Home to a growing base of consumers, Indonesia has seen the rising purchasing power of its fast-expanding middle class drive the retail industry to new highs in recent years. Foreign and domestic retailers alike are investing heavily in new construction and expansion projects that will see traditional retail models increasingly supplanted by modern franchises and chains.

Retail growth slowed somewhat in 2014, as rising fuel prices, inflation and the rupiah’s sharp depreciation eroded consumer confidence, while wage and rent growth continue to cause concerns for investors and operators. In spite of these difficulties, inflation has since eased, and the industry appears poised for solid growth in 2015, driven by the fast-moving consumer goods (FMCG) and auto segments. At the same time, a rapidly expanding e-commerce market could bolster growth and retail penetration in the coming years.

Bustling Market

Retail has been a star performer in recent years, with Boston Consulting Group (BCG) projecting that the nation’s population of middle-class and affluent consumers will reach 141m by 2020. Indonesia’s rank on A.T. Kearney’s 2014 Global Retail Development Index showed improvement over 2013, with the country standing in 15th place out of 30 developing nations and considered the second-most-attractive investment destination in South Asia – below Malaysia (9th), but above Sri Lanka (18th), India (20th), the Philippines (23rd) and Vietnam (28th).

In January 2014 the Indonesia Investment Coordinating Board (BKPM) forecast retail turnover of Rp165trn ($12.5bn) for the year, although this projection was valued at $13.7bn at the time. The Association of Indonesian Retailers, meanwhile, announced in October 2014 that it expected total retail sales would grow by 10% in 2014 to reach Rp162.8trn ($13.5bn), driven by demand in the FMCG segment, which accounts for more than 60% of total retail sales in the country.

Although GDP growth slowed to 5% in 2014 – a five-year low – domestic consumption remained strong, and solid purchasing power saw the industry clock a strong performance. Bank Indonesia (BI), the central bank, reported that the retail sales index, which is based on a survey of 650 retailers across 10 provinces, expanded by 14.9% in 2014, despite a brief slowdown near yearend. Every month saw year-on-year (y-o-y) growth, with the index hitting a high of 19.2% in July 2014.


Rising inflation and newly elected President Joko Widodo’s move to curtail fuel subsidies had a negative effect on growth late in the year, with December’s retail sales index recording the lowest expansion in 2014, at 4.3% y-o-y. Growth began to recover in January 2015, with the sales index up 10.4% y-o-y, driven by higher IT equipment sales, which expanded by 30% y-o-y, as well as food, beverages and tobacco products, which increased by 15.1% y-o-y.

Inflation eased in January as the price of fuel declined on lower oil prices, rising 6.96% y-o-y, compared to an 8.36% increase in December 2014, and is expected to remain moderate in 2015. In February 2015 BI announced it would cut its main interest rate to 7.5%, which came as a surprise to many stakeholders. BI officials expect that inflation will rest on the lower end of the 3-5% target range in 2015. The move is expected to benefit exporters, though its impact on retail will be mixed, with credit growth expected to expand, while retailers’ import bills rise.

Consumer Confidence

Consumer confidence surveys have consistently indicated strong sentiment in recent years. GDP growth averaged 5.69% between 2003 and 2013, while GDP per capita at constant prices rose by more than 50% over the same period, from $1180 to $1810, according to World Bank data. Household expenditure per capita at constant prices, meanwhile, grew by an average of 4.7% annually between 2005 and 2013 to reach $1071. A sharp recent rise in wages has also bolstered purchasing power; in November 2014 BKPM forecast total blended wage growth in the nation would reach 12.77% in 2015, following an even sharper wage hike of 19.1% in 2014. Although wage gains are expected to have a negative impact on the nation’s investment attractiveness, rising purchasing power should benefit retail.

