Great River set to be integrated retail firm
By Aloysius Bhui
JAKARTA (JP): Publicly-listed apparel manufacturer PT Great River International, formerly Great River Industries, is widely reported to have strengthened its position as an integrated retail company.
Some stock analysts contacted by The Jakarta Post recognized that the retail business is not new for Great River, because the company has not only produced but also sold its products through its own retail outlets.
A director of the Jakarta Stock Exchange (JSX) has also confirmed that Great River is no longer categorized as a textile company, but as a retail firm.
"It's not easy, however, to change the market's image that Great River is a garment manufacturer," an executive with a joint venture securities company told the Post.
Another analyst with a Japanese-based securities company said that Great River, which was established 20 years ago by the Tanudjaja family, has been widely known for its Arrow brand men's shirts and Triumph brand ladies underwear, no matter who sells the products.
"Because of its expensive products, most investors view this company as the producer of high-class apparel," the analyst said. "That is another image of Great River," he added.
"As far as I know, Great River gets easy access to any export countries because its export activities are carried out based on contracts with foreign partners," the analyst said.
In a recent interview with the Post, Great River's president, Sunjoto Tanudjaja, disclosed what was behind the company's "campaign" to be a retail company.
Competitive edge
"Our vision is to become an integrated apparel retail company," Sunjoto said. "We have redefined our business strategy by strengthening our position in the entire process of production, distribution and retailing of our products."
He said that in 1978 the company had began its involvement in the retail business by opening its own outlets in department stores, but they were very small in scale.
"We received retail facilities from department stores, but we installed our own people to manage the outlets. And I would say that any activities which involve direct interaction with the consumers is considered retail, no matter where it takes place."
In further explaining the reason for the company's move, Sunjoto acknowledged that Indonesian manufacturers of textiles and textile-related products have been easily hurt because of their dependence on export markets.
"We cannot survive if we operate only as a manufacturer of export-oriented products," he said.
Moreover, according to Sunjoto, competition among textile producers is going to be tougher in a few years, with the emergence of other new industry giants from Vietnam, China and India.
"The situation is estimated to get worse in the free trade era. We know that by 2003, the ASEAN Free Trade Area (AFTA) agreement will be effective."
AFTA requires the members of the Association of Southeast Asian Nations (ASEAN) -- Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam -- to liberalize trade among themselves by 2003 under a Common Effective Preferential Tariffs scheme.
Sunjoto said that under such foreseeable tight competition, only companies with a high competitive edge will come out as winners.
"We want to win the competition. So we must have a competitive edge."
"To make sure that we have the competitive edge, we need to directly control the production, distribution and retail processes."
Sunjoto, who is also the newly-elected president of the International Apparel Federation, said that selling prices of garments are usually determined by at least three different parties -- producers, distributors and selling agents -- each of which sets their own profit margin.
"Combining the three margins will enable us to offer our products at more competitive prices," he said.
"Being an integrated retail company also allows us to maintain product quality, to adjust our production with market demand based on up-to-date marketing research and to boost cost efficiency in the whole process," Sunjoto said.
"In short, an integrated retail company benefits from cost efficiency, sustainable supply, as well as easier quality control."
"Now we want to clarify our status as a retail company. It's already a big part of our business."
He said that last year, retail activities contributed 75 percent to the company's revenues.
Although Great River has been put under a retail category, some analysts said that they are still unsure as to whether they should evaluate this company using retail indicators.
"It's not easy to see this company against other retailers, such as Matahari and Hero," an analyst with PT Peregrine Sewu told the Post.
"It's worth noting that we are different from other retail companies, which only sell products, because we are backed up by our own production units," Sunjoto argued.
Distribution
Sunjoto said in its efforts to build a strong integrated retail entity, Great River established a subsidiary -- PT Inti Fashindo International -- in 1993, focusing its business on distribution activities.
"We had to do it because the distribution and retail activities must be managed professionally by a different management," he said.
Inti Fashindo now operates 12 branch offices and 440 retail outlets in Indonesia, which used to be managed by Great River. Around 4,000 of its employees handle retailing activities.
Currently, about 10,000 part-time fashion dealers have joined Inti Fashindo's direct selling activities. The number is expected to double by the end of the year, because beginning next month, the company will also launch direct selling activities in Bandung, West Java, and in Surabaya, East Java.
Sunjoto said that almost all big department stores are now Great River's major customers, including Matahari, Galleria, Hero, Metro, Yogya, Sarinah, Golden Truly, Sogo, Pasaraya, Seibu, Ramayana and Makro.
He said that Inti Fashindo has managed retail space in department stores totaling 27,600 square meters, up by 15 percent from 1994.
"With a steady increase over the next few years, we project that our total retail space is likely to reach 50,000 square meters by the end of 1998," he added.
To strengthen its marketing abroad, Great River has also set up two wholly owned subsidiaries operating in trade activities: Apparel World Pte. Ltd. in Singapore and Apparel World Sdn. Bhd. in Malaysia.
The two companies have already distributed 12 brands of Great River's products last year, with total sales accounting for 5 percent of consolidated net sale revenues.
"This is part of our strategy to anticipate the implementation of AFTA and to increase exports," Sunjoto said.
Alliances
Great River began its operations by producing Arrow men's shirts and Triumph ladies underwear through licensing agreements.
"After 10 years, the two products gained a 40 percent market share in the domestic market. After that, we expanded our production capacity, replaced old machines and improved the factories' facilities while gradually increasing the production of new international brands," Sunjoto said.
