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Services | Indonesia’s Retail Boom is Far From Over

Indonesia's retail landscape is undergoing profound change as modern outlets increasingly replace wet markets and independent small shops. High consumer confidence, an expanding middle class and rising personal incomes have made private consumption the most important component of Indonesia's economy and attracted numerous global retailers. Partnerships among banks and the retail sector to offer incentives and consumer credit are also fuelling spending (See Indonesian Banking Sector Outlook: In Need of a New Growth Strategy). While rising costs and increasing competition in the main urban areas are putting pressure on margins in the retail sector, investors can tap new growth potential in regions that are still under-served by modern outlets and shopping malls, but where demand is growing quickly.

Indonesia’s Retail Boom is Far From Over

A major geographic shift is taking place in Indonesia's retail landscape, with the centre of attention increasingly moving from Greater Jakarta and Bali's main tourist areas to regional capital cities across the country

 

While fluctuating strongly from one month to another, retail sales have generally outperformed GDP growth in recent years with double-digit annual increases. Central bank data show that sales at 650 retailers surveyed across the country declined in January 2014 from the previous month, but were up almost 25% on the year. In terms of goods categories, information/communication equipment and other household equipment have seen the greatest increases since 2010, clearly benefitting from the rising living standard enjoyed by middle-class city dwellers.

Indonesia Real Retail Sales Index (Base year 2010 = 100)

Indonesia Real Retail Sales Index (Base year 2010 = 100)

Source: Bank Indonesia 

Modern retail spreading to the regions

A major geographic shift is taking place in Indonesia's retail landscape, with the centre of attention increasingly moving from Greater Jakarta and Bali's main tourist areas to regional capital cities across the country. A closer look at the Bank Indonesia figures reveals that retail sales grew at a modest 7% in Jakarta between January 2013 and January 2014 and declined by 13% in the Balinese capital of Denpasar. By contrast, sales over the same one-year period rose by 33% in Bandung, 31% in Semarang and 23% in Surabaya. These three Javanese cities were followed by North Sumatra's capital of Medan (+17%) and North Sulawesi's Manado (+14%).

Taking note of this trend, both local and foreign retail companies are pursuing ambitious expansion plans to develop new markets in the so-called secondary cities, where rising purchasing power is fuelling a similar consumption boom to that already seen in Greater Jakarta. And like in the capital, the traditional local markets that were once the centre of retail activity are being increasingly replaced by efficient hypermarkets and mini markets, with the latter being particularly popular among Indonesia's young population (See The Rise of Modern Retail Outlets). The expansion of modern retail, coupled with the overall growth momentum in consumer spending, opens up a host of opportunities for foreign-based franchisers and retailers to set up shop across Indonesia and build on their brand value and competency in running outlets.

Leading retail companies are expanding their operations in the Indonesian market: 

  • Jakarta-listed PT. Matahari Putra Prima, which owns the Hypermart chain of supermarkets as well as the Foodmart chain and Matahari department stores, opened 39 new stores across the country in 2013, comprising 19 Hypermarts, 3 Foodmarts and 17 Boston Health & Beauty outlets. The company, which focuses on fast-moving consumer goods (FMCG) but also sells apparel, books and electrical goods, had a total store count of 222 in more than 60 cities at the end of 2013 and is committed to further expansion, according to its 2013 Annual Report.
  • PT Hero Supermarket, which apart from the Hero chain of supermarkets also owns the Giant hypermarkets, Starmart mini-markets and the Guardian chain of pharmacies, opened a net 77 new stores in 2013. The company has announced plans to “build a substantial multi format presence in burgeoning cities across the archipelago.” Hero funded its growth strategy with a rights issue in June 2013 and will diversify its business with the opening of Indonesia's first IKEA store in late 2014, according to the company's Annual Report.
  • PT Trans Retail Indonesia, which acquired full ownership of Carrefour Indonesia after acquiring the missing 60% stake from former French parent company Carrefour S.A. in January 2013, continued its expansion in 2013 and at the end of the year had 85 Carrefour hypermarkets in 28 cities, making it the country's leading hypermarket operator.
  • South Korea's Lotte Group is increasing its presence in Indonesia with hypermarkets, wholesalers, duty free shops and department stores, after first entering the market in October 2008 through the takeover of 19 stores from PT Makro Indonesia. Through local subsidiary PT Lotte Shopping Indonesia, the Korean retail giant is fanning out into the regions and opened several new Lotte Mart hypermarkets in 2013.

