Redmart

Redmart is a Singapore-based online grocery store that was founded in November 2011. Its strategy is to operate its own logistics and warehouses to deliver groceries to customers.

It’s recently featured in Tech In Asia (see this link) and here’s the reported revenue figures:

USD 2013 2014 2015
Revenue 1.5m 9.6m 27m
Growth %   540% 181%

In 2015, it reported net loss of 70m, out of which over 70% of that figure was non-cash losses. As such, its operating loss for 2015 was USD 21m with operating loss margin of 78%, which was maintained from 2014. The Company expects to be self-sustainable by mid-2017.

Breakeven Point

Let’s do some analysis to estimate when it can achieve breakeven point (zero operating profit/loss). We need a peer for this analysis, and Sheng Siong comes handy with all its public financial statements. Sheng Siong runs brick-and-mortar supermarket, different from Redmart’s online store, but some of the costs and margins can be used for comparison.

Sheng Siong made SGD $764m revenue in FY15 (20x Redmart’s) with gross profit margin of 24.7% (similar gross margin to Walmart’s). In FY15, Sheng Siong also achieved the highest net margin in years with 7.4% and net profit of 57m.  If we look at its FY15 annual report, we’ll see that the employment expense was nearly 99.4m, or 13% of revenue. Operating lease expense was only 21m or 2.75% of revenue.

Sheng Siong - Financials 10Y - FY15

Sheng Siong - Profitability 10Y - FY15

Source: morningstar.com

Let’s use the most optimistic case for Redmart. We assume that Redmart achieved the same gross margin as Sheng Siong at 24.7%. That means with USD 27m revenue, its gross profit was 6.7m, and the total operating cost was 21m + 6.7m = 27.7m. Next, we assume that current operating capacity, such as warehousing, truck delivery, manpower, is underutilized. These resources have been invested in advance and will run at full capacity when Redmart reaches breakeven point. In other words, these costs will stay flat while the revenue is growing until the breakeven point.

With gross margin of 24.7% and operating costs of 27.7m, the estimated revenue for breakeven point in most optimistic case is 27.7/24.7% = USD 112m. That revenue estimate is 4.15x of 2015’s revenue. Based on last year’s revenue growth rate of 181%, Redmart will need about 2.5 years to achieve 112m revenue.

However, the optimistic case is clearly not rational. Redmart can invest in warehousing in advance, but it cannot and will not do so for its logistics and manpower. To avoid excessive losses from the underutilization, Truck delivery and manpower are likely to be invested as the revenue scales up. Warehousing too, I believe, will have to be invested when the current revenue triples or quadruples. Therefore, the operating costs will definitely increase along with the rising revenue.

Redmart’s gross margin is also not likely to be as high as Sheng Siong’s. Sheng Siong’s gross margin actually grew from 20% in 2008 to 24.7% in 2015. So, as it scales up, Sheng Siong manages to get the products from the suppliers at better price or has a better product mix and sells more of higher margin products. Unless Redmart focuses more on higher margin products, its gross margin will be lower than Sheng Siong’s.

As Redmart scales up, its customer acquisition costs and advertising costs as percentage of revenue could drop. This is its potential cost cutting to improve margin. However, Redmart can’t remove these costs completely as it relies on online advertising for promotion and to bring in new customers.

Therefore, with 1) lower gross margin, and 2) major operating costs that will scale up with rising revenue, we should expect Redmart to continue reporting losses for probably several years down the road even when current revenue quadruples or quintuples.

Demand

Let’s segment the customers to see who will or will not use Redmart’s service.

  1. Cost sensitive customers: this group will always find the cheaper groceries to save money. It’s hard for Redmart to sell the products cheaper than its established peers because they have much larger scale, and their existing margins, such as Sheng Siong’s, are not high. I have heard from several friends who said Redmart’s products are not cheap. This group is not likely to use Redmart’s service.
  2. Membership: this group signs up membership with some supermarkets or hold credit cards that give additional discounts. NTUC Fairprice and Sheng Siong, for example, give additional 5% discount for their members or certain credit card holders. Redmart may occasionally work with some credit card companies for such promotion, but it’s not long term promotion. This group is not likely to use Redmart’s service.
  3. Staying very near to grocery stores: this group can shop conveniently in nearby supermarkets/convenience stores/mini mart and don’t mind shopping. In densely populated area in Singapore, we can often find nearby supermarkets. Majority of this group is not likely to use Redmart’s service.
  4. No one at home: this group has no one at home to receive the grocery delivery (I’m one example). Many young Singaporean family (those without maids) have no one at home during the day time.
  5. Having maid to shop: the family have maids to do the grocery shopping. They may prefer to continue doing so. However, some may prefer to use Redmart so that the maids can’t go out.
  6. Staying far from supermarkets: this is good target customers for Redmart.
  7. Preference for convenience (and stay at home often): this is the best target customers for Redmart. Online order also allows them to track the expenses easily and the order details are provided in emails.

