Hero Supermarket: Retail

THE COMPANY: In 1971 Hero Supermarket (HERO), Indonesia’s largest supermarket chain operator, was established under the name of Hero Mini Supermarket, and became a publically listed company on August 21, 1989. A leading retailer in the region, Dairy Farm International Holdings, which is a member of the Jardine Matheson Group through Mulgrave, is now HERO’s controlling shareholder with 80.7% ownership. HERO has benefitted from Dairy Farm’s vast experience in the sector across various store formats, due to its extensive retail operation with 5500 outlets in 10 countries in Asia.

HERO has five subsidiaries with 573 outlets as of September 2012 with the following breakdown: Hero Supermarket (36); Giant Supermarket (96); Giant Hypermarket (44); Guardian Health and Beauty (252); and Starmart (145), a convenience store. Having obtained a joint cooperation with the IKEA group, HERO will open an IKEA restaurant and furniture store in Alam Sutera in July 2014. Currently, around half of the company’s total revenues come from Giant Hypermarket, 40% from Hero and Giant Supermarkets and the remaining by the higher-margin specialty stores, Guardian and Starmart.

DEVELOPMENT STRATEGY: The transformation of HERO began in 2007 when the company introduced the Giant Supermarket brand to enable increased flexibility in pursuing opportunities in Indonesia’s fast-growing and highly competitive retail market. HERO’s internal restructuring included the upgrading of the Hero-brand stores in affluent neighbourhoods and converting some Hero stores into Giant Supermarkets with lower target markets in less premium locations. The number of Hero Supermarket stores decreased from 80 in 2007 to 36 in September 2012, while Giant Supermarket stores increased to 96 in the first nine months of 2012 from 25 outlets in 2007. At this stage, the Hero to Giant transition is near completion. The upgraded Hero stores are now better suited to cater to mid- and upper-range customers.

After restructuring its brands, HERO has been accelerating store openings while focusing on the Giant Supermarket and Giant Hypermarket store concepts. To ensure the rapid rollout of each brand, new chief operating directors have been appointed. With the company fast-tracking its store rollouts, an assumption of 2013-14 annual expansions of three to five outlets for Hero Supermarket, 20 to 25 stores for Giant Supermarket, seven to eight outlets for Giant Hypermarket, 40 shops for Guardian and 25 stores for Starmart. These are conservative assumptions that take into account execution risk in finding suitable locations that could be particularly limited in Java, where some 87% of its stores are currently located. Three IKEA store openings (25,000 sq metres each) are assumed over 2014-16.

FORECAST: As HERO nears the completion of its internal restructuring, the company looks set for sustained future growth, supported by more store rollouts, a large, rapidly increasing population base of middle-class income earners and a low modern retail penetration rate. The company’s growth strategy is built upon cementing its presence in the fast-growing mid- and low-end segments by covering the local retail market; HERO will open around 77 or 78 stores per annum in the next two years to add to its already strong base of 573 stores, as of the end of the third quarter of 2012.

With its current high single-digit same-store sales growth coupled with a rapidly rising consumption trend in the nation, 2013-14 compound annual growth rate (CAGR) of revenue at 21% is expected to translate to 25% bottom-line CAGR, helped by margin support coming from increasing sales of private label products and continued improvements in operating efficiencies. Beyond the first half of 2014, the higher-margin IKEA brand will also provide further support for future earnings growth. The excellent track records of the management team and the shareholders point to long-term value creation.