New demands: Expansion continues, while the sector begins to feel the impact of the ASEAN-China free trade agreement

With sustained economic growth putting more money in Indonesians’ pockets than ever before (GDP expanded 6% in 2010 and is expected to rise around 6.5% in 2011) the country’s retail sector is experiencing solid expansion. Indeed, the retail sector as a whole grew 12% in 2010, with many businesses pushing ahead with outlet expansion. This wave has also spread beyond the traditional economic centres of Jakarta and Java to include many provincial cities. Behind this are some profound demographic and sociological changes. Economic development has meant a larger urban middle class, eager to adopt new consumer habits and products. Retailers are now moving to match services to this dynamic new environment.

RETAIL LANDSCAPE: With a population of around 240m people, Indonesia is the world’s fourth-mostpopulated country, and represents a huge potential retail market. Yet low incomes have traditionally kept the country out of the ranks of international retail hot spots. In 2010, only 57% of the population could spend more than $2 per day, and only 18% over $4 per day. Nevertheless, the $4-per-day category is still 41.4m people – roughly one-and-a-half times the total population of Malaysia – while the trajectory of growing personal purchasing power is also undeniable: corresponding $2-per-day and $4-per-day figures for 2003 were just 38% and 6%. Wages have also been rising, up 11% nominally in 2010. Likewise, in early 2011 unemployment fell to around 6.8%, an all-time low. Within the 18% with more than $4 per day to spend, there are growing numbers of extremely wealthy consumers. Evidence can be seen in sales of Rolls Royces, long an emblem of the super-rich. Sales were up 170% between 2009 and 2010, with more expected in 2011. The very wealthy are thus a staple of the growing number of high-end shopping malls, mainly concentrated in the capital, Jakarta. Most Indonesians still do their shopping in local markets and small stores, however, particularly beyond the metropolis. Yet there are signs of this changing too, with the growth of supermarkets and middle and lower-end malls taking a larger slice of sales. This trend is being aggressively exploited by retail chains, which have been pursuing a policy of store expansion across Indonesia.

Convenience stores and supermarkets are in the lead in outlet growth, with these companies also expanding within their own premises, giving increased space to non-grocery items. Thus, hypermarkets are now, for example, responsible for around 14.6% of consumer electronics sales. In this expansion, the big outfits – such as Carrefour Indonesia, Hypermart, Giant, Alfamart, Indomaret, Matahari Department Stores and Hero Supermarkets – were able to capitalise on large war chests for investment in outlet development. Thus, while the retail market remains characterised by small operators, signs of consolidation are present.

Figures from market specialist Planet Retail suggest total retail sales in Indonesia hit $231.6bn in 2009, rising to $292.4bn in 2010, with an expected $341.9bn in 2011. Non-food retail sales are expected to account for 29% of the total, by value, over those three years.

SHARES & PRODUCTS: When it comes to the grocery segment, in 2010, all major players experienced strong results. The largest internationally known chain, Carrefour, had sales of Rp10.3trn ($1.24bn) for the first nine months of 2011, up 2.43% on the same period of 2010, despite losing two stores to fire. The majority shareholder in Carrefour Indonesia, with 40%, is Trans Retail, a subsidiary of Para Group. The remaining shares are divided among Carrefour (39%), Onesia (11.5%) and Carrefour Nederland (9.5%). Hypermart, meanwhile, which is owned by Matahari Putra Prima (MPP) and which also owns Foodmart, posted Rp2.1trn ($252m) in revenue for the first quarter of 2011, up 17%, y-o-y, with later results unavailable. The company expected to grow revenue by Rp10trn ($1.2bn) during the year, due to the increasing numbers of new hypermarkets being built throughout the year.

PLAYERS: Hero Supermarket, which operates both Giant and Hero supermarkets, along with 221 Guardian health and beauty stores and 131 Starsmart convenience stores, recorded sales growth in the first nine months of 2011 of 16.37%, to Rp6.61trn ($793.2m). Alfamart, meanwhile, owned by Sumber Alfaria Trijaya, reported revenue growth of 33.03% for the first nine months, amounting to Rp13.41trn ($1.61bn).

Figures for the first nine months for Indomaret, owned by Indomarco Prismatama, were unavailable, yet for 2010, revenue was around Rp14trn (1.68bn). Results for the first nine months for Matahari Department Store, since 2010 owned by Meadow Indonesia, were also unavailable, but the store hit revenue growth of 12.73% in the first half of 2011 compared to the previous year, reaching Rp1.86trn (223.1m). Most of these outlets, which constitute the largest such stores in Indonesia, also either began or continued with impressive campaigns of outlet expansion during the year.

