Increased demand and digitalisation are expanding the Indonesian retail sector

 

A large and youthful population, a fast-rising middle class and rapid digitalisation have underpinned strong growth in Indonesia’s retail and e-commerce sectors. Indonesian shoppers are the third-most optimistic globally, with consumer confidence benefitting from a steady rise in personal income that has supported recent growth in personal consumption and retail sales. New retail supply is on the rise in Jakarta and also across secondary cities, while occupancy rates of premium-class shopping centres remain above 90%.

The formal retail sector could come under pressure in the coming years, however, as rapid growth in e-commerce activities is challenging traditional retail models. Although retail activity remains concentrated in brick-and-mortar stores and shopping malls, e-commerce growth has soared in recent years, with online sales and customer volumes recording consistent double-digit growth since 2013.

Logistics challenges persist, and payment infrastructure is still developing, although government efforts to transform Indonesia into a cashless society have ramped up in recent times, supported by the launch of the National Payment Gateway (GPN). This could significantly augment the number of cashless transactions made in the country, further supporting mid- and long-term retail and e-commerce growth.

Size & Performance

With a population of 265m and a median age of 28, Indonesia’s retail sector is considered as one of the most promising in Asia. The sector’s growth path has been broadly positive for over a decade, supported by rising incomes as well as a burgeoning middle class. “Retail was, in fact, the last sector that was impacted by negative macroeconomic developments such as low commodity prices and currency depreciation, especially for affluent consumers,” Fetty Kwartati, head of investor relations at local high-end fashion retailer Mitra Adiperkasa, told OBG. The Indonesia Shopping Centre Association reports that the Indonesian consumer base is dominated by the 24- to 35-year-old demographic, with shoppers preferring to visit stores that have specific products with complete collections. According to the World Bank, GNI per capita in current US dollars, which is calculated by using the Atlas method, recorded broadly positive growth over the previous decade, increasing from $1600 in 2007 to $2140 in 2009, $3570 in 2012 and a high of $3730 in 2013, before moderating to $3430 in 2015 and $3410 in 2016. The GNI per capita improved in 2017, rising to $3540, according to the World Bank. Rising incomes have buoyed retail sales, according to Kusumo Martanto, CEO of Blibli.com. “The Indonesian consumer is very price sensitive, which has to do with GDP per capita. Things would change dramatically above the $5000 threshold,” he told OBG.

In January 2019 Bank Indonesia (BI), the central bank, reported that domestic retail sales rose by 3.7% in 2018, up from 2.9% in 2017, as household consumption improved due to rising consumer purchasing power. In 2018 the annual GDP grew at a rate of 5.2%, its highest level since 2013, pushing a 5.1% growth rate in household consumption, up from 4.9% in 2017. Domestic consumption also accounted for 57% of GDP.

Consumer Confidence

In February 2019 the Conference Board Consumer Confidence Survey found that consumer confidence rebounded during the fourth quarter of 2018, with Indonesia scoring a consistent 127 points throughout the year, excluding a slip to 126 points during the third quarter.

The online survey, conducted by Nielsen, ranked Indonesian consumers as the third-most optimistic in the world after those from India (133) and the Philippines (131), with confidence benefitting from late-year rupiah appreciation and the holiday period, a time when household spending is generally elevated. According to Nielsen, 79% of consumers surveyed were optimistic about financial security, 68% were optimistic were about job prospects and 63% reported optimism regarding increased spending over the next 12 months. While spending optimism was up 6% quarter-on-quarter, job prospect optimism slipped by 5% due to increasing fears regarding job losses due to automation. This was further exacerbated by political debate surrounding the Making Indonesia 4.0 development agenda (see Industry chapter).

BI released a similar survey in December 2018, the Consumer Expectation Survey. The bank reported that consumer confidence fell to 122.9 points in the third quarter of 2018, from 125.2 in the previous quarter, but rebounded to 123 in the fourth quarter, supported by “aggressive year-end sales promotions”.

Structure

Although the e-commerce segment has been expanding rapidly, cash transactions at brickand-mortar outlets still continue to dominate the retail landscape. “It will still take some time until online shopping fully replaces offline shopping. In terms of overall shopping volumes, the online segment only amounts to 5-7%. In rural areas, brick-and-mortar retailers still remain very strong,” Hendrik Tio, CEO of Bhinneka.com, told OBG.

