Posted on 29 Mar 2019
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The setting of the AGM...
I just attended Sheng Siong’s AGM this morning! This one of the most unique AGMs I had attended so far, for a couple of reasons.
Firstly, unlike most other AGMs, this one was held at Sheng Siong’s own premises, in what seems like one of their conference rooms. The size of the entire room was actually quite small, as compared to other AGMs, with much fewer people attending this one (about 50 pax).
Next, the Q&A, which was actually just one question, was done in Mandarin, which really took me by surprise. I managed to roughly understand what management was talking about, though my mandarin really leaves much to be desired.
Lastly, the AGM actually had a mini-buffet counter at the end, unlike all the other AGMs I had attended which did not have buffets at all. Although this was a nice touch for the attendees, the “buffet” was really just a spread of pastry from Polar.
Some background about Sheng Siong…
Source: Singapore Business Review
Sheng Siong is one of the largest retailers here, with 54 stores located over the island. The stores both focus on “wet” and “dry” shopping options, with a wide variety of groceries and household items available for us. They have also developed their own selection of products, which currently has 1,200 products under 18 house brands.
As some of you might know, they also started their online shopping platform and delivery services to compete with the e-commerce space, which is quite convenient as well. They also have their own centralised warehousing and distribution centre in Mandai, which was where this AGM was held.
Sheng Siong’s Financial Results
Source: Sheng Siong Group Ltd Annual Report 2018
Management had mentioned that the retail environment in Singapore for 2018 was tough, which was a point cited by other retail businesses as well that I had covered. Regardless, revenue still increased by 7.4% to 891m that year. This was driven mostly by the opening of 10 new stores in Singapore, and with some small increase in revenue from same store sales. Management did mention that this growth was dampened by increasing e-commerce competition and the closing of 2 stores in 2017.
As I had mentioned in a previous post, I do believe that the opening of new stores can’t always be a source of revenue growth locally. As of date, with 54 stores locally, I believe that the grocery market in Singapore is already quite saturated, and that future growth will be quite limited due to the strong competition and lack of population growth.
Source: Inside Retail Asia
Additionally, Sheng Siong is also more popular among the older generation, but as their population bracket shrinks over the next few decades, Sheng Siong’s competitive advantage of being a “dry” and “wet” market may become weaker. Management also had the foresight to recognise this, which is why they have expanded into China as well.
Costs and Expenses
Source: Sheng Siong Group Ltd Annual Report 2018
Overall, costs and expenses have increased from 2017 to 2018. This was mainly driven by the increase in operating expenses from the opening of new stores. For example, admin expenses increased by $16.1mn due to higher staff costs, rent, depreciation and utilities. However, cost of sales as a percentage of sales had decreased, mainly from better rebates, strong efficiency in the central distribution and better buying prices.The increase in costs from simply opening new stores as you can see, is actually quite high.
As management had mentioned, revenue usually takes quite a while to be reaped after the opening of new stores. This means that there will be significant costs outlay, such as capital expenditures on grocery shelves, equipment, staff costs and rent before the new stores start to generate revenue properly. (more on this later)
Strategy and Outlook for 2019
Opening of New Outlets
Management is aiming to open new outlets in untapped markets in Singapore, especially in areas that are new or redeveloping as they are looking for more exposure to the millennial segment.
Source: Time Out
As mentioned earlier, I don’t think this can’t be a very sustainable move because of saturation of the local market. Targeting the millennial market is probably the right move, since this population segment is starting to settle down and have their own families, and so the demand from this age group would increase over time. However, I do feel that Sheng Siong thus far has not done enough to reach this segment, based on my own consumer experience as a millennial. For Sheng Siong, their marketing strategy would need to be revolutionised since much of their efforts have been through offline marketing and targeted at older customer segments.
Developing E-Commerce Segment
Management wants to focus on their “All For You” online grocery segment as well. I believe that this should be one of their key strategies moving forward. Apart from targeting millennials and making it a lot more convenient for customers, there are a lot of costs and efficiencies that might be able to benefit from this move.
Firstly, I believe that this strategy as a form of customer acquisition, incurs less fixed costs and upfront costs than opening new stores. Such deliveries can already tap on existing stores and distribution centres, therefore, I think that acquiring customers through this manner would be more profitable. Secondly, as the number of deliveries increase, the costs to perform each delivery would reduce as well, due to economies of scale. For example, one trip by the delivery man can cover multiple deliveries, which reduces cost per delivery.
Source: The Straits Times
Management believes that more automation can be carried out. The most obvious example is the self check-out system when we pay for our items. There will also be some automation done in the warehouse also. This is an important strategy to consider, as management has mentioned that labour costs and issues have troubled the company before.
Additionally, over the decade, many of their staff will retire, and labour shortages might become a more acute problem. However, I do believe that with tightening foreign worker levy and quota, this should be an urgent issue that management needs to address.
Overall, I do believe that Sheng Siong’s financials look good so far, especially with strong growth in 2018 despite tougher retail challenges in Singapore. However, I am more concerned with their growth strategy in the future, especially with how topline can be maintained.
2 more comments
26 Apr 2019
Thanks for writing this up! Loved reading the details that you put in here with your own thoughts as well. I think Sheng Shiong is not very popular with the younger generation because it's generally not known to be "clean". When I go to the wet market at my hdb downstairs, I hardly see any young people my age if at all. Most in their 30s-40s seem to prefer shopping at fairprice, more pleasant experience maybe? I remember when I accompanied my parents to grocery shop, I disliked Sheng Shiong, I always felt a bit dirty and gross coming out after, and the arrangement and cleanliness of food produce seems to be haphazardly put out there which lowers quality perception. I'd rather go to an actual wet market and get the fresh stuff, and then go fairprice for the rest. My neighborhood has Ang Moh supermarket too which is a nicer experience than Sheng Shiong but priced cheaper than NTUC, probably comparable to Sheng Shiong. Not to mention that there are the ABC shops, which stock a ton of cheap imports at much lower prices for dry goods. For e.g. I buy my milo at $3.95 for the 3 in 1 packs, compared to ntuc's $5.95.
28 Apr 2019
Thanks Jacinda for your kind words! Yes I agree in the long run that how they evolve has to change. In the mean time, their business model seems defensible, and I suppose a lot of the focus for management has been keeping costs low as well, which is probably how profitability of the business can still improve over time.
Though i feel Sheng Siong is a good company but it is not scalable. It is difficult for them to open up a new store. How many more stores can they open in Singapore?
And for me i do not feel there is any moat in sheng siong compare to NTUC. I will go to any one of the which is the nearest to me.
Their financials are good.
But the only thing that stops me from investing is their growth. Think a...
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