How can Sheng Siong keep up with Amazon?

Fresh produce remains an advantage for traditional groceries.

Sheng Siong faces an increasingly challenging landscape after the entry of Amazon into Singapore.

According to OCBC Investment Research, even before Amazon, the supermarkets scene already has Redmart, along with new online and offline entrants. Some are smaller, whilst some target retail sub-segments.

OCBC lead analyst Jodie Foo said, "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."

Major supermarket players such as SSG, NTUC, and Cold Storage are facing difficulties in uniting supply chain requirements for their traditional model against the online model.

Factors such as technology, assortment analysis, and order fulfillment rates have to be maintained for grocery e-commerce.

The firm recommended that the traditional firms optimise online systems first. Otherwise, it may spell margin erosion and failure to quickly meet their desired ROI on their automation investments.

Here's more from OCBC:

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.

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 a fair value of S$1.04.