If we remove the customers from group 1 to 4, the market size that Redmart is serving becomes much smaller. For Redmart to compete, they must find a niche and excel in it. They can’t fight heads on with the existing retail players to win customers from group 1 to 4 above.

Competition

In today’s world, you will never be able to do a business without competitors. Several online grocery stores, such as Honestbee, PurelyFresh and GoFresh, have sprung up to compete. Honestbee, for example, received millions of funding and operate without having warehouses and trucks. Existing supermarkets, such as NTUC Fairprice, Cold Storage, have also entered e-commerce space some time ago.

Redmart might be the first player to make it big in online grocery in Singapore, but there is really no clear additional advantage like first mover or network effect. Customers can always switch between the online sites without incurring any costs at all. Being the largest in Singapore does not mean anything if it’s to start operating in Kuala Lumpur. The size matters only in the local market that it operates in, not on regional or global basis.

When Redmart is running at full capacity, it will have to invest in additional warehousing and logistics to earn additional revenue. Hence, it’s not easy to scale. If it’s to expand to other cities in South East Asia (SEA), it will have to handle logistics differently because different countries have different infrastructure and culture.

Online grocery is not a new business model to disrupt the traditional grocery market today. In late 90s, there is a company in US, called Webvan, that did what Redmart is doing. Webvan even went listed in 1999 and was valued at more than $4.8 billion. But it went bankrupt in 2001 as it ran out of cash.

All is not negative though. There are many other online grocery stores around the world, some of which have been operating for many years, presumably with profits.

Cost Structure

Grocery is a low margin business. If we compare the cost structure of online grocery store with traditional grocery store, the first item to compare is rental vs delivery cost.  Online store saves the rental by operating in a big warehouse with lower rent, while retail store pays higher rent to get strategic location in crowded area.

Online store incurs much higher transport costs to deliver goods to customers, while large retail store doesn’t have this kind of costs, except for distributing goods from their own warehouse (distribution centre) to retail stores. In some cases, suppliers distribute directly to the retail outlets. Deliveries to customers also possess additional challenges, such as bad traffic, bad weather, risks of accident, late deliveries, customers not at home, wrong items picked, etc.

Sheng Siong’s operating lease expense in FY15 was 21m or just 2.75% of revenue compared to labor cost of 99.3m or 13% of revenue. If Redmart is to achieve Sheng Siong’s operating margin, assuming all else equal, then its delivery cost has to be around 3% of its revenue. This is very difficult to achieve considering that the overall costs of operating motor vehicles are very high in Singapore.

In terms of labor costs, Redmart will need many more delivery drivers than traditional grocery stores. It does not need cashiers but will still need labors to pick and pack the online orders. So, the role of cashiers are converted to pickers for online grocery stores. When operating near full capacity, you can expect the pickers to be constantly working to fill up orders. Cashiers, on the other hand, may have less to do, especially during non-peak period. Redmart will have to execute very efficiently to lower its labor costs.

In order for Redmart to generate competitive margins compared to Sheng Siong’s, Redmart has to operate very efficiently and utilize its labor resources and truck deliveries at near full capacity. It’s a matter of excellent execution to create value for the shareholders.

Overall, given the smaller market size, likely lower gross margins and higher operating costs from transport, I think that Redmart is fighting a very tough battle. It seems to me that its business model is flawed just like Webvan’s. It’s likely to continue making losses and will need additional funding to avoid running out of cash.

Valuation

I don’t have details about Redmart’s financials and current operation metrics, so any valuation estimate here is really pointless. However, using the framework we previous discussed to value fast growing stocks, we can do a quick and rough estimation.

If we assume Redmart’s revenue to grow at 50% per year for next 4 years, it will achieve 200m at the end of four years. Next, if we assume the net profit margin is 5% (lower than Sheng Siong’s 7.4%), then the profit estimate is 10m. Multiply the earnings by Sheng Siong’s current P/E of 23x will generate market cap of 230m for Redmart four years from now.

