2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
June 2011


DEVELOPMENT OF MODERN RETAIL BUSINESS


Current Issue

In 2009, another foreign retail company, the Lotte Group, from South Korea began operation in Indonesia after acquiring Makro from SHV Holding of the Netherlands at a price of US$ 223 million. The name of Makro was changed with Lotte Mart. The Lotte Group, which started retail business in 1979, operates more than 90 outlets in various countries such as China, Russia, Vietnam, and India.

Competition in retail business is getting sharp after 40% of the shares of Carrefour Indonesia, the largest hypermarket in the country were acquired by CT Corporation, a subsidiary of the Para Group at a price of US$ 350 million in 2010. The Para Group, which is owned by Chairul Tanjung, an Indonesian business tycoon, already has big units in various business areas such as television, banking, insurance and financing sectors.

In the past five years , the assets of retail business in the country has increased rapidly  to follow the growing number of the outlets  to reach 18,152 units in 2011 from 10,365 units in 2007. The Indonesian Association of Retail Companies (Aprindo) said the retail business in the country grew 10%-15% per year. Retail sales in 2006 were valued only at Rp 49 trillion, but in 2010, the value shot up to Rp 100 trillion. In 2011 the value is forecast to rise further by 10%-15% to Rp 110 trillion with the fairly strong purchasing power of the people. Hypermarkets lead in income followed by mini-markets and supermarkets.

Indonesia with a population of 230 million is a potential market for retail business. In the past ten years, business in modern retail in the forms of hypermarket, supermarket and mini-market has been mushrooming, marked with the construction and operation of new shopping malls in large cities. Big retailers such as hypermarkets and department stores have become anchor tenants attracting visitors and shoppers. Modern retailers especially supermarkets and mini-markets have even expanded to smaller cities in district areas. Currently modern retail business has grown in suburban areas with the growing number of residential complexes built in city's outskirts.

With the government policy allowing foreign investment in retail business as regulated under the presidential decree No. 118/2000 foreign retailers began to enter the country. The interest shown by foreign retailers indicates that the business is highly profitable. The operation of foreign retailers, however, has brought a threat to the local retailers. Foreign retails have operated not only in Jakarta, but also in other large cities. Carrefour, for example, has in the pasty five years opened outlets in Yogyakarta, Surabaya, Palembang and Makassar. Now, however, license for mini-markets in Jakarta is no longer easy to come.

The condition has encouraged local retailers, which already established their foothold in the market such as the Matahari Group, which was earlier strong in department store business, to expand heir business by opening their own hypermarket outlets. Hero, which was earlier a leader in supermarket business, has also opened its own hypermarket outlets. It even changed some of its supermarket outlets into hypermarkets.

Currently, modern markets have a  30% share of retail sales in the country with traditional markets  accounting for 70%, indicating that modern retail business still have good opportunity for expansion  Currently operations of modern retailers have expanded to areas out side Java including Sumatra, Sulawesi, Kalimantan  and  Maluku.  Big retailers like Carrefour and Giant have wider market compared to their competitors as in addition to operating in hypermarket they also compete in supermarket business.

More foreign retailers are expected to venture in Indonesia in the coming years especially with the country's economic stability and improved business climate. Competition, therefore, is expected to be sharper forcing players to find an effective strategy to survive.

Structure of business in modern markets

Retail business has grown attracting global investors in Indonesia. They are superior financially, in management and networks. They have changed the map of retail business in the country in the past five years.

Modern retail business began to enter the country in early the 1980s drawing middle to high class customers. Leading traditional market centers like Pasar Cikini and Pasar Santa in Jakarta began to lose their rich customers.

Supermarkets grew aggressively in early the 1990s at the expense of traditional market centers. Supermarkets quickly mushroomed in the Greater Jakarta area and other larger cities in Java.

In the middle of the 190s, supermarket began to face competition from hypermarket with the operation of Makro (now Lotte Mart). Modern market format of Makro is different from supermarket especially in the size of plot of land occupied, the varieties of goods offered.  Hypermarkets could offer goods with cheaper prices as they buy goods from suppliers in lower prices. They are given higher price discount with larger purchases from suppliers.

