Can homegrown e-commerce players survive the competition? Here's how three Singapore online brands are doing

JIM Boland is not one person you would expect to see at your doorstep hauling the groceries you ordered online.

The chief financial officer of homegrown online grocer RedMart personally delivers orders for customers here at least twice a year.

But this is not a story about Mr Boland or why he needs to deliver groceries himself. It is about how the company he works for is giving supermarket chain giants a run for their money.

RedMart came on the scene in 2011, at a time when Singaporeans had not quite taken to the idea of buying their groceries online. Then, stalwarts FairPrice and Cold Storage had already started to get their e-commerce act together, although their deliveries took several days while their site user experience and online range left much to be desired.

RedMart quietly slipped on the radar of a small group of shoppers looking for products that weren't already available at their neighbourhood supermarket, on a well-designed, easy to navigate website. Aside from specialty groceries, however, their "bread and butter" range seemed limited at the start, especially for consumers accustomed to shelves lined with the brands they had come to know and expected to see.

Since then, the online-only business has scaled up exponentially. "We've increased to 50 times the size we were five years ago," says Mr Boland, with "triple digit average annual growth" in sales today since mid-2013.

Today RedMart carries more than 100,000 products - it started out offering 1,300 products - including fresh produce. It has more than 1,000 vendors, with gourmet grocers, specialist cheese shops and butchers, and premium liquor distributors on its roster. It introduced its own label of products in 2015, which it says has been successful. Mr Boland would not disclose the number of customers it has or how many deliveries it makes a week. But while RedMart had fewer than 10 drivers when it first started, today it has a few hundred and almost all its daily delivery slots from 7am-10pm are snapped up every day, he says.

The RedMart story

Things weren't always so rosy. RedMart was in the red some four years after starting up, with reports of US$21 million operating losses in 2015 and US$126 million liabilities in 2016. It's said that the company quietly put itself on the market in 2016, even reaching out to NTUC-owned FairPrice to gauge interest.

It had already raised tens of millions of dollars in 2014 from investors including Garena, South-east Asia's biggest tech startup, and SoftBank Ventures Korea. It counted Facebook co-founder Eduardo Saverin among its original backers. Both Mr Saverin and Garena founder Forrest Li have been on RedMart's advisory team since early 2013. Far East Ventures, the venture capital arm of Far East Organisation, also emerged as an investor in one of its rounds of funding in 2015.

In the end, it was Lazada, flush with a US$1 billion injection from Jack Ma's Alibaba, that made the move to acquire RedMart for an undisclosed sum at the end of 2016. To date, RedMart's paid-up capital is slightly more than S$490 million.

Over the years, RedMart has steadily extended its product range and customer base, and the economies of scale have helped it push pricing down. It started a "best price guarantee" last year, to offer prices that matched or were lower than at FairPrice's heartland outlets.

"As our customer base grows, demographics of our customer base changes. It's been shifting from the early adopters which are more the expat community that were familiar with online grocery, to more of the local customer base, which forms the majority of our order volume today," Mr Boland says.

The company began to understand the preferences of locals and what different ethnic groups like, explains Mr Boland. For instance, it now offers more than 600 religious items, such as joss paper, which it started stocking ahead of the Hungry Ghost festival in August last year.

Operating online gives it - and other e-commerce players - a unique advantage in inventory control. Unlike brick-and-mortar grocers that may have less complete access to buying information, RedMart is able to track the behaviour of customers through their online purchases, down to where they live.

"The number of orders coming from HDBs has been increasing dramatically. A strong majority of the orders are coming from HDBs," Mr Boland says. He hinted at expansion plans, saying he considered RedMart to be a 'South-east Asian player', but would not say more.

As the business has grown, so too their costs. While RedMart saves on physical retail store rentals, it still has to pay for warehouse space, as well as the costs of maintaining the tech side of the business, marketing the brand online, and the logistics of a delivery-only model.

RedMart's warehouse space, now at Fishery Port Road, has increased from 3,000 sq ft from when it first started to 150,000 sq ft today. Office space has grown from about 200 sq ft to 18,000 sq ft. Staff strength stands at about 1,200 as at Dec 31, 2017, from just three in 2011 - Roger Egan III, Vikram Rupani, and Rajesh Lingappa, the three founders of the company. Mr Egan is CEO, while Mr Rupani and Mr Lingappa are the president and chief technology officer, respectively.

The company would not disclose its revenue and bottomline, but Mr Boland says that operating cash flow is in the positive.

According to Accounting and Corporate Regulatory Authority records, RedMart's revenue rose 18 per cent to S$97 million last year. The group financial statements account for both RedMart Singapore and RedMart India, its technical development centre, Mr Boland says.

But its profits are swinging wildly. RedMart made a comeback from losses in 2015 to chalk up S$47.7 million in profit after tax from continuing operations in 2016. The group however, sank back into the red in 2017 with a loss after tax from continuing operations of S$10.1 million.