OPENINGS: Hero Supermarkets opened 37 new stores nationwide during the first nine months of 2011, including two Giant hypermarkets, with plans to continue opening outlets in the fourth quarter of 2011. MPP, meanwhile, has a rolling five-year plan to build 80 new hypermart outlets, with 22 new branches to open by the end of 2011, targeting Java and Eastern Indonesia. Indomaret, launched 525 new stores in the first half of 2011, with a target of 800 new outlets by the year’s end. The company specialises in mini-markets, with some 39% of its stock of 5480 such outlets operated as franchises. The company opened three branches in outlier districts in 2011, in Cirebon, Makassar and Palembang. After opening 1439 new stores in 2010, Indomaret’s main mini-market rival, Alfamart, plans to open 1000 more outlets by the end of 2011.

Matahari Department Store has much more modest capital expansion plans for 2011, consisting of 10 new stores and the renovation of several existing ones. Carrefour, meanwhile, is widely expected to replace its two lost outlets, while a new European retailer, Germany’s Metro Cash and Carry, is entering the market, with plans to open its first store in 2012.

The cash and carry segment up until now has been the province of Makro – the 2010 segment leader – Indogrosir and Goro, with customers mainly from the small retailer community. Membership fees have been steadily cut, as competition from hypermarkets is fierce.

RING THE CHANGES: All these major stores, and minor ones too, are operating within a changing Indonesia, which requires changing products, too. With 2012 expected to see around 38m urban households, thanks to an urbanisation rate of around 3.3%, stores are having to respond to the needs of an urban population with changing patterns of work and leisure. “The lifestyle of Indonesians has radically changed over the past 10 years and they do not have the time to sit down and eat a proper meal," Wendy Yap, president director of Nippon Indosari Corpindo, pointed out to OBG. "As a result, the consumption of transportable food and beverage products, like bread, is on the rise. You cannot eat a bowl of noodles on the bus.” Thus there has been growth in convenience products, such as readymade meals, fast food and other processed commodities. Evidence of this can be seen in results by chains such as California Fried Chicken (CFC), owned by Pioneerindo Gourmet International, which had revenue growth in the third quarter of 2011 of 18.49%, and Fast Food Indonesia, which owns the Kentucky Fried Chicken (KFC) franchise and posted 13.48% growth for the same period. Location is a key factor here, as urbanisation also drives up the value of retail sites near commercial areas.

CFC and KFC are both expanding in Java and on other islands in the year ahead, with KFC targeting South Sumatra, Jambi, and South Sulawesi for new stores. This is also evidence of a move out of Jakarta, Java and Bali to other islands as they begin to urbanise and see economic growth boost disposable incomes.

MOVING EAST: Indeed, 2011 has seen a number of retail companies head for eastern Indonesia in particular. Mitra Adiperkasa (MAPI), which has the Starbucks and Burger King franchises, among several others, is heading for Ambon and Jayapura, where it expects to attract local high-end consumers for its fast food products. Meanwhile, MPP’s Hypermart expansion plan also is targeting the east – Manado, Ambon, Bali and Kendari specifically – with future expansion being envisioned all the way through to Papua.

The region has poor infrastructure, yet enormous potential given its very underexploited nature. There are likely to be some tough challenges ahead in guaranteeing supply chains, given the current state of the transport, storage and refrigeration network.

NON-GROCERY CHAINS: Elsewhere, one other sign of the effect of demographic changes on retail patterns is the expansion of non-grocery chains. Hardware stores, for example, have been springing up in urban areas, with Ace Hardware Indonesia (which also owns Toys Games Indonesia and its Toys Kingdom stores) announcing 47.82% earnings growth in the third quarter of 2011, compared to the third quarter of 2010 , reaching Rp1.7tn ($204m). Of this, Rp1.03trn ($123.6m) was from hardware sales. The company has 50 stores across country, opening six new ones in the first nine months of 2011. The largest Ace hardware store in the world, at 15,000 sq metres, is now in the Jakarta suburb of Tangerang at the World Mall-Alam Sutera.

Ace’s main rival is Catur Sentosa, which sells furniture and household appliances via Mitra10 and SBF urniture. Catur Sentosa posted 27.83% earnings growth in the third quarter of 2011, compared to the third quarter of the previous year, reaching Rp3.07trn ($368.4m). Its year end sales target for 2011 was Rp4trn ($480m).

Sales of consumer electronics and electrical goods are also expanding fast, while department store businesses continue to do well. In the latter group, Ramayana Lestari Sentosa owns Ramayana, Robinson and Cahaya, with a major ready-ware and clothing business thus in its portfolio. The umbrella company reported 8.28% revenue growth for the first nine months of 2011, with a store expansion plan also under way that should see six new stores opened by the end of 2011.

The 100th Ramayana department store was opened in 2011, in Aceh’s Hermes Palace Mall, demonstrating again the way outlets are expanding. Lotte, a leading department store chain in South Korea, is also planning to expand to Jakarta soon via a $27m investment. Four stores are planned for the capital, with the first set to open by the end of 2012, The company hopes to have a total of five stores constructed by 2018, though company president Suh Chang-suk told the Jakarta Post in July 2011 that number could increase depending on the response of the Indonesian market.

