2008-2009 DATA CONSULT. All rights reserved.

January 2008


A Presidential Regulation is expected to be issued next month on retail business. The regulation is important  for development of retail business in the country as it concerns zonation of modern retail outlets particularly hypermarket outlets, trading terms, and protection of traditional market  centers and small and medium enterprises (SMEs).

In the past decade the modern retailers have expanded rapidly. According to the association of Indonesian retail companies (Aprindo) retail business grew 10%-15% annually. Retail sales in 2006 were valued at Rp 49 trillion and this year the sales are forecast to rise to Rp 57 trillion. The condition would be more conducive for retail business with the cut in the Bank Indonesia interest rates and efficiency in production cost.

Modern retailers have a  share of 30%  with traditional markets taking 70% of the retail market value. The opportunity is still wide open for modern retailers to grab a wide share of the retail market. Modern retailers have continued to expand with new outlets springing up in large cities.

Indonesia  with a population of 220 million, the fourth largest in the world, is a potential market for retail business.  A presidential decree No. 118/2000  allowed foreign retailers to operate in the country. Since then a number of foreign retailer companies  entered the country operating large outlets such as hypermarket.

The strong interest shown by foreign investors in retail business in the country indicates that the country is highly potential. The operations of foreign retail companies in the country, however, could be a threat to local retailers. Foreign retailers operate mainly in large cities. Carrefour has outlets in Jakarta, Yogyakarta, Surabaya, Palembang  and  Makassar.

The expansion of foreign hypermarket has prompted local retailers to follow their steps. The Matahari Group, which was previously the largest operator of department stores has opened its own hypermarket outlet. Hero, which has the largest number of supermarket outlets has also joined in the hypermarket  competition. It even plans to  expand  some of its supermarket outlets to become  hypermarkets.

More foreign retail companies are expected to come to the country when the economic condition improves. Meanwhile, the old players would be more expansive  to  exploit  any  potential market.  The  competition will be tighter  and

all players will  work hard to find effective strategy  to defeat other competitors. Under such condition competition is not always fair. Meanwhile the legal system is not entirely effective to handle all disputes. Controversies over locations, competition with traditional markets and a host of other problems  will need an effective legal system to sort out conflicts of interest fairly to create a favorable investment climate.

Business structure of modern markets

Retail business has become a global business and Indonesia  could not escape from being the target of  invasion of  foreign retailers. With superiority  in capital, technology and management, foreign retail giants would easily expand their foothold in the country. Their entry has significantly  changed  the  outline of retail business   in the past five years marked with the rise and fall of  retail companies in the country.

Indonesia has become a target of invading foreign retail giants in the past several decades. Each decade was marked with  the emergence of new format  of modern retail business with traditional market always being pushed to the sideline. Early the 1980s when big supermarkets began to make their appearance in Jakarta , traditional markets such as Cikini and Santa  market centers, once known to be the main shopping places for the middle to high class members of the community  were soon forgotten by most of their regular visitors.

The expansion of supermarkets was faster  early the 1990s with new outlets springing up  in strategic areas rapidly reducing  the role of traditional market centers. At that time many new residential complexes were opened  in Java notably in the Jabotabek area. The opening of new human settlements open room for  new market but  almost  all dominated by  supermarkets.

In the middle of the 1990's  when Makro and Goro opened their outlets especially in Jakarta, supermarkets faced  potential competitors for the first time. Makro and Goro introduced a new format of modern markets different from supermarkets  especially in size of place they occupied and the variety of their products. The difference was sharper  in services to their customers.  Makro and Goro are not as generous in services to its customers but  it offers cheaper prices. They out greater emphasis in price than in services to attract buyers.

Meanwhile,  small scale supermarkets called minimarkets, have also joined in the competition. Minimarkets succeeded in expanding their systems, they grow along large supermarkets in the competition although they have different market format and segments. The two systems expanded with competitive prices and convenience.  Minimarkets, however, are closers to the end consumers  but they are smaller in scale.

Among the leading minimarkets are Indomaret  and  Alfamart  having the largest chains. In a relatively short period Indomaret and Alfa have succeeded in establishing   large networks of outlets. Indomaret already has 1,880 outlets and Alfamart 1,757 outlets.

The most serious challenge faced by supermarkets came from hypermarkets, first by Carrefour from France. Hypermarkets have  larger  outlets  with greater variety of goods  in cheaper prices. The presence of hypermarkets  threaten the position of supermarkets, especially as hypermarkets are allowed to operate in strategic areas in the business center  or in  city center, which have been the main operating areas of supermarkets.

