Taking it to the next level: Purchasing power and consumer spending are on the rise

To say that there has been a retail boom in Indonesia is an understatement. The people of the country have over the course of a few years become consummate shoppers, staying up to date with the latest trends and eagerly spending. Indonesia’s economy has always been driven by the consumer, but now it is being taken to the next level as the people of the now have more money to spend. But to simply say that Indonesia is catching up does not do justice to the current trend. This is not a matter of just closing the gap with Malaysia or Singapore. In a sense, Indonesia is starting to lead.

BY THE NUMBERS: Figures for 2011 and 2012 have been impressive. According to Bank Indonesia, retail sales have grown at double-digit rates for over a year, up 17% year-on-year (y-o-y) in November 2012, 19.3% in October, 19.2% in September, 10.6% in August and 20.0% in July. Since November 2011, the only sub-10% month was May 2012, at 8.0%. Sub-sector retail sales have been particularly strong. Information and communications equipment was up 35.5% y-o-y in October 2012 and is up 21.6% since the beginning of 2011. Sales of “other household goods” are up 49.9% since the beginning of 2011 and had some months of particularly strong yo-y growth: June 2012, up 45.5%; April 2012, up 40.5%. And the outlook seems bright, with consumer confidence hitting multi-year highs at the end of 2012.

MIDDLE-CLASS MATH: After years of dragging along the bottom, the Indonesian economy is now strong. Growth rates in the early 2000s were running below 5% as the country continued to work off the damage of the 1997-98 crisis amidst a weak global economy. The latter half of the decade was better, with growth above 6% every year between 2007 and 2012 except one. Indonesia hit its stride as foreign investment poured in – with foreign direct investment doubling in five years and jumping seven-fold over a decade, proving resilient regardless of what happens elsewhere. This performance has been a boon to both consumers and manufacturers. “In early 2000 most of export garment and textile orders moved to China, but now the trend is changing and customers are returning to Indonesia. Trisula has a strong garment and textile supporting industry, which is a significant competitive advantage for global players,” Dedie Suherlan, president director of Trisula International, told OBG.

A strong economy built a consuming class almost overnight. In 1999, a quarter of the country was middle class; now it is more than half, according to Bahana Securities estimates. “People are moving up the income ladder,” Adrian Joezer, an analyst at Mandiri Securities, told OBG. “That is why retail sales are picking up.” In five years, household consumption expenditure in current dollar terms has more than doubled. It is also important to note how the money is being spent. After years of holding back, Indonesians appear to be increasing discretionary spending on what can be considered premium goods, according to research by global measurement firm Nielsen. According to Nielsen, the fast-moving consumer goods (FMCG) sector is growing twice as fast as the overall economy. Indonesians have historically spent almost half their income on food, but as they become wealthier, they are beginning to spend on products other than necessities. “If you have more money, it doesn’t mean you will eat more, it means you will buy more tablets and handsets,” said Joezer.

SHOPPING COMPLEXES: The increased demand has coincided with a boom in new shopping complexes. According to real estate services firm Colliers International, total retail space that it covers in Jakarta has gone from just over 1m sq metres in 2000 to 4m today. The rise in demand coincides with a change in the way people shop. Malls, minimarts and hypermarkets are fast replacing wet markets and traditional outlets, and they are as advanced and sophisticated as any in the region.

According to the US Department of Agriculture, the total number of modern food trade outlets in Indonesia rose almost ten-fold between 1999 and 2009. Over 50% of all packaged groceries are sold in modern outlets, up from 35% in 2000. Nielsen says that minimarkets account for 17% of all grocery sales. Mall growth has been dramatic: a decade ago there were only a few, but as of 2012 there were over 130 malls. “Over the past seven years there has been a significant boom in the retail sector, and many new malls have been built. The sector remains attractive, and we expect even higher growth in the coming years,” Hitesh Bharwani, group managing director at Kanmo Retail Group, told OBG.

OUT TO SHOP: The figures suggest that the trend is broad and represents more than just the result of elites shopping. According to the Association of Indonesian Retailers, middle-class consumers (48% of the population) account for 44% of FMCG purchases, while 53% of middle-class consumers visit modern trade outlets more than twice a month.

“The Indonesian middle class has already reached 130m. Customer consumption habits vary when annual income reaches $3000. We will see the demand increase, as new consumers keep surpassing this milestone,” Nugroho Setiadharma, the president director of groceries distributor Supra Boga Lestari, told OBG.