RULES & REGULATIONS: The entry of more foreign outfits into the Indonesian retail business has been some time coming. Partly, this is due to state regulations, designed to protect local small businesses.

A 2010 rule prohibits foreign direct investment (FDI) in outlets with a floor space of less than 1200 sq metres, meant to protect local mini-market and grocery stores from being priced out by larger international outfits. Restrictions on 24-hour convenience stores are also in place to protect the declining fortunes of traditional grocery businesses, while some local authorities have taken steps to ensure chains do not open close to local markets, where many Indonesians still shop and trade.

A 2006 law, meanwhile, requires that foreign retail franchises use local partners if they are going to expand their businesses in Indonesia. The result of these regulations has been to leave the mini-market segment increasingly in the hands of large Indonesian outfits, such as Indomaret and Alfamart, with foreign entities concentrating on hypermarkets and supermarkets.

At the same time, the government is keen to promote increased FDI in retailing – in line with its continued efforts in other areas of the economy – with those outfits already in the field looking able to achieve substantial returns on their investments in the sector.

Partly, this is due to low costs – local salaries and wages remain relatively low, as do land prices and the costs of many locally sourced commodities. Large returns are also partially because of the robust growth mentioned above, with foreign entities able to capitalise on a reputation for quality and the prestige of their brands.

INFORMAL SALES: One other challenge for foreign investors – and indeed, for Indonesian chains – is the informal retail sector. While data on this is by definition hard to find, most market analysts suggest this segment continued to grow in 2010, with the informal sector a common sight on the streets of any town or city. The grocery sector is most strongly affected by this, with sales of tobacco and food and drink by street hawkers common. Other products often sold this way include books, DVDs, clothing and footwear, mobile phones, and other electronic and electrical appliances.

Local regulations can be a challenge in terms of land acquisition. Time delays in obtaining licences and permits is an issue companies remain concerned with.

FREE TRADING: Meanwhile, the growing impact of the ASEAN-China Free Trade Agreement (ACFTA) is also being felt on the retail trade, with this impact sometimes becoming controversial.

The ACFTA, which came into effect on January 1, 2010, is increasing competition, leading to more availability and affordability of certain products, although also challenging domestic producers. Certainly, ACFTA implementation has been followed by a jump in Indonesia’s trade deficit with China – up from $4.6bn at the end of 2009 to $5.6bn at the end of 2010 – yet free trade with other ASEAN countries has also seen largely similar increases in imports. Malaysia, for example, remains the chief source of imports in terms of food and beverages. A factor to consider here is Indonesia’s poor transport infrastructure, which sometimes makes it more expensive for retailers to source local products than it is to source foreign ones.

The ACFTA and ASEAN more generally, along with the host of other FTAs to which Indonesia is a party, or is soon to be one, will likely make imported retail items cheaper and more widely available, which may in the end be good both for the consumer and for retailer margins. Yet there may also be a downside risk in future protectionist measures, as governments move to keep safeguarding local industries.

BANKING ON CHANGE: One other outcome of changing economic and social circumstances has been the increased availability of consumer credit for Indonesians. Going forward, more bank link-ups with retailers are widely expected, taking an example from Carrefour’s link to Bank Mega and Matahari’s link to Bank Mandriri, which provide loyalty and credit cards to customers, boosting both banks’ and retailers’ margins. Bank Mega has also for some time provided credit for Carrefour’s suppliers, creating another dedicated line of business for the bank to profit from.

Mitra Adiperkasa, which holds franchises for a series of clothing stores, such as Marks & Spencers, HE Mango, MaxMara and Stradivarius, is also tying up with Bank Central Asian (BCA) to promote that bank’s credit cards in its store. Mitra is on schedule to open 100-150 new stores across country in 2011, with sales growth predicted to come to around 20%. Thus, the next period should also see an expanding consumer credit market fuel further retail growth.

OUTLOOK: The Indonesian retail market remains a highly price-sensitive one, although an increasing awareness of brand quality is also evident, as incomes rise and information about products becomes more widespread, thanks partly to continued penetration by information and communications technology.

Indeed, one trend that is now appearing on the radar is internet shopping, which while still relatively small – around 4% of the consumer electronics sales in 2010, for example, with an overall value of around Rp100bn ($12m) that year – shows great promise. Between the years 2009 and 2010 the sector managed to expand an impressive 38% in value. Naturally, the precarious state of the global market will also likely have an impact on Indonesia’s economic growth (and thus its own consumer behaviour) in the months ahead.

Yet Indonesia remained largely unscathed by the 2008-09 downturn, with the size of its huge domestic market cushioning it against external shocks. Thus, expansion into geographical areas that have previously been neglected is likely to continue, albeit with some caution given the infrastructure constraints, while competition on price and quality will remain fierce. The country’s consumers meanwhile, are becoming increasingly familiar with modern retail outlets, patterns and options – and many clearly are still wanting even more.