ANZ-Roy Morgan’s consumer confidence index, which is based on a survey covering over 1700 people nationwide, averaged 115 between 2005 and 2010, but spiked in recent years, averaging 150 between 2011 and 2014. The company’s December 2014 index, however, demonstrated the impact of rupiah depreciation and rising fuel costs. The survey, released in January 2015, reported that consumer confidence fell 9.4 points to reach 152 in the last month of the year – below the 2014 average of 156.2, and representing its sharpest drop since 2012. The index declined across all given sub-categories, with the steepest fall witnessed in the “perceptions of personal finances” category.

According to the survey, only 40% of Indonesians reported that their families were better off financially than they were a year ago, while 12% said their situation had worsened. The survey also found that 69% expected conditions to improve by December 2015, down from 75% in November 2014. However, only 4% reported negative expectations.

Overall, confidence and optimism remain high, with 84% of Indonesians expecting that the country will have “good times” financially in 2015, and 92% expecting the same over the next five years. According to the survey, 56% also believe that now is the right time to purchase major household items.

Vehicles for Growth

Vehicle sales, another key indicator of consumer confidence and economic growth, are also expected to rebound after a brief slowdown brought on by fuel subsidy cuts. Total vehicle sales grew by 113% between 2008 and 2014, reaching an all-time high of 1.23m units in 2013, according to BKPM. The year 2014 saw a moderate decline, to 1.21m units, with sales falling by 13.6% y-o-y to reach 377,923 units in the last quarter, down from 437,560 between September and December 2013. Slower sales were attributed to the fuel subsidies cuts in late 2014, and BKPM reported that automobile sales were down by 7.2% y-o-y in January 2015, though this is not expected to continue through the year. Consultancy Frost & Sullivan projects vehicle sales will rise by 5% in 2015 to reach 1.27m units, driven by expansion of the low-cost green car segment (see Industry chapter) and bolstered by recovering consumer confidence.

Indeed, prior to Widodo’s November 2014 fuel price hike, consumer confidence reached an all-time high, with ANZ-Roy Morgan’s August consumer confidence index reaching 161.4. As the global oil market remains depressed, with Brent crude prices hovering above $60 per barrel in May 2015 – compared to $115 per barrel in June 2014 – confidence is expected to increase accordingly. With fuel prices now pegged to the international market, consumer confidence has already showed signs of recovery. ANZ-Roy Morgan reported that Indonesia’s confidence index improved in February 2015 to reach 154.1 – a 1.6-point y-o-y increase, and a development that bodes well for vehicle sales.

Modern Market

Although Indonesia’s food and beverage market has traditionally been dominated by mom-and-pop retail outlets and wet markets, the country’s rising middle class has increasingly flocked to airconditioned supermarkets and hypermarkets, which have reported strong expansion in recent years. This is in line with a wider regional trend. Nielsen, a data analytics firm, reports that South-east Asia’s traditional retail market share will decline from 54% in 2013. Major retail chains and supermarkets, meanwhile, will expand to hold a 53% market share by 2020.

According to the Indonesian Food and Beverage producers Association, food and beverage sales stood at Rp900trn ($74.4bn) in 2013 and were projected to have risen by 11% in 2014 to Rp1000trn ($82.6bn). The food and beverage market has outperformed the economy in recent years, and food consumption is expected to achieve a compound annual growth rate (CAGR) of 7.6% between 2014 and 2018, according to market researcher Business Monitor International. Rising consumption will drive sales at grocery stores, which are expected to grow by a CAGR of 10.7% over the period.

The food and beverage market is increasingly characterised by wider brand choices, with the expansion of Carrefour and Hypermart indicating their growing popularity among middle-class families. Chain convenience stores like 7-Eleven have also taken off, with hundreds of new master franchise holders emerging, such as Mitra Adiperkasa, which controls licences for Burger King, Domino’s Pizza and Starbucks; Modern Internasional, which operates the 7-Eleven franchise; and Fastfood Indonesia, master franchisee for KFC and related Yum! Brand firms. According to HKTDC Research, the expansion of franchises saw the number of convenience stores in Indonesia double from 2007 to 2012 to over 16,000 stores, making this segment one of the largest contributors to retail growth. Modern Internasional has opened 176 stores since the 7-Eleven brand entered the market in 2009 and plans to expand its portfolio to 2500 by 2025, indicating the considerable growth potential for foreign franchises.