This was due to the changing share value of redeemable and convertible preference shares and convertible loans from the Lazada acquisition, which released a liability on RedMart's balance sheet, Mr Boland says.

RedMart Singapore's total assets in 2017 stood at S$32.9 million, while total liabilities were S$132.6 million. The year before, assets were S$19.3 million and liabilities, S$109.5 million.

The game is only going to get harder. Determined not to be outdone by the upstart and new entrants such as Amazon Prime Now, incumbent FairPrice has revamped its online platform. Just last month, it pushed out FairPrice On, with a streamlined process and higher delivery capacity. It also tied up with Grab to give customers rebates on supermarket buys and discounts on rides. (RedMart's Lazada tie-up offered discounted Netflix membership as well as Uber deals, although the Uber connection is now lost with the folding of Uber into Grab.)

"The number one thing is to continue to grow our customer base and our sales. The more we grow, the more efficiency we can squeeze out of our operations which is where our costs come from," says Mr Boland. "I would say we are still at the end half of getting up to scale. We still have a long way to go. We could triple, quadruple our growth... in Singapore and we will certainly become profitable at the bottom line."

Marrying clicks and bricks

Given the intense competition, Dennis Tay, founder of multi-label lifestyle and design store Naiise, feels that online businesses need to establish a physical presence for customers.

Naiise started out online in 2013, but Mr Tay advocates the omni-channel strategy. He's not alone in moving from clicks to mortar - counter-intuitive as it may seem. Heavyweights like Alibaba and Amazon are starting to take up significant retail space, setting up their Hema and Amazon Go supermarkets in their key markets. Two of Singapore's online furniture retailers - Castlery and HipVan - have also added physical showrooms to their mix.

"I think a lot of brick-and-mortar retail has been very static and purely transactional for the last 10, 20 years," says Mr Tay. "It's a good time to innovate. There's just something about shopping physically that cannot be replicated online," he says during an interview at Naiise in The Cathay, its biggest store in Singapore at 9,000 sq ft.

"When we first took the foray into the offline space, we... never knew how it would fare. It was a risk we had to take. I always wanted to have an offline store but I imagined that it would only have happened in 2023," Mr Tay says.

Naiise dipped its toes in the water with a few pop-up stores, the first being a rooftop farm pop-up in January 2014.

"In the early stages when we started to expand into retail spaces, we were able to build stores under S$5,000. It was a good way for us to understand the market, to try and test the online and offline collaboration and figure out ways to enhance it," he says.

Five years into the business, Naiise now has six retail stores in Singapore and one in Kuala Lumpur, Malaysia, that opened last December. Its first store in Singapore opened in Westgate in March 2015, a move partly influenced by lower rentals in the market at the time. Naiise is also looking to open in London, though that plan is on hold for now due to the high cost of rental there.

Mr Tay, who ran a one-man show when he started, now employs about 70 staff. He manages Naiise with his wife and business partner.

While e-commerce businesses save on rental costs, Mr Tay says that the online space isn't cheap either as it is in fact a labour-intensive business that can be logistically difficult to handle.

"In terms of cost structure, with physical spaces, you pay for rental and that forms your advertising. In the online space, it is also just as expensive because you're fighting in terms of bidding for keywords. You're running ads on multiple social media channels, and this cost does rise."

Naiise showcases locally designed wares and carries more than 25,000 products from 800 local brands, and about 200 other designers from countries like Japan, South Korea, and Thailand. Customer faves include cushions made in the form of an ang ku kueh, food products like jam, local music CDs, and even cookware. The company also hosts event workshops at its stores.

Every vendor that partners Naiise gives a 30 to 40 per cent commission for each sale it makes. Mr Tay says that Naiise doesn't charge them for rental space, unless they wish to have a pop-up store for instance. It also charges a marketing fee but that "doesn't happen often because people are quite happy with the space allocated to them".

In fiscal 2017, Naiise's topline was between S$4 million and S$5 million, and 70 per cent of the sales came from brick-and-mortar stores, Mr Tay reveals. Overseas orders contribute about 5 to 10 per cent to its total revenue on a month-to-month basis. Bottomline figures were not available.

Costs have grown "quite substantially", says Mr Tay. Monthly operating cost that includes staff expenses and rental amounts to about S$200,000.

But its revenue stream has also grown. Year on year, online sales have grown about 6 to 7 per cent. Brick-and-mortar sales dipped from 2016 because the company closed three stores - two large stores at Central at Clarke Quay and Suntec that occupied about 12,000 sq ft in total, and a 1,000 sq ft space at Scape. Mr Tay says sales were "good" at those stores, but the Suntec rental was too high and the Scape store was "too small". "We also have to make sure it makes financial sense."

"If we do a size-to-size comparison, we still grew by about 10 per cent in offline sales," he adds.

Although he declines to reveal how much Naiise spends on rental each month, he says that the highest he would commit for rental will be around S$4 to S$5 per sq ft for a 4,000 sq ft space.