In October 2018 Euromonitor, an international market research firm, released a report detailing Indonesia’s top-10 retailers by sales. Retail group Indomarco Prismatama, which operates the Indomaret convenience store chain, took the top spot with $4.9bn of sales and 15,633 outlets in 2017, followed by Alfamart with $4bn across 13,991 outlets. The Matahari Department Store ranked third with $1.4bn of sales, followed by Trans Retail Indonesia — which operates Carrefour and Transmart Carrefour — with $1.2bn of sales. Dairy Farm International, which owns the Hero Supermarket Group, Guardian, Star Mart and Giant chains, recorded $903m to rank fifth place, followed by lifestyle retailer Mitra Adiperkasa, operator of Starbucks, Burger King, Adidas, Marks & Spencer and other well-known international brands, with $866m of sales. Matahari Putra Prima Group — holder of the Hypermarket and Boston Health chains — and electronics retailer Erajaya Swasembada reported sales of $781m and $688m, respectively, followed by fashion retailer Ramayana Lestari Sentosa, and bookstore retailer Gramedia Asri Media, with $643m and $430m of sales, respectively.

Liberalisation & Regulatory Reform

The government has been gradually liberalising both its brick-and-mortar and e-commerce retail segments, most notably in May 2016 with Presidential Regulation No. 44, which revised foreign ownership limits on various retail segments set by the country’s Negative Investment List (DNI). In brick-and-mortar retail DNI revisions included a change to ownership limits on department stores with retail space of between 400 and 2000 sq metres, removing a prohibition on foreign ownership and replacing it with a 67% ownership cap. In e-commerce revisions allow e-commerce marketplaces, daily deals, product and price aggregators, and online classified ads sites involving more than Rp100bn ($7.1m) of investment to be 100% foreign owned, although it capped foreign ownership on sites with less than Rp100bn ($7.1m) of investment at 49%.

The administration of President Joko Widodo has indicated it is planning another major overhaul of the DNI in 2019, and in February that year Asian Legal Business, a business intelligence site owned by Thomson Reuters, reported that some e-commerce regulations are expected to be revised again. This bodes well for future investment, with the Australian Trade and Investment Commission (Austrade) reporting in 2018 that the government’s “positive regulatory tweaks” work well for businesses looking to access online shoppers, particularly given the traditionally difficult process of gaining access to average Indonesian consumers. Austrade reported that investments in Indonesian retail have been hindered by complex local operating conditions and a challenging Customs and regulatory environment, with e-commerce offering “the possibility of much easier access by lowering or eliminating many of these hurdles”.

Retail Space

Rising competition from the e-commerce segment and the government to limit new shopping mall developments — stemming from Jakarta’s then-governor issuing a moratorium on new malls in 2011 — has kept Jakarta’s occupancy rates relatively flat in 2018. According to a 2018 report published by real estate services firm Colliers International, retail occupancy rates in Jakarta fell by 2.3% in 2017, a trend forecast to have continued in 2018 as competition between conventional retail formats and online shopping ramp up. Nonetheless, Colliers reported that “the swift influence of online shopping has yet to impact the existence of premium shopping centres, particularly because the merchandise typical of this type of format is not widely transacted online”. Indeed, occupancy rates at premium-class shopping centres have remained above 90%, with Colliers reporting that Jakarta’s premium-class retail occupancy rates were stable at 94.6% in the first quarter of 2018. Notable international brands including Clarks, Banana Republic and Gap closed their Indonesian stores in 2018, although Colliers reported that despite these closures, Indonesia still remains attractive to foreign retailers.

Investment

This is evidenced by recent investment announcements including Chinese retailer Miniso’s decision to open 100 new outlets in Indonesia in 2018, as well as Abu Dhabi’s Lulu Group Retail International’s plans to open 10 new outlets before 2019, after launching two stores in 2017. There have been no further updates regarding these plans as of March 2019.