Modernisation has already seen convenience franchises rise to prominence, and the Jakarta Post reported that the mini-market segment grew by 17.4% between 2004 and 2014, while the hypermarket segment posted 17.9% growth over the same period. Sales from minimarkets and convenience stores are expected to rise by an average of 16% per annum between 2013 and 2015, according to research consultancy Euromonitor.


For several years, operators struggled to comply with regulations aimed at supporting the growth of small and medium-sized enterprises (SMEs) and local industry. In 2012 the Ministry of Trade (MoT) introduced a framework to increase SME growth by requiring all franchise stores to source at least 80% of raw materials and inputs locally or risk losing their operating licence. Months later, the MoT moved to restrict the maximum number of mini-markets, supermarkets and department stores owned by a single entity to 150, and in 2013 it imposed similar limits for the food and beverage industry, setting the cap at 250 stores.

Any operator exceeding these limits is required to ensure that at least 40% of its stores are owned and managed by a local third party. Food and beverage operators, meanwhile, can exceed the 250-store threshold by establishing an equity partnership in which any new outlets worth up to Rp10bn ($826m) must be at least 40% owned by a local third party.


7-Eleven’s expansion plan would therefore not have been possible until recently, with the government moving to implement a significant retail reform in August 2014, announcing it had removed the 250-store cap for food and beverage franchisers, although the limit still applies to new entrants. Investors welcomed the change, as it sets the stage for large-scale retail expansion in the coming years. However, ongoing challenges in the regulatory landscape – most notably the recent decision to add the small-scale retail industry to a revised edition of the negative investment list (see analysis) – remain a point of criticism for some.

Another major concern for stakeholders is a 2013 regulation stipulating that 80% of retail stock be locally sourced – a rule many operators have found impossible to obey, particularly since the government has not specified details on what local content means and how the regulation would apply. Burger King, for example, has reported that it is unable to source all the beef for its restaurants locally. When it announced the new franchise regulations in August 2014, the government also said it will revise the 80% local content rule, especially in light of the upcoming ASEAN Economic Community integration, slated to kick off in 2015. Newly expanded access to regional markets presents potentially lucrative outside opportunities to retailers, and Indonesia wants to maintain its competitive edge.

Suggested reforms to the 80% law include issuing detailed guidelines determining what constitutes local content, introducing exemptions for products which cannot be produced in Indonesia but are important to local consumers, and potentially offering exemptions for local goods produced on a global supply chain.

Jakarta’s Malls

As Indonesia’s primary business centre and national capital, Jakarta represents the most popular entry point for foreign investors. In the retail segment shopping malls have offered considerable opportunities to investors, as consumer habits have seen Indonesians embrace shopping centres as a venue for leisure and socialising, in addition to shopping. As a result, shopping centres have proliferated in recent years, surpassing 70 facilities as of 2014 and increasing four-fold since 2000, according to HKTDC Research. Foreign brands have flocked to capitalise on this growth, including luxury brands like Gucci, Louis Vuitton and Hermès. Mid-to-high-end brands such as Zara and Japan’s Uniqlo have also made their entrance in recent months.

A rising population of affluent shoppers offers considerable opportunities for global retailers, and stakeholders believe that under the right conditions the country could become a leading regional, or even global, retail destination. “Indonesia has huge potential in terms of retail tourism, but the connection between these two sectors has not been made yet. If you look at Dubai and Singapore, these are shopping and retail meccas, but that connection between tourism and retail has not been made here,” Hitesh Bharwani, group managing director at Kanmo Retail, told OBG. “We need policies that support the growth of international retail, and which can support tourism growth, particularly in how the supply chain runs. We need quick and efficient logistics and moderation of price pressures.”