Cost-wary e-commerce players looking to take physical spaces may actually find a sympathetic ear these days. Dehong Tan, property analyst at Phillip Capital, tells BT that mall landlords in Singapore today are not necessarily looking for tenants who can pay the highest rent, but those who are able to draw shopper traffic.

As part of the business model, brick-and-mortar stores allow e-commerce businesses to attract walk-in patrons, and double up as warehouse and fulfilment stations for the delivery of online purchases, says Wendy Low, executive director and head of retail, Knight Frank Singapore.

"E-commerce players have also realised the intrinsic value of occupying a physical space. Looking ahead, conventional retailers can explore integrating click-and-collect services in their existing physical stores, which may help reduce warehousing and additional manpower costs over the long term," she says.

The idea of self-collection resonated with Naiise's Mr Tay when the company launched the concept in 2015. "We started to see that almost 30 to 40 per cent of our online orders were being sent to the stores to be picked up.

"We start to recognise that people like to get their products at their own convenience versus waiting at home, not knowing if the delivery man might come at a time they've stated," he says.

The independent retailer

Kate Low, who started online lingerie retailer Perk by Kate in 2012, believes that going omni-channel is essential. Perk by Kate holds regular pop-up events, with the most recent one done last Christmas. The company says pop-ups are cost-effective and a good way for it to connect with customers. Ms Low is also looking at a small 300 sq ft space in the Central Business District as most of her customers work there.

Ms Low believes the online business model is workable in a small-scale market like Singapore precisely because the country is small and deliveries are done fairly smoothly.

But even if startup costs are low, scaling costs for small businesses like hers may not be viable. She explains: "If you want to do an online business targeting Singapore only, the market size is quite small, factoring in the increasing competition. With the fight for the same eyeballs, it's not easy to scale up."

Nestled in a cosy space in Chai Chee, her business operates out of a warehouse and office space of 1,900 sq ft that costs S$2,300 every month in rental. Ms Low, who pumped in about S$10,000 to start Perk by Kate, has two staff who pack orders and attend to customer enquiries.

In a month, Ms Low's total expenses including staffing, marketing, rental, and inventory can come up to S$80,000. "I spend quite a fair bit on marketing and photography. It's an essential part of the business," she says.

She also spends substantially on inventory purchase because the company was constantly running out of stock last year. "While that made us exclusive in a way, we also realised that it cost us business."

The company made over S$1 million in revenue in the 2017 fiscal year, and Ms Low says that gross profit margins were "very low".

"It's not my aim to scale up the business. I'm happy to stay at a decent level and maximise profitability. I'm not happy with aiming for S$10 million in revenue when I actually don't make money," she says.

She is now looking at Hong Kong and Australia. Sales from overseas contribute about 20 per cent to the company's topline. And besides lingerie, Ms Low has also ventured into bedding. Perk by Kate's sister brand Yuu was launched in end-January this year. That business cost her S$40,000 to start. Ms Low adds that her first brick-and-mortar store might combine the products of both Perk by Kate and Yuu.

Returns and revenue

For most startups, funding is the key to sustaining the business, but that pushes profitability front and centre.

Like RedMart and Naiise, Perk by Kate's product returns rates are low, about 2.5 per cent, says Ms Low, compared to a benchmark rate ranging from 20 to 30 per cent for larger businesses.

According to Hawksford Singapore, which provides corporate and fund services, venture capitalists expect a return on investments of at least 25 to 30 per cent for each year of investment. Generally, venture capital investments last between two and five years.

Naiise's Mr Tay in fact prefers not to canvas for capital, turning investors away because the company has managed to "always keep things sustainable and keep our costs low as well". For Perk by Kate's Ms Low, not getting investors onboard gives the company more authority over what it does, and "we're not faced with the stresses of trying to over-expand at a wrong rate".

What's much less debatable is the steady shift in retail. Online retail sales account for around 4 per cent of Singapore's total retail sales which as at February stood at S$3.7 billion. The 4 per cent is still a tiny fraction but one that looks to be growing steadily.

According to PricewaterhouseCooper's Total Retail 2017 report which surveyed 30 countries and more than 24,000 people, 36 per cent of 520 respondents in Singapore make online purchases on a monthly basis.

Excluding groceries, a third of the respondents here purchase online via a computer monthly, whereas 21 per cent purchase items via their smartphones. Only 26 per cent indicated that they would shop at brick-and-mortar stores instead of purchasing online.

The survey also found that 48 per cent of respondents here shop online because it is cheaper than buying from a store, while 35 per cent will do so because of convenience.

Charles Loh, PwC Southeast Asia Consumer and Industrial Products consulting leader, says that the retail landscape today has been "deeply impacted by the vibrant online retail scene".

"Being a transportation and tourism hub, retail continues to be a very relevant and important industry for Singapore," says Mr Loh, adding: "We anticipate that the channel of choice and transaction volume will continue to shift towards the online channel."

For RedMart, Naiise and Perk by Kate, the signs point to online retail growing from strength to strength. Whether they will continue to be nimble enough to stay steps ahead of the competition remains to be seen.

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