Mini-markets making their presence felt

Jakarta today boasts more than a hundred shopping malls. If the capital city is any indication for consumer trends, then the growth potential across the country is enormous. But while malls with their hypermarkets and department stores steal most of the attention and account for a major share of overall sales, mini-market franchises are becoming an important factor and are claiming an increasing market share in the grocery segment. Consumers appreciate mini-markets for their convenient location and long opening hours. Like their larger-shop rivals, the leading mini-market chains Alfamart, Indomaret and 7-Eleven have all announced plans for aggressive expansion to grow their business beyond Java. More nimble than supermarkets and hypermarkets, mini-markets will in many cases spearhead the move of modern retail into towns and cities up and down the country.

Franchise regulations, however, place strict conditions on whom a franchiser can issue licenses to, particularly after reaching a certain number of outlets. Current franchising policies effectively favour local small and medium-sized enterprises (SMEs), as do rules requiring a minimum amount of local SME-made goods to be sold in franchise outlets.

Food and fashion to benefit from consumer trends

Despite the ambitious expansion that is already underway, Indonesia's retail market holds much more future potential thanks to the country's economic development and favourable demographics. Large numbers of people are set to join what the Boston Consulting Group in a 2013 study called the middle-class and affluent consumer (MAC) socioeconomic category. By 2020, the consultancy predicted, the MAC population would almost double to 141 million. Other studies have come to similarly upbeat conclusions about the country's growing consumer class and rising per-capita income, which are bound to boost discretionary spending.

In the largest cities, growing purchasing power, coupled with the young average age of Indonesia's most-courted consumers, should benefit the fashion segment in particular. Hence it is hardly surprising that newcomers are still entering that market. Japan's Fast Retailing Co opened its first four stores of fashion retailer Uniqlo in Indonesia between June 2013 and April 2014, while Sweden's Hennes & Mauritz inaugurated its first of several planned Indonesian outlets in October 2013, through local franchisee PT Hindo (See Indonesia’s Textile and Clothing Industry).

The spread of modern retail into the regions, on the other hand, should see the food and beverage segment reap most of the gain initially. This is because living standards in the secondary cities still lag far behind those in the urban centres, and lower-income consumers tend to spend a larger portion of their earnings on groceries. In a second wave of expansion, though, the proliferation of outlets and rising consumer aspirations are set to reinforce one another, which should support sales in any goods category – from fashion to FMCGs and from electronic gadgets to household appliances.

Online retail not pulling its weight

Internet shopping is considered to be under-utilized in Indonesia even though major brands such as Carrefour Indonesia offer products on their websites at the click of a mouse. In the past, this was blamed on e-commerce security concerns and inadequate infrastructure. However, as consumers are beginning to feel more at ease with online banking and as internet connectivity is becoming both more robust and more affordable, online sales are a major new opportunity that retailers cannot afford to pass up.

Rising inflation, a depreciating rupiah and slower GDP growth reflected a harsher macro-environment in Indonesia in 2013, which could very well take the shine off retail sales even in 2014. The sector also has to deal with intensified competition and rising costs from salaries, rents and utility bills. In the long run, however, there can be little doubt that favourable demographics, rising personal incomes and plenty of untapped potential make the world's fourth-most populous country an attractive home for retail investment.

Global Business Guide Indonesia - 2014

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Indonesia Services Snapshot - Retail

Total Retail Sales: $376 billion USD (estimated, 2015)
Sales Growth: 7.1% (yoy, September 2015)
Number Employed in the Sector: 26.65 million (February 2015)
Number of Modern Retail Outlets: ±30,000 (2015)
Main Areas: Hypermarkets, Supermarkets, Department Stores, Minimarkets, Speciality Stores.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List implies that foreign companies may only operate in retail spaces greater than 400 sqm for convenience stores, 1,200 sqm for supermarkets, and 2,000 sqm for department stores.