Cold Storage, Giant acquisition: Supermarkets in Singapore still profitable despite stiff competition, analysts say

SINGAPORE: Despite razor-thin margins and intensifying competition, supermarkets in Singapore remain profitable, analysts said following the sale of Cold Storage and Giant stores in Singapore to Malaysian retail group Macrovalue. 

DFI Retail Group, the Singapore-listed company that owns the two chains, announced on Monday (Mar 24) that it will offload 48 Cold Storage and 41 Giant stores, along with two distribution centres, to Macrovalue for S$125 million (US$93 million). The Cold Storage stores are under its Cold Storage, CS Fresh, CS Gold and Jasons Deli brands.

The deal marks DFI's exit from the traditional grocery space in Singapore, as the group shifts its focus to its health and convenience arms – Guardian and 7-Eleven. In particular, the company's health and beauty business accounted for over half of its total operating profit last year, DFI said.

In contrast, the Giant chain of supermarkets has been shrinking in Singapore. Eleven of its outlets – including supermarkets, hypermarkets and smaller express stores – closed in 2024. 

SUPERMARKET INDUSTRY "ROBUST"

Retail experts CNA spoke to acknowledged that profit margins are thin in the supermarket category. 

Supermarkets are traditionally low-margin businesses worldwide and this region is no exception, said Dr Terence Fan, an assistant professor of strategy and entrepreneurship at the Singapore Management University (SMU).

"Clearly, DFI has seen a difficult time in the past decade or so since the emergence of RedMart, then the onslaught of online retailers and finally COVID," he said.  

"It is likely that (DFI) had already been planning to exit from this industry as its margins have slowed and remained super-competitive relative to its other businesses, here and elsewhere," said Asst Prof Fan, who is also an academic director of accreditation at the university.

He added that Macrovalue likely bought the supermarket chains due to the proximity between Malaysia and Singapore. It already owns the Cold Storage and Giant stores in Malaysia, having acquired GCH Retail Group, which operated the brands there previously, in 2023.

"Our small population in relation to Malaysia meant that Macrovalue can easily and better leverage its economies of scale while DFI no longer could. In a super-competitive business, every bit of scale advantages counts," Asst Prof Fan added. 

The supermarket sector in Singapore is robust but expected to register "only modest growth" going forward, said Professor Lawrence Loh from the National University of Singapore (NUS) Business School.

Apart from DFI, NTUC FairPrice and Sheng Siong dominate the local supermarket sector, he noted. The new ownership is unlikely to disrupt the current three-player landscape, though established supermarkets must stay nimble in the face of niche entrants such as Don Don Donki and Little Farms.

Despite the closure of the 11 Giant outlets last year, supermarkets are not in decline. Retail sales for supermarkets and hypermarkets grew 11 per cent year-on-year as of January, according to figures released by the Department of Statistics Singapore. 

Cold Storage and Giant also earned profits last year. The operating profit of DFI's food division – which the two supermarket chains fall under – stood at US$57.8 million for the 2024 financial year, an increase from US$45.3 million in FY2023. 

The sale reflects a strategic pivot by DFI and not because the supermarket business is not profitable, analysts said. 

Associate Professor Lau Kong Cheen from the Singapore University of Social Sciences (SUSS) said it was not surprising that DFI intends to focus on the convenience and beauty and health segments given that the group has a larger number of outlets in these categories than FairPrice. 

Guardian currently operates about 130 stores while FairPrice's Unity has about 90 outlets around the country. Meanwhile, 7-Eleven's nearly 500 stores vastly outnumber the 180 or so Cheers and FairPrice Xpress stores.

Such stores also require less manpower to operate, and their products fetch higher profit margins.

"Thus it makes good business sense for DFI to focus in this direction," said Assoc Prof Lau, who is head of SUSS' marketing programme. 

On online grocery retailers edging out supermarkets, especially those without an online presence, he pointed out that these retailers have their own costs to bear, such as logistics and handling fees. 

"Although online retailers trump traditional ones without (an) online presence in terms of convenience, there are quite a number of customers who still prefer to buy perishables at physical stores to verify their freshness," he said. 

"What would really hurt retailers without (an) online presence is … if they do not have (a) sufficient spread of physical stores."

COMPETITION COULD DRIVE PRICES DOWN

Macrovalue's entry may spark price competition, though its impact remains uncertain. 

Amid intense competition from other key players in the sector, it is likely that Macrovalue will adopt "more aggressive" pricing, said NUS' Prof Loh. 

SMU's Asst Prof Fan agreed that increased price competition is a possibility as some brands sell products at significantly lower prices in Malaysia, and Macrovalue's large presence in Malaysia might allow for more competitive sourcing. 

Assoc Prof Lau from SUSS said pricing pressure could take subtler forms such as promotions, bundle deals and loyalty programmes. 

But the sale to Macrovalue could affect customers in other ways. For example, the fate of products exclusive to Cold Storage and Giant such as in-house Meadows products is still up in the air. 

It will depend on whether Meadows will be retained after the transaction – which will be completed in the second half of this year – and if Macrovalue is given the rights to continue to sell the brand's products, said Assoc Prof Lau.

Customers also want to know what will happen to DFI's Yuu loyalty programme. 

"A major concern for customers will be whether this loyalty programme will be discontinued under Macrovalue ownership. Probably to DFI's advantage, they may want to collaborate with Macrovalue to allow them to use the Yuu loyalty programme that is still applicable to Guardian and 7-Eleven," he said. 

"Otherwise, customers will be concerned about the status of the Yuu programme loyalty points that they have accumulated all this while."

In a statement on Tuesday, a DFI spokesperson said that the existing credit card rewards and rebate programmes will continue for customers in Singapore. This includes the Yuu Rewards Club – where members can use their points to offset purchases and get exclusive deals and promotions – and other existing DFI Retail Group cash vouchers when shopping at all Cold Storage, CS Fresh, Jasons Deli and Giant outlets.

There will also be no changes to Guardian and 7-Eleven rewards and programmes.

IS S$125 MILLION TOO LOW? 

The sale price of S$125 million has also raised questions online, with some drawing comparisons to Eu Yan Sang's recent acquisition by a Japanese consortium for S$695 million. 

Analysts said the valuation reflects Cold Storage and Giant's weaker recent performance. Eu Yan Sang saw revenue jump 16 per cent to S$297 million and profit climb 26 per cent in FY2023 – while DFI's supermarket business only recently returned to the black.

"In short, Eu Yan Sang was a much more profitable business then, compared to Cold Storage Singapore at this moment," Assoc Prof Lau said, adding that this could be the potential reason why its sale value was much higher than that of Cold Storage and Giant.

SMU's Asst Prof Fan said the sale price may be "a bit on the low side". When DFI acquired Cold Storage in 1992, the deal was worth S$130 million and included Guardian and 7-Eleven. Adjusted for inflation, that figure today would be about S$224 million.

However, DFI would have sold it for a higher price if there was any such offer, so the sale price was "maybe not too unfairly low", he added.

NUS' Prof Loh said that DFI's share price, which closed 4 per cent higher after Monday's announcement, served as evidence that the sale amount was fair.

"If there had been an unfair discount, the market would have reacted negatively," he said.