Bahana Securities estimates that a full 90% of the Indonesian population spent more that Rp1m ($100) a month in 2012, up from 60% in 2008. The character of shoppers is also changing. In 2003 only 10% of shoppers said they would not plan what they wanted to buy when they went shopping, according to Nielsen. By 2011 that number had increased to 21%. A decade ago only 13% of shoppers would buy more than what was on their “wish list”; in 2011, according to the market researcher, that number had increased to 39%.

GETTING AHEAD: The Indonesian consumer is developing fast as incomes rise, and they move from getting by to getting ahead. Nielsen notes the emergence of “cash-rich, time-poor” Indonesians willing to pay more for quality and convenience. At the same time, the firm found a rapid increase among consumers in the use of the internet for shopping and becoming better informed about products. While Indonesia may still be a developing country, its consumers are well aware of prices, trends and developments. Nielsen has noted a strong interest in several specific products: hair conditioners, especially of the “leave on” variety; milk, especially low fat or fortified cheeses; frozen meats; and diapers.

Regarding consumer behaviour, global cosmetics company L’Oréal observed that at first consumers did not really distinguish between products, buying cosmetics almost solely on price. However, they are now quickly picking up on differences in quality and significance of brands, and are fast opting for the better, more expensive, products. Many people in retail say that in fact Indonesian consumers have gone quickly from relatively uniformed to highly sophisticated. In some ways, they are even more aware of current trends, designs and styles than the average consumer globally. They tend to be name-conscious and like to avoid cheap or private label products. “Indonesians are very brand conscious. We believe global brands will grow fast,” Fetty Kwartati, corporate secretary and head of investor relations at Mitra Adiperkasa, local franchiser of global brands, told OBG. Bharwani adds that, “Brand equity is important; Indonesians are worldly consumers.”

JAKARTA, FIRST: The Indonesian market is so strong at this point, and the consumers are seen as so aware and relevant, that some brands are choosing to go to the Jakarta market first when penetrating South-east Asia. They also come because they recognise that Indonesia is the largest market in the region, with a middle class estimated at 150m people by 2014, and because rents are lower than in Singapore. According to Kwartati, Cold Stone Creamery, an American ice cream brand, and Blanco, a Spanish fashion brand, chose to break into the regional market via Jakarta.

The retail revolution is primarily a phenomenon in Jakarta, as other locations have proven more difficult to penetrate. One issue in expanding to other areas is logistics and transportation. Many areas outside the capital are well to do – thanks to resource riches – but high costs and unpredictable timetables make it difficult to create a retail network that incorporates distant locations. When Ace Hardware set up in Surabaya, for example, the American chain found it had to keep more inventory on hand than usual, increasing costs as a result. Other retailers say that while people outside the capital have money, they tend to spend less freely. “We are seeing that modern trade is getting a lot of traction, but it is developing most in Java,” Teguh Yunanto, executive director of retail management services at Nielsen, told OBG. “Jakarta is not Indonesia,” he added.

HINTERLANDS: Others take a different view on retail expansion. While the remote areas are still seen as difficult to reach, some retailers find that locations away from the super-high-end downtown areas are in fact the most successful. Bharwani of Kanmo, whose brands includes Mothercare, Coach and Karen Millen, notes that one of his most profitable stores is in suburban Jakarta. He adds that the internet is an important and fast developing part of the overall strategy, and that the traditional model of setting up in a few key locations in the city centre is not the way forward – multichannel is. “The market is growing outside Jakarta,” he said.

SOCIAL HOT SPOT: Malls have become more than just places for shopping. Because of the lack of outdoor recreation space, malls have become destinations in and of themselves. People go to the malls to meet friends and spend a day, not just to shop (convenience stores have taken on a similar role on a smaller scale as people often congregate at these outlets to chat over snacks). But because of high traffic congestion, this is becoming a problem, and malls have become major choke points. The answer is the development of satellite malls and suburban shopping centres. Rather than attract the people downtown, these secondary locations will pull people away from the hotbed. While they will lack the “destination” appeal, they will likely draw more pragmatic young professionals.

The market is expected to remain strong over time. As the economy grows, as its people become wealthier, as infrastructure improves, as foreign investment pours in and as the ASEAN Economic Community becomes a reality, consumers will spend more, and more retail space will be built. Indonesia could indeed be the next China, with strong markets in major cities as well as in the secondary urban locations. Furthermore, Indonesia’s demographic trajectory makes it all the more attractive. While China faces major demographic challenges as much of its future wealth will be spent on taking care of elderly citizens, Indonesia is facing a demographic dividend. As the number of children as a percentage of the overall population falls, the percentage of working age people is increasing, while the number of elderly is rising slowly. Indonesia is becoming rich as it is working, meaning that its money will pour more into consumption than into social security.

