Retail Staples - RHB Invest 2017-08-02: Clash Of The Titans

Retail Staples - RHB Invest 2017-08-02: Clash Of The Titans SHENG SIONG GROUP LTD OV8.SI DAIRY FARM INT'L HOLDINGS LTD D01.SI Amazon Prime Now

Retail Staples - Clash Of The Titans

  • Competition is brewing in the Singapore grocery retailing scene. 
  • Last week, Amazon finally landed in Singapore, launching its Prime Now express delivery service via its mobile app. With a lower minimum spend to enjoy free delivery, we believe Amazon could bring a new wave of disruption to existing players by encouraging consumers to switch to online shopping. 
  • But is it all doom and gloom for the existing brick-and- mortar chain supermarket operators? We do not think so. In fact, we think they can have an edge over the competition should they put in more concerted effort to embrace changes.

Amazon is now competing in Singapore. 

  • Amazon.com Inc (Amazon) (AMZN US, NR) launched its Prime Now express delivery services in Singapore last Wednesday via its mobile app. Its product range includes beauty products, books, electronics, stationeries and toys but focuses on groceries. 
  • Amongst the online grocery platforms, we note that Amazon currently offers the lowest minimum spend to enjoy free delivery. A comparison done by tech blog Vulcan Post further shows that the prices on Amazon are the lowest compared to e- grocery incumbents – RedMart and honestbee.

The threat from Amazon. 

  • At the moment, we think the impact on the grocery retailers under our coverage – Dairy Farm and Sheng Siong – is not significant. 
  • Currently, Singapore’s online grocery market share stands at a mere 1.2%. On top of that, product assortments available on Amazon especially fresh produce are still limited. However, this is still early days for Amazon. We think the outsized media hype, faster and cheaper delivery services would likely convert shoppers online over time.

Maintain OVERWEIGHT on the Singapore grocery retail sector as it is not all doom and gloom for supermarket chain operators. 

  • In the short run, fresh produce still remains the key selling point of the brick-and-mortar supermarkets as consumers still prefer to see and touch these items before purchasing.
  • Our Top Pick for the sector is Dairy Farm. It just built its fresh distribution centre (DC) in Singapore last year and is set to open a DC in Philippines and another in Malaysia this year. We believe the wide array of fresh offerings would increase margins for the group and raise its resiliency against e-commerce. 
  • In our previous note Dairy Farm : Of Fresh And Beauty (16 Jun 2017), we highlighted that the group has been building its corporate brands products. Dairy Farm’s corporate brands owned more than 10,000 stock keeping units (SKUs). In 2016, Dairy Farm’s corporate brands achieved double-digit growth while its penetration rate grew by 0.2ppts. Management aims to increase its corporate brands penetration to 20% in the future from less than 10% currently. By investing in good-quality corporate brands, Dairy Farm is able to have an edge to differentiate itself against other players and give consumers added reasons to visit Dairy Farm’s outlets or online stores.
  • We recently downgraded Sheng Siong to NEUTRAL due to a limited upside in gross margin expansion and a recent cut in its dividend payout ratio. However, we believe that Sheng Siong with a high proportion of sales (44%) and driven by fresh food would be relatively more resilient against the online competition. (See report: Sheng Siong - Lower Dividend Payout Is Disappointing)

Looking at the longer term, we believe the future of retail lies in omnichannelisation. 

  • On this note, we still think that supermarkets are in good stead to defend their market share. In the US and China, both Amazon and Alibaba have gone into brick-and-mortar to improve consumer experience. Hence, we think that chain supermarket operators with storefronts across Singapore could actually create a more dynamic shopping experience for consumers. 
  • Today, both Dairy Farm (giantonline.com.sg, coldstorage.com.sg) and Sheng Siong (allforyou.sg) have their own e-grocery platforms. We think that their physical outlets could serve as mini-fulfilment hubs to hasten delivery timing or serve as click-and-collect locations. 
  • Ultimately, chain supermarkets could still lead when it comes to integrating online and offline services, thereby providing a holistic shopping experience, if they choose to put in the effort to do so.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-02
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.05 Same 1.05
BUY Maintain BUY 10.000 Same 10.000