This 5% net margin is quite optimistic. Just imagine that if the margin assumption is 3%, then the net profit estimate will drop to to 6m. Assigning P/E of 23x may also be too aggressive. As you can see, changing the assumption slightly can impact the valuation by large percentage.

When valuing fast growing companies, the likelihood of error is much higher because the company may not meet the high expectations for variety of reasons. You can change any assumption slightly and the impact can be huge to the overall valuation. I don’t have the skills to value such company and will not attempt to do so.

 

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11 thoughts on “Redmart

  1. Outstanding analysis

    You treat the business as a business, and not a “disruptor “, no imperial clothing fawning over the company who have always struck me as being led by well meaning but naive people who got too much too fast too easy.

    I enjoy their service and hope it continues, however I cannot see a future for it as it stands.

    I predict a trade sale at a considerable investment loss to an incumbent in the bricks and mortal grocery business . The traditional grocers know their local business simply too well, and the redmart founders don’t count a local among them, and their investors and senior hires are overwhelmingly foreign as well, all of whom are sold on the idea that somehow if it starts in Singapore it will lead the region in e-commerce. A welcome reality check for the government too who will back anything that waves the flag.

    To their credit they have back pedalled on a white elephant of starting in Hong Kong which would have sunk their business fast.

    They are a tiny player comparatively in the Singapore grocery market against players who have been around a very long time , it’s frankly madness to take on another vastly different country, culture and economy until they are pumping out self sustaining cash by the tens of millions, even then requiring investment and becoming a massive distraction as it would morph into a simply utterly different business and culture.

    My advice, just dig deep in Singapore and find a niche that you can dominate, and dominate profitably. They are growing but not as fast as they should if they were going to revolutionise grocery in Singapore. And they have pretty much burned their cash. Investment wise I think they act like they are uber in the USA instead of a grocery business in a single city with no external scalability.

    Hong Kong is insanity anyway as its more and more China, a country where efficiency is everything and foreigners cannot enter and compete in the basis of efficiency and productivity. China is another league and protectionist to boot.

    I can’t imagine an exit for the founders unless it’s part of a deal brokered by the goverment to take over the smoking hole in the redmart finances through a fire sale to NTUC.

    I like the founders, I believe their cash investors like them, I believe they have no way to grow in Singapore particularly as long as the government squeezes foreign labour supply. I believe they are running out of road and need to be sold at a devastating loss to capture whatever knowledge they have built in logistics. Even then they could be replicated and likely will be by calm observers in NTUC.

    Ultimately the redmart story will put the lie to Singapore being somehow a regional leader where behemoths naturally start. It’s a small market where everything is utterly different to every other economy nearby. Being a success in Singapore alone is worthy of a goal, but it does not translate at all into capacity to address any other market least of all using similar techniques.

    My experience in taking a Singapore brand overseas is, take the name and get a small rent for it, then hand over to savvy locals who have years of experience bruising their way to a strong position and stand out of their way while offering moral support.

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    1. Well said. Can’t agree with you more.

      Redmart is fighting heads on with the existing BIG and established players who have many advantages. NTUC Fairprice, for example, can even run two large supermarkets within 300 meter distance in a densely populated area. That captures pretty much of the grocery business in that neighborhood. Most people living in that neighborhood will see Redmart’s delivery service less of a value because they find just as much convenience in their nearby supermarkets.

      If the entire grocery market is growing fast, then Redmart might ride on the tailwinds to grow its business and incur lower cost to acquire new customers. However, grocery in a mature market like Singapore is a slow growth business. The low margin nature makes it even more competitive. If Redmart wants to grow fast in a generic grocery business by selling the same products as everyone else, it has to take market share from other players, which is a tough battle.

      Like you said, it has to find a niche that it can dominate (profitably). Many successful grocers started that way. Walmart started by entering relatively small town that big players were not interested in during mid 1900s and was extremely aggressive to be a low cost operator. Now, Walmart has become the largest grocers in the US (and also in the world) with slow growth, but other smaller grocers in the US can still grow well by running the business differently. Dollar General, Dollar Tree, Family Dollar Stores, for example, achieved above average growth in grocery market in the US by selling slightly different products, some unbranded ones at lower price, and open the stores at more convenient locations. (Dollar Tree bought Family Dollar stores in 2014, and I owned shares of Dollar General).