INTERNATIONAL APPEAL: Global brands and investors are starting to appreciate the opportunity Indonesia presents. However, it has not always been this way. For a number of years, Indonesia was a hard sell. The history of volatility in the market and the lack of depth added to logistics and bureaucratic issues discouraged major retailers. But the arguments against being in the country are becoming less convincing.

Apple is one good example of Indonesia’s retail revolution. The company had an online store in Indonesia from 2008 to 2010, but shut down in November 2012 due to delivery problems. It maintained a local Indonesian site, but customers could not make purchases. According to recent reports, the company is planning to reopen the store and follow it up with a physical store in the country, totalling an investment of $2m-$3m.

Others are also arriving. Swedish retailer IKEA will open its first Indonesian store in Tangerang outside Jakarta in 2014 after granting Hero Supermarkets distribution rights through 2021. Parkson, the Malaysian retailer, plans to open five branches in Indonesia, focusing first on Jakarta, Surabaya and Medan. The company also bought Centro Department store in June 2011, and will open branches in smaller cities and more remote areas. Thailand’s Central Retailing Group will open a Central Department Store in the Grand Indonesia Mall, a $19.5m investment. The Thai group has 14 department stores in Thailand, three in China and 11 in Italy.

NO LUCK: Some retailers, however, have not been so successful. In September 2010, British department store Harvey Nichols shut down its Grand Indonesia Shopping Town store that opened in October 2008, its first in the region. It carried super-high-end brands, such as Alexander McQueen and True Religion, but fell short of expected success due to the global economic slowdown. Carrefour, meanwhile, sold out its 60% stake in Carrefour Indonesia in November 2012 for €525m. The French chain has been exiting less promising markets after an aggressive global expansion programme.

While Indonesia is seen as a retail market with great potential, it also has its share of risks. Inflation is one, the cost of electricity is another, as it is set to rise 50%, and the minimum wage is going up from Rp1.5m ($150) to Rp2.2m ($220) in Jakarta in 2013. Retailers will be challenged as costs increase. Most, though, see it as manageable and possibly good trend in the long term. Higher costs will motivate outlets to become more efficient. More broadly, they see a positive side to the higher wages: consumers will be able to afford more. Indeed, one retail executive said that a few years ago his administrative staff were not customers, but now they are. “If we see it from the other point of view,” noted Kwartati, “they have more money to spend.”

TAMING THE TREND: Jakarta, the country’s main retail market, is already reaching certain limits, to the point where shoppers may have trouble getting to malls. Traffic is increasing logistics costs, and there are growing concerns about consumerism in Indonesia. “The lack of infrastructure is holding back growth in the sector and making logistics costs very high for firms. We are seeing some improvements, but still far from the levels of investment the country needs,” Budyanto Totong, president director of Catur Sentosa Adiprana, told OBG.

Former Jakarta Governor Fauzi Bowo placed a moratorium on new mall construction in 2011. While this went largely unnoticed, as the city already had a large amount of existing retail space and some in the works, it is likely that the new governor, Joko Widodo, will also take measures to temper excess consumption. He blocked some shopping malls as mayor of Surakarta, and he could very well do the same in the capital. The new franchise law also has some investors concerned.

More broadly, overall demand must be brought into question. While Indonesia is fast developing, most of its people earn low wages and are relatively poor. The definition of middle class, after all, is below the poverty line of most Western nations. It is not clear how deep the market will ultimately be.

Meanwhile, protectionism is growing, nationalism is on the rise and stronger industrial policy is being considered. The success of Indonesia’s retail sector is predicated upon open local markets, the continuation of Indonesia as consumption-driven society and strong resources prices – conditions that are not at all guaranteed. “Indonesia’s large market and favourable demographic profile offer long-term potential, but it will take time for personal disposable income to rise to the levels needed for double-digit growth in retail sales,” Mirza Diran, a partner at PwC Indonesia, told OBG.

OUTLOOK: Retail sales are likely to remain strong for the next year at least. As the minimum wage kicks in, more money will pour into retail. As the sector develops, shopping will become more convenient, efficient and enjoyable. As new brands enter the market, and as marketing dollars are spent, more demand will be created. To maintain the growth over the longer term, though, the country has to effectively regulate and manage the sector, and for that matter the whole economy. Certain restrictions and laws will no doubt be implemented, but the question remains whether they will be enacted in a way to support sustainable growth.

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The Report: Indonesia 2013

Retail chapter from The Report: Indonesia 2013

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