Indonesia's rapid retail development

All eyes are on China and India as promising markets for the future. The huge Indonesian market, however, also offers interesting opportunities. Local and foreign retailers are developing modern retail structures at a rapid pace, especially in the urbanised areas where a middle class is emerging. Carrefour and Dairy Farm are actively engaged, while there is speculation on other foreign retailers’ interest in Indonesia.
Elsevier Food International, Vol.9, No.1, February 2006Pascal Kuipers

Like other markets in South-East Asia, Indonesia is a transitional market where modern retail structures are on the rise while traditional distribution networks are still the dominant channels, catering to the majority of people. Especially in the large cities of the Indonesian archipelago, modern retailing is developing fast.

Indonesia’s rapid development pace of modern retail formats is happening against a background of a strongly developing fast moving consumer goods (FMCG) market. According to AC Nielsen’s ShopperTrends research, the Indonesian FMCG sector increased its value sales by 14 per cent in 2004 (in 2003 the growth rate was seven per cent), whereas in neighbouring countries the 2004 growth rates were lower.

Modern retail structures like hypermarkets, supermarkets, convenience stores and discount stores represent some 25 per cent of the market in Indonesia. In value terms, PriceWaterhouseCoopers (PwC) expects the modern retail market in Indonesian to reach IDR80.7 trillion in 2007 (US$7.9 billion by the 2005 exchange rate), with an average annual growth of IDR9.5 trillion (US$930 million).
Traditional retail structures like street markets and kiosks still cater to the vast majority of Indonesians, especially to people living in the countryside and to low income groups in the urbanised areas. But traditional retailing is gradually declining as modern retail formats increase their business. They increasingly cater to people living in urbanised areas, which is 40 per cent of Indonesia’s population of 230 million.

An emerging middle class
Despite the tsunami disaster of December 2004, increasing inflation, fuel price rises and an expected increase of the interest rates, consumer confidence remained intact which benefits the Indonesian economy at large. GDP and GDP per capita have been growing in recent years and are expected to maintain their growth rate. Also from a socio-demographic perspective, conditions for retail development look good in Indonesia. Some 51 per cent of its 220 million population is under 25 years old. A middle class, representing some ten to 12 per cent of the population, is emerging at a growth rate of some ten per cent.

There is, however, another side to the coin as unemployment has increased strongly, especially among young people. Almost two-thirds of the unemployed are in the 15-24 age group. According to PwC, labour costs have increased by more than 60 per cent in the past decade without being offset by an increase in productivity. Furthermore, labour markets in Indonesia have become rigid, influenced by increases in minimum wage rates and uncertainty over labour regulations. Subsequently, even an emerging market like Indonesia is confronted with a harsh fact of globalisation, as manufacturers of labour-intensive industries in particular prefer to locate their activities in lowest-wages regions such as China and Vietnam.

A recent report by the French Ministry of Economy, Finance and Industry (MINEFI) on the retail sector in Indonesia, refers to ACNielsen data which show an increase in disposable income for household expenditure such as food, electricity, water, petrol and maintenance products. An emerging middle class, illustrated by a significant increase in the highest A and B categories, is most obvious in Indonesia’s cities, comments the French report.
It is therefore not surprising that modern retail structures flourish in Indonesia’s cities. Especially on the most densely populated island of Java where the country’s largest cities are situated, such as the capital Jakarta, and the cities of Semarang, Bandung, Surabaya, Yogyakarta and Malang. Modern retailing is also developing in cities elsewhere in the Indonesian archipelago, such as in Medan and Palembang (Sumatra), Denpasar (Bali) and Makassar (Sulawesi).

The metropolitan area surrounding Indonesia’s capital Jakarta is the focal point of development of Indonesia’s state-of-the art retail. This area – also referred to as ‘Jabotabek’ comprising also Jakarta’s satellite cities of Bogor, Depok, Bekasi and Tangerang – ranks among the world’s ten largest metropolitan areas with some 18 million inhabitants. It is in this area where most of the country’s modern retailers are represented.

 

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Country Characteristics

Population: 242 million (July 2005)
GDP: US$827 billion
GDP: Growth rate at 4.9%
GDP: Per capita US$3,500
GDP by sector:
-Agriculture 14.6%
-Industry 45%
-Services 40.4%

Source: COA World Factbook 2005

 

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Local and foreign retailers
Before the first foreign retailers entered the Indonesian market, local retailers were already actively developing modern retail formats. Since the 1970s, Indonesian retailers have established a network of supermarkets all over the Indonesian archipelago and currently most Indonesian towns and cities have at least one supermarket with a sales surface between 1,000 and 4,000 m² at their disposal.
Leading local retailers are Matahari – which set itself an ambitious task in 2005 to become the number one grocery retailer in Indonesia within five years – Alfa Retailindo, Ramayana, Indomarco and Hero. Like Matahari, which operates department stores, supermarkets, hypermarkets, discount stores and drugstores stores, Alfa Retailindo has a multi-format strategy (convenience stores, cash & carries and supermarkets). Its majority shareholder is local company Sigmantara Alfindo which owns 56.6 per cent of the shares. Recently, the US company Altria became the retailer’s second largest shareholder after its subsidiary Philip Morris acquired the Indonesian cigarette manufacturer Sampoerna which holds 23.4 per cent of the shares.
Ramayana operates department stores and supermarkets, usually on the ground floor or basement of its department stores. Indomarco focuses on its Indomaret convenience stores and has a leading position in this sector. Quite a contrast with Hero, the company which started as a supermarket operator, but which developed into a multi-format retailer (supermarkets, hypermarkets, convenience stores and drugstores) under the influence of its main – and soon majority – foreign shareholder Dairy Farm.