      In Singapore, one grocer who plays differently is ValuDollar. ValuDollar sells branded and unbranded products at lower prices by importing these products from the developing countries that usually sell them at lower prices. In this way, part of the savings from lower cost can be passed back to the customers. The store display has narrow aisles with racks as high as ceilings. The intention is to fully utilize the space, which is expensive in Singapore. The focus is on cost saving for themselves and for customer. I don’t know their financial performance, but by observing their crowded stores and new store openings, I reckon they are profitable business and growing.

      I don’t know what niche is good for Redmart. I just think that in order to survive, it has to evolve into something else, not just a pure generic grocer. Hope they manage to find it before the cash runs out.

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  2. thanks for sharing, very insightful. as of today, Redmart has already been bought by Lazada. online grocery model needs scale and technology to minimise cost in order to survive. I compared prices of certain products with that of Fairprice. some are cheaper. guess this is selling point so far. And for first time buyer, it offers $25 discount for 4 times. Attractive method to gain and retain buyers i think.

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    1. oh, I did not know they offer $25 discount for 4x for first time buyer. Probably I should starting ordering now. 🙂
      The discount is a lot considering the low margin that grocers are making.

      I think that’s good (but also expensive) to gain new buyer. As to retain buyers, I think it’ll work for those who prefer the convenience of getting the grocery delivered to them. For those who compare prices, once the discount is over, they are likely to revert to their preferred grocers. That’s what I’ll probably do if I use their discount.

      A friend of mine said their office pantry is already using redmart. That’s a niche market for grocery delivery. But in the end, it’ll depend on the competition too. Others, such as Fairprice, Cold Storage, are also doing delivery.

      In the end, I think execution is the key. The overall grocery demand in Singapore is probably growing at low to mid single digit rate only. The most efficient (low cost) operator can squeeze a bit more profit. Competing on price is never a good choice when the overall demand is growing slowly and the margin is low too.

      This business depends more on repeat customers than finding new customers. If the cost that redmart spend on new customer acquisition cannot retain them as repeat customers, then the money has not been well spent.

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      1. agree with what you said. grocery business is like a zero-sum game in Singapore. in long term perspective, online grocers are hard to survive as competition with fair price, sheng siong are fierce. probably that’s why redmart was sold to lazada. at least lazada is operating domestic and abroad. and also has more potential to scale and more space to grow. more important, more capital to burn… BTW, investing is your full time job?

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  3. Nope, currently not full time yet. Doing something else.

    Scaling in South East Asia is really challenging. Different countries have different infrastructure, culture, red tapes, etc.

    In the end, all these competitions are benefiting us, the consumers.

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  4. Being an app maker, Grab or Uber can deploy their apps across different cities. This is a natural advantage of an application/software/internet maker compared to traditional business. Developing, maintaining and enhancing apps/software is a fixed cost that can generally be done at one location (e.g. HQ). They also make use of Google Maps/FourSquare so they don’t need to re-build the maps for each city. As they scale up, the “unit cost” of apps development becomes lower.

    But different cities in SEA require different strategies. They may have to lobby the government differently, incentivize the private/taxi drivers differently, advertise and promote differently, and compete with different competitors. So, what works in one city may not work in another city. That’s a problem for scaling up, isn’t it?

    Example: private drivers can wait for calls to pick up passengers at changi airport and easily charge lower rate than taxi as the latter have additional airport surcharge. But private drivers simply cannot pick up passengers in many Indonesia airports.

    I don’t know how well Grab is doing, but Uber is bleeding billions of dollars. Grab seems to be more aggressive than Uber in SG by giving out lots of promotion. This is really throwing out cash to get/maintain market share. So, I don’t think Grab is doing anything better financially.

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    1. Grab is similar to Airbnb in many ways. MIT published an research paper that categories business models into 4 basic archetypes: creator, broker, asset owner and distributor. The major differences are whether they make money by creating or owning assets.

      Airbnb and Grab are clearly those kind of Broker type, which links up customers and drivers (asset owner, temporary rent out asset to make money), but does’t own physical assets. The value adding part is their information to make transaction happen.

      So 2 questions are critical in the long run for players like Grab, Uber or Didi:

      1. what’s the market size of private car transporting service, out of entire car transporting service? It does not look like a zero sum game, but news said Grab did squeezed market share from Taxi.

      2. % of commission can be obtained from each transaction in a sustainable way. how does it compare to the $ of creating and maintaining the software.

      but at this moment those players are still heavily competing against each other by burning a lot of money. good for customers like us, for now.

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