Indonesia’s retail sector has been growing at a rapid pace since 2005 in line with the growth of the middle class. After sluggish growth of 5% in 2009, 2010 saw sector growth of 12% with 15-20% expected for 2011. Traditional retail habits that saw local markets as the centre of activity have been quickly replaced by that of malls and hypermarkets that offer convenience as well as entertainment. Partnerships among banks and the retail sector to offer incentives and consumer credit is also fuelling spending. Existing local and foreign companies are entering into ambitious expansion plans to gain a stronger foothold in secondary cities and developing regions throughout the country. Thus, competition in the sector is getting more intense as foreign companies seek to move in on the country’s huge retail potential and low penetration rate.
Since 1998, foreign companies were allowed into Indonesia’s retail sector which saw the entrance of the French multinational, Carrefour in the same year that has 64 hypermarket outlets to date (2011). Other players followed suit such as South Korea’s Lottemart and Japan’s Sogo in department stores. Foreign companies exist alongside large scale local retailers such as Matahari which is Indonesia’s largest retailer by market value, Indomarco Prismatama and Hero Supermarkets. Hypermarkets have gained popularity in the modern retail sector since their introduction in 2003 and are now accounting for over 40% of the sector’s sales. Carrefour holds the leading market share at 40% for 2010 followed by Matahari’s ‘Hypermarket’ chain that has 52 outlets and Hero’s Giant chain. Changing lifestyles will see their dominance continue to gain strength as they offer a combination of convenience and low prices that appeal to Indonesian consumers.
Sources: Planet Retail; Economist Intelligence Unit
Traditional markets still account for around 60% of total retail spending throughout the country as modern retail facilities are heavily concentrated in Java. This is expected to gradually decrease in line with the expansion plans of retailers and retail property developers to go into the regions outside of the main urban centres of Java and beyond. Carrefour announced plans in 2011 to open an additional 20 stores a year for the coming years. Matahari, following its decision to not sell its hypermarket business at the beginning of 2011, has announced plans of 17 new Hypermart stores with focus on provinces in Eastern Indonesia such as Papua. Lotte Mart, which came into the market by acquiring local retailer Makro Indonesia in 2008, is planning on opening 30 new hypermarkets by 2015. Mini market and convenience store chains also have ambitious targets to ride the retail wave. Sumber Alfaria Trijaya’s Alfamart chain that has 4,853 stores across the archipelago plans on adding a further 800 outlets while main rival Indomaret is targeting 800 new stores for 2011 to bring their total franchise portfolio to 5,755 stores.
Government regulations to protect traditional retailers can create a somewhat restrictive environment for retailers to operate in. Regional Regulation No. 2/2002 requires that modern retail outlets can only be set up a certain distance from existing traditional markets. The distance is determined by the size of the modern retail space, although the implementation of this measure varies according to the local regency in question that distributes the permits. In addition, as of Presidential Decree 111/2008, foreign companies may only operate in retail spaces that exceed 1,200 square metres and department stores of 2,000 square metres or more. Other regulations include Presidential Decree No. 112/2007 and Ministry of Industry Decree No. 53/2008 which stipulates that hypermarkets can only be established on arterial roads or roads that can be covered over a high speed. Supermarket and department stores are restricted to roads that can be travelled at a low speed or for short distances. Such restrictions are an unattractive prospect for investors given the slow rate of infrastructure and transport development. This is particularly true of areas outside of Java where the most interesting retail opportunities lay. This will require extensive coordination between retailer, local government and investors in Public Private Partnership projects such as freeways and toll roads to make future ventures viable.
The involvement of the Indonesian Business Competition Supervisory Committee, KPPU, in recent cases of retailer expansion to ensure that they do not encroach of local zoning regulations is a reflection of the overlapping and sometimes confusing regulations. This has impacted on expansion plans for companies such as Indomaret and seen an ongoing investigation in Carrefour after it purchased a stake in Alfamart. Clearer regulations for the future are therefore needed to incentivise both local and foreign retailers to expand into less developed regions of the country where there is need for the logistics and distribution network that large scale retailers bring with them.
As retail sales figures continue to soar to an estimated $513 billion USD by 2015 (EIU), the banking sector has been quick to tap into the potential benefits. In order to build filiality among customers in the face of intensified competition, retailers have partnered with banks to offer loyalty rewards and other perks. Carrefour established a partnership with Bank Mega while Matahari’s Hypermart offers a credit card with Bank Mandiri. Such cards offer regular discounts as well as financing on large purchases such as electronics and white goods. This is serving to fuel the boom in consumer credit with plenty of space for further growth given the estimated 4.5% penetration of credit cards (Bank Indonesia). The convenience that such cards offer will serve to accelerate the growth in use of modern retail outlets among the population.
Indonesia’s modern retail sector holds huge potential for future growth, particularly in the hypermarket sector as well as department stores and speciality outlets. Competition in the sector will continue to heat up as expansion plans of major retailers get underway albeit at a lesser pace than they may have hoped due to government regulations. More foreign players are also expected to come into the sector such as Germany’s Metro which has announced its plans to enter the market in 2012. However, success is not guaranteed and many foreign companies have come and gone in the past after having failed to capture the local market. It is however certain that the modern retail outlet is very much here to stay in Indonesia and will continue to grab market share from that of traditional markets as incomes rise and increase the demand for convenience.
Global Business Guide Indonesia - 2012
Retail Sales: $133.9 billion USD (2011)
Real Sector Growth: 18%
Number Employed: +20 million
Modern Retail Market Share: ±40%
Main Areas: Hypermarkets, Supermarkets, Department Stores, Mini Markets, Speciality Stores.
Relevant Law: Presidential Decree No. 111/2008 which states that foreign companies may only operate in retail spaces greater than 1,200 sqm for hypermarts and 2,000 sqm for department stores.