Sheng Siong Group Ltd (SGX: OV8) had an impressive start to 2018. Higher same store sales and the opening of four new supermarkets were key drivers of its revenue growth. However, as with any company, there are risks and potential pitfalls that lie ahead.
Here are three potential pitfalls that could hamper Sheng Siong in the future.
Possibility of market saturation in Singapore
Singapore has a tiny market size and there is already stiff competition in the supermarket space. NTUC Fair Price and Dairy Farm International Holdings (SGX:D01) operate around 140 and 110 stores respectively. In addition, Singapore has 114 wet markets and hawker centres scattered all over the island.
Sheng Siong currently has 48 stores in Singapore. With same store sales increasing in recent quarters, there seems to be still room for store count expansion. However, this cannot go on indefinitely and there could be a point when the market starts to get saturated or new stores, due to their close proximity, may cannibalise existing store sales.
In addition to traditional supermarkets, online retailers may also pose a threat. Sheng Siong introduced its online shopping website (allforyou.sg) in December 2013. But according to its investor relations team, online sales only account for around 1% of total sales.
If consumer behaviour shifts towards online grocery shopping, Sheng Siong will need to reinvent itself and improve its online shopping experience to attract customers to its platform.
Challenging China market
Sheng Siong currently has one supermarket in China and is looking to further expand its brand in the country. Although China does indeed have a much larger market and immense potential for Sheng Siong, there are numerous challenges when dealing with international expansion.
For one, local competitors should already have a head start. Also, government regulations may affect Sheng Siong’s expansion plans.
The Foolish bottom line
There certainly are reasons to be optimistic about Sheng Siong. However, as with all companies, there are uncertainties and potential pitfalls ahead. Investors should at least be aware of the risks before making an investment decision.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Sheng Siong Group Ltd. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.