Jakarta’s cumulative retail supply stood at 4.6m sq metres in the first quarter of 2018, with new supply expected in 2019 as the city’s administration relaxes limits on new mall construction. Retailers are also expanding into the country’s second- and third-tier cities. In July 2018 Colliers reported that five new shopping malls will be built in Jakarta by 2020, with the capital set to see 350,760 sq metres of net leasable area (NLA) enter the market. Six new malls with 225,685 sq metres of NLA will be constructed by 2020 in the satellite cities surrounding Jakarta. Indonesia’s second-largest city, Surabaya, is also slated to see formal retail supply augmented in 2019, with 139,465 sq metres of NLA expected before 2020.

E-commerce

While the traditional retail sector continues to record positive growth, rising competition from the up-and-coming e-commerce segment is set to dramatically transform market fundamentals. “One of the key trends observed is that consumer preferences have shifted from department stores to speciality stores and online shopping,” Kwartati told OBG. According to a January 2018 report published by Austrade, Indonesia’s e-commerce market has recorded dramatic growth in recent years, growing by between 60% and 70% since 2014. Furthermore, citing data from Macquarie Bank, Austrade projected the value of the e-commerce market will grow from $8bn in 2016 to $60bn in 2020.

Estimates from McKinsey are also optimistic, with the firm reporting in August 2018 that the country’s e-commerce market could be valued between $55bn and $65bn by 2022. The report found that the gross merchandise value of goods and services purchased using e- and social-commerce platforms is forecast to reach $40bn and $25bn, respectively, by 2022. Andreas Surya, principal at local venture capital firm Kejora Ventures, notes even higher growth expectations. “The government has estimated that e-commerce will be worth up to $130bn in the coming years, which is much higher than McKinsey estimates,” he told OBG. “Some 50-60% of e-commerce in Indonesia is currently done through social media. With the growth of official platforms, we expect a shift in the market.” Morgan Stanley, meanwhile, reported that Indonesia’s e-commerce growth has exceeded expectations, rising by 50% annually from 2017 to reach $13bn of sales in 2018.

Technological uptake and smartphone penetration are certainly supporting e-commerce growth. Google Indonesia reported that smartphone penetration in the country more than tripled between 2013 and 2016, from 14% to 43%. Demonstrating this growth even further, the “Global Digital Report 2019”, published by Canada’s social media management platform Hootsuite and the UK’s digital marketing agency We Are Social, found that 76% of internet users made a purchase via a mobile device in January 2019, which stood as the highest rate in the world, even surpassing China at 74%. Furthermore, according to McKinsey, the country is expected to add 50m new internet users between 2015 and 2020, simultaneously bringing internet penetration to 53%.

Market Demographics

Smartphone adoption has already made a major impact on e-commerce, with Austrade reporting that there were 18m online shoppers in Indonesia in 2015. McKinsey estimated that this number rose to 30m, or 15% of the adult population, by August 2018. Citing data from Google and state-owned investment firm Temasek, Austrade reported that the total population of online shoppers will rise to 119m by 2025, while Colliers International reported that middle- and lower-income groups benefit the most from e-commerce growth. Usage of smartphones will also permit shoppers to save time offering lower price points when shopping online.

The e-commerce market, with sales of $8bn according to Austrade, is relatively small compared to regional leaders, most notably China, which recorded $692bn of sales in 2017. Indonesia’s e-commerce sales as a percentage of total annual retail sales are also relatively low, at 1.6%, compared to China’s 13%. “In simple terms, Indonesia is not China. Most Indonesian small and medium-sized enterprises (SMEs) are not yet producers, they are sellers,” Teddy Oetomo, chief strategy officer at local e-commerce firm Bukalapak, told OBG. “I would love to see more production by SMEs, but most of them do not yet have the skills, capacity or machinery.” Morgan Stanley estimates are more positive, however, with the bank reporting that the e-commerce market stood at $13bn in 2018, and that the sector will expand by 32% annually over the next five years to be valued at $52bn by 2023.

Austrade and other stakeholders report that e-commerce activity remains concentrated in major urban centres due to ongoing logistical challenges in remote regions. “While e-commerce is currently largely concentrated in Jakarta and Java, there is still considerable room for growth in demand from other cities like Medan, Makassar and Manado,” Farian Kirana, CEO of local courier firm Lion Parcel, told OBG. “Other cities in the eastern part of Indonesia are also set to benefit the most from e-commerce due to the absence of shopping malls there.” The McKinsey report, which found that e-commerce sales account for 5% of total retail sales, echoed these sentiments, noting that e-commerce sales are expected to rise to between 17% and 30% of sales over the next five years. This will offer further knock-on benefits, with the sector set to create 26m direct and indirect jobs by 2022, equivalent to 20% of the workforce.

