Riding the High Waves of Indonesia’s Retail Scene

Jul 30, 2014 | Columnist, Commerce, English, Ideas, Ideas for Strategy

Steven Tan, Senior Consultant at Consulus, who spent a number of years in Indonesia muses about what’s next for Indonesia’s retail scene after Jokowi’s victory

Political Gridlock or Transformational Change?
Amidst a close and hotly disputed presidential election, Jakarta governor Joko Widodo, better known by his nickname Jokowi was declared the winner by the election commission on July 22. Jokowi garnered 71 million votes or 53 per cent of the vote; 9 million votes more than his rival contender, ex-general Prabowo Subianto. Prabowo’s legal challenge in the Constitutional Court, alleging widespread electoral fraud and irregularities in vote counting, is largely seen as a face-saving gesture and is unlikely to succeed. Both candidates had used different unofficial exit polls on election day to claim victory. President Yudhoyono had called on both sides to restrain their supporters, to quell growing fears that the rising political tensions could spark fresh unrest and even violence. Widodo is likely to be inaugurated as president in October, when Yudhoyono steps down after a decade in power.

Indonesian Economy in Perspective
The Indonesian Economy had enjoyed a decade of rapid growth fuelled by high global prices for its abundant commodities in the world’s third biggest democracy. Indonesians lives on about 6,000 of more than 17,000 islands in this archipelago that spans 5,000 km from east to west and across three time zones. The immense size of the population which grew from 225 million in 2005 to 250 million and is projected to expand to 270 million in 2020 forming a massive domestic consumption base. Indonesia’s “Competitive Landscape” ranking had improved from 50 to 38 whilst it continued to lag behind in “Ease of Doing Business”, ranking 130 out of 185 countries from 2012 to 2013. GDP per capita is also forecasted to double from US$3,500 to US$6,000 from 2013 to 2020 & triple to US$9,000 in 2030 (Source: World Bank).

Key Political Challenges
The Key Challenges facing the incoming new President is to restore confidence, manage inflationary pressures, resolve the country’s current account deficit, improve physical infrastructure, capitalise on the wealth of natural resources, streamline bureaucracy with policy and administrative changes and to achieve social welfare and pro-business balance. However, systemic corruption which remains rampant is a bugbear that would take more than a generation to overcome.

Indonesian Retail Trend Analysis
Total Mass Grocery Retail (MGR) Sales in Indonesia is valued at US$36 billion in 2013.
The underdeveloped Organised Mass Grocery Retail (MGR) Sector in third-tier countries like Indonesia provides a springboard for growth, a huge opportunity to catch up with the organised retail development in Australia, Japan, Hong Kong & Singapore. Organised MGR in Indonesia is forecasted to account for 30% of total grocery sales in 2020 from a low base of 24% in 2012. This contrasts with Singapore where it already represents 70% of organised MGR in 2012. (Source: Business Monitor International) This is also in line with rapid urbanisation and the continued broadening of affluent consumer bases with higher disposal incomes and levels of consumption supported by modern retailing formats, systems & processes.

Key Obstacles to Growth
High inequality of income and wealth (as measured by the Gini coefficient index), poor physical distribution infrastructure, government interference, restrictive legislations and regulations “protecting” the livelihoods of millions of Indonesians operating in the one million of “warungs” (small traditional mom & pop stores) and in the wet markets are the key obstacles to growth. Lack of “cold chain” food preservation knowledge and equipment, poor bio food safety and hygiene standards of micro & small suppliers are other concerns. There is also a need for public education to overcome myths of consumer preference for “warm meat & wet-market freshness” vs chilled and frozen products.

The Shocking Exit of Carrefour

In a defining moment, on 20th November 2012, Carrefour announced the sale of 60% of its controlling stake in its Indonesian hypermarket and supermarket business to its joint venture partner CT Corp, the banking, media and retail conglomerate controlled by Chairul Tanjung, the enterprising Indonesian businessman for Euro 525mn (US$673mn). This marks the fifth exit from an overseas market under Georges Plassat, Carrefour’s new chief executive, as the world’s second-biggest retailer by sales, reduces debt and reinvests in its core markets in Europe, China and South America. Under the agreement, CT Corp through its subsidiary, Trans Retail Indonesia, will take full control and Carrefour will become an exclusive franchisee until 2017 – similar to the deal Carrefour struck earlier the same year in its exit from Greece.

The Market Entry of Lotte
At the end of 2008, LOTTE Mart of LOTTE GROUP, a large retail company from South Korea, acquired 19 Makro Wholesale stores in Indonesia and officially renamed them LOTTE Mart Wholesale on April 24, 2010. Currently, LOTTE Mart have 23 Wholesale and 12 Hypermarket outlets spread across17 cities in Indonesia.