At the same time small supermarket with the format of mini-market grew   coming as new potential competitors for larger supermarkets. The two formats of modern market have wide and strong networks chains. Mini-markets offer competitive prices and conveniences. Mini-markets have the advantage of being closer to customers as they could operate in smaller housing complexes and residential areas.

Among leading mini-market chains are Indomaret and Alfa. They are dominant in this sector. In relatively short time they quickly mushroomed into giant chains in number of outlets. 

The most difficult time for supermarket probably came when Carrefour hypermarket from France started operation in the country. Carrefour opened large outlets offering goods in cheaper prices. Carrefour opened outlets in strategic areas and attracted mainly middle to high class customers at the expense of supermarket.

With the sharp competition from hypermarkets and mini-markets, Hero, which was the supermarket leader, began to change its positions. It opened its own hypermarket outlet in joint venture with Giant Retail Sdn Bhd of Malaysia. Aware that Jakarta has been too crowded where Carrefour has dominated the market in strategic areas, Giant chose to establish its foothold first in Surabaya and Tangerang, which had no hypermarket yet. Hero also established its mini-market chain called Starmart.

Not all supermarkets survived the growing competition Supermarket Tops of Aholds from Belgium, which operated mainly in West Java, almost collapsed and was finally acquired by Hero.

Business format

Modern retailers are growing to meet the market demand. The format of modern market may change any time. There has been no standard set for retail business in Indonesia.

The main formats of modern retail business in the country are hypermarket, supermarket, mini-market or convenience store, department store, and specialty store. 

Hypermarket, supermarket, and mini-market are generally the off springs of wholesalers and traditional markets. Therefore, hey are called modern markets.  The main differences between modern and traditional markets   are in the size of plot of land occupied, range of products and convenience in services. .

Modern markets referred to in this reports are limited only to hypermarket, Supermarket and Mini-market.

Hypermarkets
Hypermarket was the form of big modern market. Hypermarkets are housed in more spacious buildings and offer greater varieties of goods. The hypermarket concept was first introduced in the country by Carrefour from France. Wholesaler Makro is included in the category of hypermarket as Marko has format almost the same as hypermarket. Makro, however, has different market targets as it offers goods   to big buyers such as restaurants, hotels and catering. It would not offer goods to individual customers.

A hypermarket has more than cashiers and sells at least 25,000 items of daily necessities like electronic products, and furniture.  Carrefour even sells 50,000 types of goods in each of its outlets, Giant 35,000-50,000 types. Makro, however, offers only around 15,000 types. Macro's prices are lower as its offer goods only to large buyers. For example, it offers toothpaste at a cheaper per unit but a buyer is required to buy at least a dozen. Its customers, therefore, are owners of small shops, stores, hotels or restaurants.

Supermarkets
Supermarket has started operation in the country before hypermarket was introduced. Supermarkets offer self service for its customers. 

Mini-markets
Mini-markets also known as convenience stores are an off spring of notions stores and offer convenience and similar services as offered by supermarkets but in smaller scale.

Number of outlets

In the past five years, the number of retailer outlets in Indonesia has increased 17.57% a year on the average. In 2007, the number of retail business in Indonesia was recorded only at 10,365 units, but in 2011, the number has shot up to 18,152 units in various cities in Indonesia.

The outlets of hypermarket grew in number from 99 units in 2007 to 154 units in 2010. By the end of 2011, the number is expected to grow further to 167 units. 

On the contrary, the number of supermarket outlets has tended to decline from 1,377 units in 2007 to 1,230 units in 2010. Some of the outlets have been closed because of sharp competition from mini-market. In addition, some of the supermarket outlets have been converted into hypermarket outlets.

The increase in the number of retail outlets is attributable mainly to strong growth recorded in the number of mini-market outlets. In 2007, mini-market outlets totaled 8,889 units - up to 15,538 units in 2010.  The number is expected to increase further to 16,720 units in 2011. Indomaret and Alfamart are the largest chains of mini-markets which offer franchise system.

The largest in Jakarta

Most modern markets including local and foreign companies are in Java, which is home to most of Indonesians and the largest business center in the country

In  2010, the number of modern market outlets in Jakarta and satellite cities (Bogor, Tangerang, Bekasi, Depok) make up  38.1% (6,916 outlets) of the total number, West Java  14.08% ( outlets), East Java 12.12% (2,556 outlets), Central Java  10.2% (1,852 outlets). Sumatra has the second largest number making up around 8.2% (1,488 outlets) of the total number.

