Where did RedMart go wrong, and why did Lazada buy it?

When RedMart launched in Singapore in 2011 – the idea was not really loved by investors, and the founders had to meet hundreds of individuals to put together enough money to kick start.

Fast forward a number of years, RedMart is loved by many consumers in the country. Their operations are impeccable, you get your grocery delivered within a 2 hour window, and everything is packed properly (and nicely).

Yet, ask a random group of people you will see a lot who have tried (and loved) the service but few who use it regularly.

After six years of operations, RedMart was finally sold to Lazada for a rumoured US$35 million, well below the US$55 million venture funding that had gone into the company.

I am pretty sure that is not the result that the founders, and their investors, had wanted. Where did it go wrong and what are the lessons for the rest of us?

Solving a problem that did not exist

We often hear people saying “we want to build a XXX of Singapore” – it usually sounds tempting (and even proud), until you analyse the market.

When RedMart launched in Singapore in 2011 – the idea was not really loved by investors, and the founders had to meet hundreds of individuals to put together enough money to kick start.

Fast forward a number of years, RedMart is loved by many consumers in the country. Their operations are impeccable, you get your grocery delivered within a 2 hour window, and everything is packed properly (and nicely).

Yet, ask a random group of people you will see a lot who have tried (and loved) the service but few who use it regularly.

After six years of operations, RedMart was finally sold to Lazada for a rumoured US$35 million, well below the US$55 million venture funding that had gone into the company.

I am pretty sure that is not the result that the founders, and their investors, had wanted. Where did it go wrong and what are the lessons for the rest of us?

Solving a problem that did not exist

We often hear people saying “we want to build a XXX of Singapore” – it usually sounds tempting (and even proud), until you analyse the market.

“Singapore is too small” is often the reason why investors turn down such funding proposals. However, this is a rather simplistic way to look at things.

Singapore’s GDP is almost 50% more than that of Vietnam, and GDP per capita is five times that of the runner-up among Southeast Asia’s six major countries (SG, MY, TH, ID, PH & VN). So there is enough consumption power and NTUC Fairprice, the biggest grocer in the country, had a turnover of SGD3.4 billion in 2016.

Here is the problem – ask any Singapore resident, most will tell you that they will pass by a Fairprice or Cold Storage (a slightly more premium grocer, with 48 outlets) or Sheng Siong (a budget grocer, with 40 outlets) on the way back home. Even if they don’t, their domestic helper would be able to easily reach one to do the grocery shopping.

This is very different from places like US, Europe or Australia, where urban areas are less dense, there is huge suburban span, and people do not find grocery shopping that straight forward.

Therefore, RedMart was essentially trying to solve a problem that did not exist. Most residents in Singapore do not find it painful to shop for groceries. This is not even to mention the experience people get by browsing goods at a physical supermarket (which is on their way back home from work).

That’s why after many years and creating a hugely expensive infrastructure, RedMart only had a turnover of US$27 million, less than 0.8% of that of Fairprice.

To compete effectively with Fairprice (or even Cold Storage), much more venture funding will be needed (for a highly uncertain outcome). Not every investor would be willing to put US$100 million bet for this.

Hong Kong is worse…  

So without a better story, a cheap sale was almost inevitable from the onset. One way to improve their outlook is to venture out of Singapore, to a big market.

What was really curious was that RedMart picked Hong Kong as their next market. Hong Kong is similar to Singapore in terms of consumer sophistication and consumption power.

However, Hong Kong is arguably an even worse market for RedMart – I’ve lived in Hong Kong for years before and was almost never more than 5 minutes walk away from a supermarket (often Wellcome and ParkNShop).

One other similarity between Hong Kong and Singapore is the cost of manpower. If you do not achieve enough density, delivery is more expensive than renting a shop front – which means to break into the market effectively, RedMart would need to burn hundreds of millions of dollars.

That is why it quickly pulled out.

How about the rest of Southeast Asia? Thailand, Indonesia, the Philippines and Vietnam? Well, some of these countries DO NOT allow foreign capital to be in retail. For those which do, the market conditions are so different from Singapore that RedMart’s existing experience in Singapore would not translate.

Hence the valuation would not simply add up.

Unfortunately for RedMart, the customer experience was beautiful, operations impeccable, but business model doomed.

A cog in the machine

So what did Lazada (Alibaba) see in RedMart – to be willing to spend millions to acquire it?

A few things really, and it may prove to be a very good buy for them.

Firstly, it’s a piece of the overall offering that Lazada was missing, they had fashion, cosmetics and electronics covered, but no fresh produce. With the (at the time) imminent arrival of Amazon in Singapore, they did not want to be missing a similar offering.

Secondly, with Lazada’s reach into Southeast Asia, and Alibaba’s billion(s) behind it, they now have the knowhow and training ground for grocery offerings in other parts of Southeast Asia.

We think Amazon picked Singapore to be their first launch site in Southeast Asia for exactly the same reason.

So it was a strategically (if not economically) important acquisition for Lazada on many fronts. With Southeast Asia being the next big ecommerce battleground, the US$35million spent on RedMart should play out to be a very wise decision in the next few years.

Of course, we have been assuming Lazada to be wise and strategic – there is also a possibility that they are not, which we should not rule out.

In either case, the (subset of) consumers in Singapore can continue to enjoy the good service RedMart is offering.

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Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.