Modern Retailing

Indonesia

Economic News

22 Jul 2010
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As shopkeepers are winding down from the rush of end-of-Ramadan shopping, the government is finalising legislation delineating zones for modern retailers and traditional markets.



It is estimated that 70% of annual retail sales occur during Ramadan and modern retailers are capturing an ever-increasing amount of business. Figures from the consumer statistics firm ACNielsen reveal that large retail chains now account for a 30% market share in Indonesia. And their share is growing fast.



"Modern retailers have grown by an average 25% per annum compared to only 10% for traditional markets," said Thomas Darmawan, executive director of the Indonesian Food and Beverages Association.



The government however is inclined to protect traditional forms of retail due to the number of people employed in this sector and the extensive network of traditional shops throughout Indonesia.



"Modern retail operations do not necessarily pose a challenge to traditional retail models in Indonesia, given that they focus on a different segment of the market," Ipung Kurnia, the president director of the Hero Group, told OBG. "Although the government tends to protect small-scale retailers, modern shops do operate more efficiently given their central purchasing centres, while at the same time creating jobs as they expand into the regions."



Meanwhile, in a bid to protect politically sensitive traditional retailers, the government is finalising details of a new bill set to delineate the rights of both types of retailers. The new rules will protect the proximity of traditional markets to the neighbourhoods, while setting out specific zoning rules for modern retailers.



In line with the government's approach to regional autonomy, local authorities will be responsible for deciding the appropriate zoning.



"It should be up to local administrations to decide where traditional and modern markets should be to best benefit the local economy," Susilo Bambang Yudhoyono, Indonesia's president, said in August.



The new rules will build on provisions set forth in the negative investment list produced in July, which details in one set of rules the restrictions of foreign investment in each sector of the Indonesian economy. This list sets the traditional retail sector as off-limits to foreign investors, while at the same time allowing 100% foreign ownership of modern supermarkets and hypermarkets.



Indonesian authorities maintain that the aim is not to restrict the growth of modern retailers, but rather to optimise the volume of local produce sold through modern means as well as to ensure a level playing field through proper zoning.



"The government's position is not to restrict modern retailers," said Mari Pangestu, Indonesia's minister of trade. "The issue here is where they should be located; so the local government must have proper zone planning."



Although the new retail rules will delineate the location of modern retailers, their growth will likely continue as strong as it has in recent years.



Since the liberalisation of the retail sector in 2000, foreign players such as Carrefour and Macro have entered the market with large- and medium-sized outlets. Meanwhile local players such as Matahari and the Hero Group have expanded their supermarket and hypermarket operations, while Alfamart and Indomart dominate the minimarket segment.



The number of modern outlets, from hypermarkets to minimarkets, grew by 14% in 2006. Traditional stores grew by 3% to 1.84m throughout Indonesia.



Although a majority of the larger modern retail outlets are located in the major cities of Jakarta, Surabaya, Yogyakarta, Palembang and Makassar; retailers are increasingly looking at regions further afield for new outlets, following the rapid economic development in certain regions.



Spurred on by a rapid growth in consumer credit and falling commercial interest rates, consumer confidence has recovered from the impact of rises in the price of fuel in 2005. Through loyalty cards, such as the one offered by Carrefour, and low interest loans modern retailers are capturing a growing share of this spending. In addition, with estimates for the middle class at around 20m people and bullish forecasts for growth in this class, retailers are positioning themselves aggressively to attract this segment.

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