Indonesia: Retail battle takes shape

Rising profits and plans for expansion by major Indonesian retailers as international players enter the burgeoning mall segment highlight confidence in the sector’s prospects. However, creeping inflationary pressures and growing regulatory requirements threaten to dent the growth expectations of the industry and the overall economy.

On March 27 Mitra Adiperkasa (MAP), a local retailer, revealed plans to open 200-250 specialty shops, more than 50 food and beverage outlets, and two department stores across the country at a cost of about Rp900bn ($92.25m). MAP, the master franchisee for a number of global brands, such as Starbucks, Domino’s Pizza and Lacoste, said in the same week that its revenue jumped 29% in 2012 to Rp7.59trn ($777.98m).

Speaking with The Jakarta Post, Fetty Kwartati, corporate secretary at MAP, said the success could be explained by favourable demographics. “Externally, domestic consumption has been thriving thanks to the growth of the middle class,” she said, adding that Indonesian consumers have “briskly accepted the brands” the retailer had introduced to the market.

Matahari Putra Prima (MPP), a local retailer and member of the Lippo Group, announced at the end of March that it had nearly doubled its net income in 2012, rising to Rp238.5bn ($24.45m), up 98% from Rp120.3bn ($12.33m) in 2011. MPP also announced that its shares surged by 158% after investors sold stock at more than double the market price.

Such stellar performance by domestic retailers has been noted overseas, with a number of Asian fashion and lifestyle companies setting up operations in the country in early 2013. In March, Japan-based retail firms Fast Retailing and AEON Mall opened up flagship stores in Jakarta.

“We consider that Indonesia has great prospects. We are confident we can take a share of the Indonesian market as a unique retail player,” said Toyofumi Kashi, president-director of AEON Indonesia. “We predict that in the near future middle-class customers will no longer be satisfied with the existing services and products,” he added.

Malaysia-based Parkson Retail Asia also hopes to take a greater stake in the market, with plans to open stores in Indonesia in 2013, the China Post reported in March. Parkson’s new stores will either enter the market under its own brand, or through the local Centro chain it acquired in 2012. The Malaysian retailer hopes to increase its Indonesian revenues from less than 3% of the group’s total sales in 2012 to 10% by the end of 2013.

“With the size of the middle class in Indonesia, which I think will grow very quickly, the market is big enough to accommodate a few more players,” Alfred Cheng, executive director of Parkson, told Forbes in October 2012. Indeed, in a February 2013 report, the World Bank estimated the economy will expand by 6.2% this year, largely due to increasing domestic consumption. “With the right policies in place, Indonesia could push growth, harnessing the forces of urbanisation and rising incomes, while providing quality jobs for a growing labour force,” the World Bank said.

Consumer confidence is also running high. According to MasterCard’s 2012 index, released in February, the archipelagic nation placed at the top of the Asia-Pacific rankings alongside the Philippines. “Extreme improvements were recorded in Indonesia, where consumer confidence jumped 30.1 index points ... Both Indonesia and the Philippines are benefitting from rising investment from domestic and international investors in spite of uncertainty in the global economy,” the index said.

Despite such an upbeat assessment, there have been some recent developments that could concern investors. The government recently said it would limit the number of outlets a foreign restaurant franchise can own to 250 within five years and has also ruled that franchised stores and restaurants must carry 80% “local content”, to be determined by a special team that will ensure compliance, Reuters reported in February. The changes, among others, are meant to boost local manufacturing and investment as well as tax collection.

Rising inflation could also dampen growth this year. Retailers told BI they were seeing strong upward pressure on prices thus far in 2013 due to post-flooding supply disruptions, rising labour costs and higher electricity bills. In January consumer prices climbed 4.57% compared to the same month in 2012, while in March inflation continued to rise, hitting 5.9% – the highest the rate has reached since March 2011.