Logistical challenges remain a formidable concern for retailers, as evidenced by a recent moratorium on mall construction in Jakarta, rolled out in October 2011 in response to rising congestion and a lack of available land for development. The moratorium was extended during Widodo’s tenure as governor from 2012 to 2014, and although current governor Basuki Tjahaja Purnama has announced he will consider new mall projects provided they do not negatively impact the flow of traffic, retail rental rates in Jakarta are expected to continue their upwards trajectory in 2015.

Rental Hikes

While Jones Lang LaSalle reported in November 2014 that Jakarta’s retail space was among the cheapest in Asia per square metre, retail rental rates grew by 10.4% from July to September 2014, to $704 per sq metre. Rates will likely remain high. In February 2015 global property consultancy Savills Research forecast that future supply of retail space would remain limited, with only 141,848 sq metres of new retail space added to the market in 2014 – a 4.9% expansion, the majority of which came from development of the St Moritz mall under Lippo Group.

Jakarta had an estimated 2.8m sq metres of retail space in 2014, while new supply in 2015 will reach just 35,911 sq metres, according to Savills. New space is expected to be added via commercial buildings, podiums and arcade centres in mixed-use developments. As a result, occupancy is projected to increase from an average of 92% in 2014 to 96% by 2018. Rising rents will likely put additional pressure on retail margins, which have already been hit by rising import costs as a result of the rupiah’s depreciation.

Outside Jakarta

With retail space becoming increasingly expensive in Jakarta and urbanisation expected to grow faster outside of Java for the next five years (see Economy chapter), retailers are increasingly looking to second- and third-tier cities. These include the fast-growing urban centres of Bandung, Yogyakarta, Surabaya and Medan, with Savills reporting that brands like H&M, Bath & Body Works, and Victoria’s Secret are considering expansion into these cities.

“We see a lot of potential outside of Java in second-and third-tier cities,” Kanmo Retail’s Bharwani told OBG. “There is a lot of opportunity, and over the medium- to long-term horizon, we expect a significant share of sales to come from these cities, although sales will ultimately depend on the brand and market. You will see more mid- and lower-market growth outside of Jakarta compared to luxury brands.”


While brick-and-mortar outlets are expanding, e-commerce activities are also taking off, with the number of online shoppers increasing by 28.2% in 2014 to 5.9m, according to Singapore’s SingPost. The company forecasts Indonesia’s online consumer base will reach 8.7m by 2016. Although 20% of online shoppers have flocked to traditional websites like Zalora or Lazada, new channels are expanding rapidly – 26.6% of online shoppers preferred to use online forums and classified sites such as Kaskus and OLX to make purchases, while some 26.4% preferred “social commerce”, using social media platforms like Facebook to make purchases. Investment in online retail start-ups has risen sharply as a result (see Telecoms & IT chapter), and e-commerce represents perhaps the most significant long-term growth channel for the retail industry, although the segment remains underdeveloped, in part due to an infrastructure gap that will require over $450bn in investment up to 2019, according to BKPM.

“Any serious retailer needs to look at omni-channel strategies, not just brick-and-mortar. In its current stage e-commerce is still not profitable, because running an online channel is very expensive, although this is not due to network infrastructure,” Bharwani said. “The issue is in fact two-fold: e-commerce is a discount-driven channel in Indonesia, as it is in most parts of the world. Margins are very narrow in e-commerce. The second challenge is the cost of online marketing; the cost of customer acquisition is very expensive.”


Although retail could be set for another volatile year, with the rupiah’s depreciation expected to cut into purchasing power and increase price pressure on retailers, lower inflation and rising wages should help offset this. The market remains highly attractive to foreign investors despite its stringent regulatory environment, and growth is expected in 2015 as a result of rising domestic consumption and e-commerce expansion. While retail space in Jakarta will remain limited in the medium term, rising rents will help spread industry growth across the nation. This will keep the sector robust and dynamic into 2016, as well as present lucrative opportunities to foreign and local investors.