent brand recognition, but margins could be lower than Singapore.

Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date:03/09/13

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