Jakarta overcrowded

Jakarta has the largest number of modern market outlets for all formats in 2010, the country had 152 hypermarket outlets and 44 units of them were in Jakarta. Jakarta had 21% of the number of supermarket outlets and 40% of mini-market outlets.

The number of hypermarket outlets have been considered too many in Jakarta, therefore, in June 2006, the city administrations revised the regional regulation No 2/2002 on private modern markets.

Based on the regional regulation No.2/2002, modern retail outlets with a floor space of 100-200 sq.m. may not be located closer than 0.5 kilometer from the traditional market. The distance is 1.5 kilometers for modern retail outlet with a floor space of 1,000 - 2,000 sq.m; 2 kilometers for one with a floor space of. 2,000 - 4,000 sq.m.  and 2.5 kilometers for one are having a floor space of more than 4,000 sq.m.

Currently hypermarket outlet is required to be located in a shopping mall as the license for a shopping mall is granted after meeting the regulation on distance form traditional market.

So far some hypermarket owners have not complied with the regulation in the location permit. Some weak authorities still easily bow to the financial power of investors. They allowed themselves to be dictated by the investors. For example, the Plaza Semanggi is allowed to be built on a location less than 2.5 kilometers from the Benhil market. Even a decision of the governor No 44 of 2003 on directive for private modern markets was cancelled by the State Administrative Court after being protested by a hypermarket owner.

This year, the Jakarta provincial administration will issue retain business license only for a modern retailer having a floor space of more than 5,000 sq.m located in a shopping mall. The administration will not renew license for one housed in a stand alone building.

However, the plan that bans big retailer in a stand alone building has been strongly rejected by the owners of big hypermarkets, Carrefour and Giant.

In Jakarta, all outlets of Makro are located in separate buildings. Carrefour has five outlets occupying separate or stand alone buildings. The outlets of Giant and Hypermart and other smaller hypermarkets are housed in shopping malls as anchor tenants.

Foreign retailers stronger

The presence of Carrefour since   1998 has sharpened competition in the retail business in Jakarta. Before Carrefour started operation in Jakarta, other foreign retailers had operated in Indonesia. Such as Walmart, Makro, and Continent. Continent was later acquired by Carrefour.

Other foreign retailers that came later included Dairy Farm International Giant Retail Sdn Bhd from Malaysia. The Malaysian firm teamed up with PT.Hero Supermarket Tbk to establish hypermarket called Giant. Earlier Hero dominated supermarket business in Indonesia, with its Hero supermarket chain. .

The success of foreign investors with the format of retail format of hypermarket has encouraged local retailers like Matahari Group to join in the competition in the hypermarket business by opening its own hypermarket chain called Hypermart. Earlier the Matahari Group had succeeded in its department store business with Matahari department store chain.  Matahari has the largest number of department store outlets in Indonesia.

In 2009, the Lotte Group from South Korea expanded operation to Indonesia by acquiring Makro from SHV Holding NV of the Netherlands Lotte paid US$ 223 million for the acquisition. The Lotte Group was founded by Shin Kyuk Ho in 1973. Currently, it has 45 subsidiaries operating in hotel, food, distribution, retail, chemical and construction service business. The group started business in the retail sector in 1979. Now it has more than 90 outlets in various countries including China, Russia, Vietnam, and India. The Lotte Group is the fifth largest business group in South Korea with assets totaling 31 billion euro with net income of 23 billion Euro in 2007.

However, the foreign domination began to decline with the take over of Carrefour by the Para Group in 2010.  The Para Group also known as CT Corporation owned by Chairul Tanjung, the indigenous business tycoon acquired 40% of PT Carrefour Indonesia. Currently Trans Ritel is the largest single shareholder of Carrefour SA (39%). Other shareholders include Carrefour Nederland BV (9.5 %), and Onesia BV (11.5%).  The 40% stake was worth US$350 million, for which CT Corporation used loan from Credit Suisse, Citibank, ING and JP Morgan. ....

See list of contents>>
 
MONTHLY REPORT
INDONESIAN COMMERCIAL NEWSLETTER (ICN)
HOME            Head Line            Focus            List of Contents          To Subsrcibe