According to PwC domestic retailers represent some 75 per cent of the modern retail market, while foreign retailers account for 25 per cent. By 2007, foreign retailers will have a share of over 31 per cent of the modern retail market, expects PwC, because they will have the funds needed to finance market penetration.

First mover was the Dutch company SHV that entered Indonesia via its subsidiary Makro Asia, opening its first Makro Cash & Carry store in 1992. Catering to small entrepreneurs, the cash & carry format suits an emerging market well. Foreign retailers, however, really started to affect developments in Indonesia after the government began facilitating foreign investment in 1998. In that year, Indonesia’s retail industry was opened to foreign investment following a letter of intent signed by the Indonesian government and the International Monetary Fund. Immediately, foreign retailers began to invest in the country. A commitment which was shaken – but not destroyed – by the 1998 riots and financial crisis that hit Indonesia’s economy.

Delimmo, the investment arm of Belgian retailer Delhaize, converted a convertible bond into a 51 per cent stake in the local retailer Superindo in December 1998. In February 1998, Hong Kong-based retailer Dairy Farm acquired a 32 per cent stake in local retailer PT Hero. Currently it holds a 44.55 per cent stake in PT Hero and Dairy Farm has a right to increase this to a 69.1 per cent majority share at will.
Both are examples of foreign retailers acquiring a share in a local supermarket retailer to gain a foothold in the Indonesian market. When French retailer Carrefour entered the Indonesian market – also in 1998 – its aim was to organically increase a network of hypermarkets in collaboration with its joint venture partner Tigaraksa. As hypermarkets were at the time an almost unknown phenomenon on the market – in 1995 local retailer Matahari had started with its Mega M hypermarket format – acquisition of an existing network was no option. As French retailer Promodès followed the same strategy, establishing a joint venture with local group Sinar Mas in order to operate Continent hypermarkets in Indonesia, this venture was included in Carrefour’s Indonesian operations following the merger of both French groups in 1999.

 

Formats of growth
Indonesia’s supermarket sector is performing below average. The urge to deal with this is a new impetus to the modernisation of Indonesia’s modern retail structures. Matahari is modernising its store network by closing underperforming stores and repositioning other supermarkets to its ‘MarketPlace’ format which is targeted at a middle and higher income clientele. PlanetRetail refers to other local retailers that also announced to invest in modern retail structures. Ramayana intends to invest some US$45 million to open ten new stores, mostly in areas outside Java. Alfa Retailindo – which saw its 2004 net profits plummet by 71 per cent to US$11,731 – announced in August 2005 to be investing US$4.1 million in order to open two new stores in Makassar and Bekasi. This investment which equals five per cent of total revenues brings the retailer’s store number to 36. Hero announced an investment of some US$16.2 million for five Giant hypermarkets, six additional Hero supermarkets, twenty drugstores (Guardian) and twenty c-stores (Starmart).

Hypermarkets and convenience stores are Indonesia’s main growth formats in modern retailing. Carrefour is the uncontested leader in the hypermarket sector with 20 stores which are mostly situated in the Jabotabek region, with total sales exceeding US$600 million. Contrary to its experience in the difficult and saturated Japanese market, Carrefour managed to put its stamp on the hypermarket sector in the emerging market Indonesia.

As said, at Carrefour’s market entry in 1998 hypermarkets were almost non existent in Indonesia and the existing initiatives were undertaken by department store retailers. They could not compete with the French hypermarket expert. “We don’t go head-to-head on pricing with Carrefour anymore,” PlanetRetail quotes Matahari’s senior executive Danny Konjongian as saying, when the local retailer decided in 1999 to reformat its Mega M hypermarkets to a one-stop-shopping concept (a combination of a Matahari department store and a supermarket). According to Matahari, the presence of a Carrefour hypermarket in Jakarta led to a 40 per cent drop in turnover at a neighbouring Mega M store.
Matahari, however, did not abandon the hypermarket sector. It developed ‘Hypermart’, a compact hypermarket format with sales surfaces between 4,500 and 9,000 m².

Currently there are 14 Hypermarts and Matahari plans to have a store base of some 50 stores by opening new outlets and converting larger Matahari supermarkets to the Hypermart banner.

Carrefour, Matahari and Dairy Farm are large enough to cough up the funds needed to partake in the development of the hypermarket format. Other retailers are looking for alternatives to offset declining sales levels in traditional supermarkets and grocery stores. Investing in the convenience store sector (also referred to as ‘mini markets’) is recognised as the cheaper option in search for growth. They are rapidly growing in popularity, as they are often conveniently located in housing estates and residential areas.
One year ago Carrefour’s CEO José Luis Duran said, “Asia is our real engine of growth”, adding that probably half of the stores Carrefour intended to open in 2005 and 2006 would be in Asia. China will probably be the focal point of Carrefour’s Asian ambitions, but Carrefour is also represented in Taiwan, Thailand, Malaysia, Singapore and Indonesia. In Indonesia, Carrefour benefits from an early mover advantage as besides Dairy Farm no other large multinational retailer have set up shop here. Wal-Mart – which was in Indonesia before but was loss making – and Tesco are rumoured to be interested in setting up shop in Indonesia.

India is an even more promising market in South Asia but there the rumoured massive entrance of multinational retailers has not yet materialised. In this respect the wait for such things to happen in Indonesia will be even longer.