Interview: Virendra Prakash Sharma
How will downward revisions of Indonesia’s GDP impact retailers’ expansion plans going forward?
VIRENDRA PRAKASH SHARMA: While it is true that this could affect the expansion plans of some companies, for retailers operating within the middle to upper income groups there is great resilience. Demand in this area of the market is therefore unlikely to be badly affected. Going forward though, such revisions affect overall market sentiment and with GDP growth forecasts being scaled down from 6.8% to under 6% there is definitely a psychological impact in terms of confidence. In the last couple of years there has been vast growth within the retail sector, and it is likely there will be a period of consolidation over the next 12 months. I would not say this is due to the election but rather a combination of factors including the Jakarta Mall Moratorium, which will prompt a momentary and likely beneficial pause for retailers, which may allow them to consider their next move.
How do you foresee the incoming moratorium impacting the retail sector’s growth, and how could Jakarta benefit from such an action?
SHARMA: Rental rates are going up due a lack of new supply, however, productivity cannot immediately increase which puts pressure on the retailers in terms of their margins. There is certainly capacity for Jakarta to have more malls relative to available land and per capita supply, however, the city’s infrastructure and related congestion problems must first be addressed.
The moratorium is very much the correct decision for the time being, as it will allow the city’s administration to tackle existing infrastructural deficiencies. Indeed, Jakarta’s mass rapid transit and monorail projects are long overdue and, once they are realised, I hope that they have a fantastic effect on the city’s retail prospects.
Regionally speaking, people need to be comfortable with coming to Jakarta and travelling between our excellent shopping destinations; however, at present, this cannot be guaranteed. As a result we have been losing out to Singapore and Hong Kong, respectively.
What measures can be taken for Indonesia to compete more effectively within the ASEAN region?
SHARMA: The significant reduction of the current tax on luxury goods is an important step. There are hundreds of outbound flights going to Singapore and Hong Kong where Indonesians travel to avoid domestic luxury taxes. Such measures must be abolished in order to ensure that we keep our consumers in the country.
In Indonesia, the two biggest factors affecting the retail sector are rents and wages, and we are often paralysing ourselves in this sense. While rental is a more complicated issue, wage increases are having serious affects and any further significant increases will put a question mark over the sustainable operation of many garment factories. While, on one hand, the wage increases will certainly benefit some workers, many others will likely be forced out of their jobs in light of resultant factory closures. A balance must be found before the negatives outweigh the positives.
Another area where Indonesia can improve is in e-commerce. Retailers are investing in online infrastructure and are starting to see encouraging results. While Indonesians still value face-to-face transactions at the mall, there is a growing acceptance as to the benefits of shopping online, which is being catalysed by greater penetration in the airline and hotel booking sectors.
Are current growth estimates realistic, and for how long can the retail sector expand at this pace?
SHARMA: Indonesia is the fourth most populous country in the world. In the next couple of years per capita income will likely cross the $5000 mark and there will undoubtedly be tremendous growth.
While some people overestimate the number of middle class people in the country – for example referring to figures of between 40m and 80m people – a more realistic number is around 40m-45m. There is still major potential in Indonesia and while it has perhaps been outshone by China and India in the past, looking ahead it is a country offering a bright future for retailers.
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