The Rise and Rise of Modern Grocery Trade

Minimarts and convenient stores lead the proliferation of small retail formats with its modern air-conditioned ambience, greater accessibility, cheaper product prices and compact product range; increasing by 63% from 10,289 outlets in 2008 to 16,720 outlets in 2011. Alfamart is the market leaders in Indonesia’s small-format modern retail segment with 8,557 stores accounting for 50% share of the market as at end 2013. Alfamart plans to open 800 new stores every year. In the long term, it expects franchisee stores to constitute 40% of the total store base (up from its current 29%). It now has 19 DCs (Distribution Centres) throughout the country, each DC catering to 150 to 600 stores. As of May 2010, Its main rival, Indomaret of the Salim Group, reached 4261 outlets with total of 2,444 outlets owned and the remaining 1,817 are franchise-owned stores. Indomaret is estimated to have about 7,600 outlets as at end 2013. It plans to invest Rp 1.3 trillion (US$109 million) to open 1,300 new outlets across the country in 2014. Franchising offers a viable option for the “warung” small stall owners to upgrade and embrace positive change for the future. Stronger bargaining power, greater supply chain efficiencies and integrated retail software systems have accelerated the growth of the Modern Grocery Trade business.

Private Labels
Trans Carrefour is leading the market to strengthen private label products development. It currently has about 3,000 stock keeping units (SKUs) of private label products, representing 7.5 percent of the company’s product portfolio, which has reached around 40,000 SKUs from 4,000 suppliers across Indonesia. More than 60 percent of its private label products are non-food, such as clothes and wooden containers, whilst the rest are food.

The best-selling private label’s list includes the ten “sembaco” everyday food staples like rice, noodles, soy sauce, cooking oil and sugar. It currently partners with about 300 small and medium scale enterprises (SMEs) to supply all the private label products. It had planned on increasing the number of its SME partners but often faced problems regarding quality standards.

Incorporation Traditional Heritage Values in a Modern Setting
All the major retailers are adopting a Multi-local, Multi-Format approach to better relate and meet the aspirations of the Indonesian consumers who value their rich traditional cultural heritage.
New more flexible and adaptable retail merchandising and display concepts to replicate the “wet market” and the Traditional “Sawung” Hut (Jajan Pasar) is evident. Small local operators are offered favourable concessions to run local traditional food stalls and assimilated well into the hypermarkets operations, aiding and alleviating the plight of traditional traders.
Stéphane Deutsch was appointed President Director of PT Hero in July 2014. Mr Deutsch moves into the role from his current position as Chief Executive Officer of Dairy Farm’s operations in Vietnam, which he had held since August 2013. Prior to joining Dairy Farm, Mr Deutsch worked for Carrefour for 23 years in various Chief Financial Officer roles and as Chief Operating Officer for Carrefour South China. In 2010, Stephane became Chief Executive Officer of Carrefour Malaysia and Singapore. He is a French citizen with 25 years of experience in retail operations and finance roles across China, Malaysia, Singapore, Korea, Vietnam, Portugal and France.

Djoko Sutanto, Founder PT Sumber Alfaria Trijaya Tbk (Alfamart)

At age 17, Djoko Susanto started managing his parents’ modest 560-foot stall inside Pasar Arjuna, a traditional market in Jakarta. The stall, called Sumber Bahagia (“source of happiness”), sold groceries at the time, but soon Djoko decided there was a bigger opportunity peddling cigarettes. Business was brisk as not only smokers but also small wholesalers and retailers became frequent customers. He met Putera Sampoerna in the early 1980s and the two agreed in 1985 to build 15 similar stalls in Jakarta. The first Alfa Minimart (later changed to Alfamart) was opened in 1989 to appeal to Indonesia’s lower to middle-class customers in search of cheap prices and convenience. Putera Sampoerna, then sold his clove and tobacco cigarettes business, along with its subsidiaries (including his firm’s 70% stake in Alfamart), to Philip Morris International in 2005 for US$5 billion. With no interest in retail, Philip Morris sold the Alfamart stake to Djoko and private equity investor Northstar. In 2010, Djoko bought out Northstar, leaving him with 65% of the company. Shares of the thinly traded retailer quadrupled over two years, catapulting him to be No. 25 among Indonesia’s richest and into the ranks of the world’s billionaires, with a net worth of US$1.04 billion.
(Source : Forbes Indonesia)

The “Jokowi” Factor
The 53 year old President-elect of Indonesia is vested with the mammoth responsibility of stirring the innate human spirit of Indonesians based on “Pancasila”, the 5 foundational principles.
To galvanize the people to let go of personal and communal selfishness and greed, to embrace social justice for the disadvantaged and the common good of one’s neighbour; on the path of righteousness, to collectively realise the full potential of an united democratic republic of Indonesia.
Optimistic Realistic View of Future Trends
The optimistic realism in me purports that Indonesians would be able to surf the high waves of progress & prosperity with their “perahu layar motor” (PLM – ‘traditional motorised sailing boat’) and not be destroyed by the tsunami of divisive political affiliations or the terrorism of radical Muslim fundamentalists. A rich and diverse blend of the traditional Indonesian heritage of 300 distinct ethnic groups speaking 740 different languages and dialects in the 33 provinces and the Special Administrative Region of Yogjakarta, upholding the ideal of Indonesia’s motto of “Bhinneka Tunggal Ika” (“Unity in Diversity” literally, “many, yet one”). To leverage on the strength of human capital and the abundance of natural resources to realise its full potential as the world’s largest Muslim country and founding leader of Asean.


 

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Steven Tan has more than 30 years of management experience and advises CEOs and senior leadership in FMCG sectors covering the Asia Pacific. If you like to have a chat with Steven, he can be reached at steventan@consulus.com

This article is part of The Columnist, a newsletter by Consulus that offers ideas on business, design and world affairs. For past issues, browse the complete archive.