Regulatory Reforms

With e-commerce sales soaring, the government has been making efforts to improve revenue collection from the industry, with an ongoing regulatory crackdown weighing on the near- and mid-term growth outlook.

In January 2019, for example, the Ministry of Finance announced that as of April that year, all online marketplace operators in the country will be required to detail each vendor’s turnover and report it to the authorities. Online vendors with more than Rp4.8bn ($340,358) in annual turnover are also required to charge value-added tax to their customers and report these values to the authorities. New regulations also stipulated that small and medium-sized business vendors now pay 0.5% income tax on all turnover, while vendors of large enterprises must pay a 25% corporate income tax. With the latter being the same rate that is applied to conventional retailers.

This followed the October 2018 announcement that all online merchants – including small vendors using the digital infrastructure of large e-commerce players – will now be required to obtain tax identification numbers. According to Reuters, both reforms have been criticised by the Indonesian E-Commerce Association, which has said that new rules will drive smaller online sellers to shift activities to social media platforms. These reforms are also claimed to negatively impact transparency and revenue collection.

E-commerce Players

Indonesia’s five largest e-commerce players by web traffic are Lazada, which was recording 118.5m monthly visitors as of March 2018; Tokopedia, with 111m monthly visitors; Bukalapak, with 100m monthly visitors; Blibli, with 45.9m monthly visitors; and Shopee Indonesia, catering to 39.1m visitors. Apart from Lazada, which is majority-owned by China’s Alibaba, and Singapore-based Shopee, all of the country’s largest e-commerce players were founded in Indonesia, with the sector benefitting from rising foreign investment. Austrade reports at least $2.5bn of foreign direct investment (FDI) in Indonesian e-commerce platforms between 2016 and 2018, usually made by leading Chinese and Western firms via joint ventures or partnerships. Morgan Stanley, meanwhile, reported that Indonesian internet companies attracted $7.4bn of capital in 730 deals during 2017 and 2018. According to Austrade, local e-commerce giants have achieved market dominance because they provide businesses with a platform to establish an online shop, accept transactions and deliver goods to customers. With sales and competition rising, some stakeholders now predict an upcoming period of consolidation, which would leave one or two dominant players controlling the bulk of e-commerce in the country. “The e-commerce segment already has many competitive players, so the vertical market tries to only focus on niche segments,” Tio told OBG. “Mergers and acquisitions are likely to happen in the short to medium term, as well as regional expansion of e-commerce powerhouses”.

With competition rising and consolidation expected, McKinsey has identified several additional challenges weighing on e-commerce growth in Indonesia, most notably infrastructure bottlenecks and high logistics costs. Although the government is addressing its infrastructure deficit with a massive public investment programme (see Transport & Infrastructure chapter), logistics challenges remain one of the biggest obstacles facing e-commerce expansion. Another significant challenge facing e-commerce growth is the limited development of non-cash payment infrastructure, with McKinsey reporting a lack of seamless, secure and scalable payment options, despite considerable potential for the development of this market.

Cashless Society

At present Indonesia’s payment infrastructure is comprised of three main components, including card payments, peer-to-peer (P2P) transfers and digital money. P2P regulations allow the usage of transfer and payment gateway services as well as the provision of e-wallet services, although BI issued a regulation prohibiting the use of cryptocurrencies for payments in December 2017.

According to the “World Cash Report”, published in April 2018 by global security company G4S, just over 50% of all transactions in Indonesia are made in cash. Use of cashless payments has risen significantly in Indonesia in recent years, with debit card transactions increasing by 84% between 2012 and 2016, even as the value of ATM withdrawals and currency in circulation rose by 65.5% and 53.1%, respectively, over the same period. Credit card transactions rose simultaneously by 37.7%, while e-money transactions recorded a 578.9% growth rate over the same period. The report found that the number of payment cards per inhabitant has risen sharply by 56.7% over the previous five years, one of the highest growth rates in Asia after India (136.3%) and China (69.3%).