Hero, which has been a leading supermarket company, could not stay put waiting for a  deadlier attack. The group decided to open their own hypermarket outlets  by teaming up with Malaysia's Giant Retail Sdn Bhd. Aware that Jakarta has been dominated by Carrefour, Giant chose to establish itself first in Surabaya and Tangerang  where there had been no hypermarket.  The Hero Group  also expanded its minimarket outlets called Starmart.

Not all supermarket networks have survived in the sharp competition. Tops, which was owned by Aholds , a retail company from Belgium  operating mainly in West Java was finally sold to Hero.

Number of outlets

In 2006, the number of retail companies in the country  increased from 2005. Hypermarkets expanded 30% in outlets from 106 to 138 units,  supermarket grew 11% from  1,141 outlets to 1,277 outlets and minimarkets 15% from 6,465 outlets to  7,476 outlets.

In 2006, the number of retailer outlets shot up 15%  to 8,891  from 7,712 units in 2005  with locations in large cities in the country.

The high increase in the number of modern retail outlets in the country has been attributable mainly to minimarkets, which have recorded a sharp increase in the number of outlets. In 2005, the number of minimarket outlets totaled 6,465, but in 2006, the number shot up to  7,476 units.

The minimarket outlets are dominated by Indomaret and Alfamart. The outlets include those under the franchise system  and ones individually managed.

Most of modern retailers both local and foreign companies are located in  Java, the most densely populated island of the country.

In 2006, Jakarta has 3,384 outlets of modern retailers or 38.1% of the total number in the country.  West Java had 1,249 outlets  or 14.08%, East Java had 1,075 units or 12.12%, Central Java 905 outlets or 10.2%. After Java, Sumatra has the largest number  with 551 outlets or 6% of the total number in the country.

Jakarta leads in the number of outlets for all types of modern retailers. Jakarta has 39 units or 28% of 138 outlets of hypermarket in the country, 21% of supermarket outlets and 40% of minimarket outlets in the country.

According to the Jakarta Trade Office, the number of hypermarket outlets in 2005 was already too many in the city. In July, 2006, the Jakarta city administration revised the regional regulation  No 2/2002  on private market.

Based on the regional regulation No.2/2002, the location of a modern retail outlet with a floor space of 100-200 sq.m. is at least 0.5 kilometer from local market center. The distance is 1.5 kilometers for an outlet with a floor space of 1,000-2,000 sq.m., 2 km for one with a  floor space of 2,000-4,000 sq.m. and 2.5 km for one  with a floor space of larger than 4,000 sq.m. 

Now a hypermarket outlet must occupy a space in a shopping small. A shopping mall  is  required to comply with the regulation on the distance separating  it from traditional market.

However,  the regulation on location is not fully complied with by some operators of hypermarkets. Plaza Semanggi  and  the Benhil traditional market is less than 2.5 kilometers apart. 

In fact a decision of the Jakarta Governor No 44 in 2003 on private markets  was cancelled by the Administrative Court  apparently in favor of  a  hypermarket operator, which protested the regulation. 

This year the regional administration of Jakarta  will issue only license for less than 5,000 sq.m. of retail outlets occupying spaces in a shopping mall. The provincial administration will not issue license for retail outlets occupying a separate building.

However, the decision  of  the Jakarta regional administration not to issue new license for modern retail outlets  occupying own building has been protested by large retailers such as Carrefour and Giant.

All Makro outlets occupy separate buildings. However, Carrefour has only four outlets and Giant 1 outlet occupying separate buildings. Most of outlets of Carrefour,  Giant  and other Hypermarkets occupy spaces in a shopping mall.

Foreign retailers getting stronger

The presence of Carrefour in 1998 has changed the map of business competition among retailers in the country. Coming ahead of  Carrefour to operate in the country included Walmart, Makro, and  Continent, which was later merged into Carrefour.

Coming later was  Dairy Farm International Giant Retail Sdn Bhd  from  Malaysia. The Malaysian hypermarket  teamed up  with PT.Hero Supermarket Tbk to establish Giant Hypermarket. The Hero Group is the largest supermarket operator  in the country.

In time of economic crisis, Delhaize from Belgium opened its supermarket out lets in the country and not it has 50 outlets.

With the exception of  Walmart, which has left the country. most foreign retailers have reported handsome profit from their operations in the country.

The success of foreign retailers with the hypermarket format  has prompted  the  Matahari Group to open hypermarket outlets called Hypermart. The Matahari Group is a the largest operator of department stores in the country. ......................

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