The government has targeted transforming Indonesia into a cashless society. With cashless and e-money payments on the rise, BI has taken on an increasingly important role in supporting growth of cashless transactions, most notably through the GPN launched in December 2017, which serves as a key pillar of the e-commerce roadmap. The GPN will also help transform Indonesia into a cashless society, by introducing important infrastructure-sharing requirements for participating banks. The new payment system introduces interoperability for the payment systems of the country’s four-largest banks (see analysis).

Under Regulation No. 19/8/PBI/2017, all domestic cashless transactions made within Indonesia are expected to be processed using the GPN, meaning any parties wishing to provide payment processing services will be required to connect to the system. Indeed, issuers, acquirers and payment gateway operators – including banks with ATMs and debit cards – were all required to be connected to the GPN via membership in at least two of its four switching institutions by June 2018. BI reported that 95 banks connected to the GPN system by the June deadline, which is a significant increase as 49 banks were connected during the previous month.

E-commerce Roadmap

In August 2017 the government published its first e-commerce roadmap, an important mid-term policy framework comprising eight main pillars including funding, taxation, consumer protection, education and human resources, communication infrastructure, logistics, cybersecurity, and implementing organisations. The framework includes key targets for relevant government entities and has set specific deadlines for each target.

Under the funding pillar, the roadmap calls for micro-credit programmes to support app developers, as well as for a business incubator, and service offerings including start-up mentorship, creation of a universal service obligation fund for digital SMEs and e-commerce start-ups, and support for different financing options such as angel investment, seed capital from venture capital and crowd-funding platforms.

In taxation, the roadmap calls for lower tax rates for local start-up investors and reduced taxation procedures for e-commerce ventures recording less than $357,191 in turnover annually. The map also calls for the establishment of a national e-commerce awareness campaign and national incubation programme, and for e-commerce players to use the national logistics system, Sislognas, to strengthen routes between cities and rural areas. National broadband development is the top priority under the communication pillar, while cybersecurity prerogatives include establishing a national surveillance and e-commerce monitoring system, education campaigns addressing cyberthreats, and standardised data collection. Consumer protection has also been a major focus. In Indonesia, there has been direct prioritisation towards reducing bank fees, improving transparency, boosting financial inclusion and monitoring tax revenue collection through the establishment of the GPN.

Private Sector Wish List

In December 2018, 34 institutions were granted e-money business licences, including OVO, the country’s dominant payment platform, as well as TC ash, Dana, GoPay and PayPro. These companies will play an increasingly important role to help Indonesia shift towards becoming a cashless society, while offering private companies and investors high potential returns in a fast-growing segment (see Fintech chapter). Under current BI regulations, the cashless transactions of non-bank entities will be regulated by separate BI regulations which have yet to be published. With more regulatory reforms anticipated in 2019, private stakeholders have increasingly lobbied the government to implement a business-friendly model encouraging GPN participation.

For example, a February 2019 white paper released by UnPAY and Tencent Research Institute recommended that the authorities should implement measures and reforms, including a comprehensive licence access system secured by a foreign provider but regulated by BI and the Financial Services Authority. The paper also encouraged the authorities to group payment services into two categories: front end and back end. Front-end services would involve firms that transact directly with clients, including acquirers, payment gateway operators and e-wallets, while backend parties would have no direct interaction with customers, and would include card firms, clearing houses and final settlement departments. The paper further recommended that all applicants should be allowed to transact in only one of these categories.

Outlook

Indonesia’s traditional and e-commerce retail sectors are already benefitting from favourable demographics, positive macroeconomic trends, rising middle class and increased smartphone adoption. While public stakeholders are seeking to foster growth while maintaining transparency, improving consumer protection and ensuring sustainability remains a major focus. The government is also scheduled to have more regulatory reforms in 2019, including revisions to the DNI, which could further liberalise various retail segments, in addition to new GPN activities that will integrate and harmonise payment platforms. The country is on its way to developing the necessary physical and digital infrastructure set to underpin long-term retail and e-commerce growth, with FDI and sales to continue on a positive growth trajectory.

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The Report: Indonesia 2019

Retail & E-Commerce chapter from The Report: Indonesia 2019

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