He said that today, Great River has obtained 47 international brands of various products through licensing deals.
Its products range from ladies' underwear, men's wear, casual wear and jeans, men's underwear, children's wear, cosmetics, accessories, designer wear and household products.
"We are the market leader in ladies' underwear and men's shirts, with a market share of 70 percent and 60 percent respectively. Our latest products, including children's wear, casual wear and jeans, have already gained a 10 percent market share," Sunjoto said.
Among the brands produced by Great River are Triumph, Bee Dees and AMO for ladies' underwear; and Arrow, Choya and Balenciaga for men's shirts.
Other brands for casual wear are Ballenoman, Lee Jeans, Elle, Kenzo Jeans and Grand Slam.
For high-class customers, the company produces design wear under the Oscar de la Renta, Studio Ferre and Cerutti 1881 brand names.
"We need high-class brands to lift up the image of our overall products," Sunjoto said.
He added that revenues from the sales of ladies' intimate apparel and men's shirts has grown by approximately 28 percent and 30 percent per annum respectively.
Table 1: Product contribution to sales --------------------------------------
1995 1994
(%) -------------------------------------- Ladies' wear 49.8 44.2 Men's wear 25.4 24.8 Children,HH,Cosmetic 1.5 4.6 Casual Wear 4.6 4.2 Designer Wear 1.5 4.6 Subsidiaries 8.0 8.3 Others 6.1 10.4 --------------------------------------
As an apparel retail company, Great River also sells accessories and complementary products like watches, shoes and cosmetics.
"We realize that the market segment of Great River's products is upper-middle income consumers. The brands like Kenzo or Oscar de la Renta are obviously unpopular among the low-income people or even the middle class."
"Because of high-class products, we need foreign technology and know-how in the production of raw materials and finished products."
Today, Great River has set up joint ventures with foreign leading textile manufacturers from Japan and Europe. Those companies include PT Toyobo Knitting Indonesia (in which its equity participation accounts for 32 percent), PT Gunze Indonesia (40 percent), PT Gunze Socks Indonesia (30 percent) and PT Great Iphoch Indonesia (20 percent).
"The partnership will facilitate technology transfer, provide easy access to export markets, increase production efficiency and substitute formerly imported raw materials, thus lowering overall cost," Sunjoto said.
He said that high quality apparel can only be produced if the company also has high quality raw materials.
"Currently we still buy up to 50 percent of our raw materials from other companies including imports."
Great River currently has four plants located in Cibinong, Cikarang, Bandung and Purwakarta, all in West Java.
Its production units include PT GST Utama Garments, a garment producer (of which Great River owns 97 percent), PT Sangga Label Industry, a label manufacturer (51 percent) and PT Pan Mulia Jati Mitra, a shoe manufacturer (100 percent).
Great River, which went public in 1989, has recorded sustainable sales growth in last five years, both in domestic and export markets.
Last year, it booked an increase of 23 percent in net sales to Rp 128, of which exports accounted for 30 percent.
Net profits also grew by 27 percent from Rp 10 billion in 1994 to Rp 13 billion last year. (See Table 2).
For the first three months of this year, its net sales already reached Rp 52 billion, while its net profits rose 63 percent from the same period of last year.
"We are optimistic to book Rp 250 billion in sales revenues this year," Sunjoto said.
Table 2: Income Statement -------------------------------------------------------------- DESCRIPTION 1995 1994 1993 1992 1991 --------------------------------------------------------------
(in billions of rupiah, except for profit per share) -------------------------------------------------------------- Net sales 182.3 147.5 123.7 99.8 6.9 Gross profits 90.2 67.5 47.8 37.1 27.7 Operating Profit 39.4 23.8 13.4 12.8 10.2 Profits after tax 13.3 10.4 8.6 8.3 7.4 Operating profit per share 610 369 253 372 297 Earning per share (EPS) 206 162 163 194 172 EPS growth (%) 27 -0.6 -15 12 - PER (x) 7.7 13.2 28.4 13.9 - --------------------------------------------------------------
Table 3: Net Sales Export vs Domestic market share (in billions of rupiah) ---------------------------------------------------
1991 1992 1993 1994 1995 --------------------------------------------------- Domestic 44.2 59.8 78.6 102.5 124.8 Export 32.6 40.0 45.1 44.9 57.5 --------------------------------------------------- Source: Great River
Sanjoto said that Great River has exported its products to 20 countries.
"In terms of volume, exports to North America accounted for 40 percent in the last two years (as compared to 52 percent in 1993); Europe, 15 percent (23 percent); Japan, 26 percent (15 percent); and ASEAN and other countries, 19 percent (10 percent).
Commenting on the future prospects of the company, some analysts gave mixed opinions.
An analyst from PT Asian Development Securities estimates that Great River would take advantage of the growing upper-middle income people and Indonesia's high economic growth.
The country's annual per capita income has now reached US$1,000, while the country's middle-class population, with annual incomes over $4,500, is estimated at nearly 20 million now.
Another analyst from Peregrine Sewu Indonesia, however, said it would not be easy for Great River to expand its retail business rapidly because of its high-class products.
Sunjoto said that the company will try to increase value added products to keep pace with the cyclical demand of high-class products, which are subject to changes of design, model or even quality.
"Therefore, we should continuously increase the licensing of international brands," Sunjoto said.
He said that the domestic market will remain as the primary source of revenues, while revenues from its wholly owned subsidiaries in Malaysia and Singapore, which have witnessed an increase of 50 percent and 25 percent respectively last year, are expected to increase this year.
"Moreover, some of our joint ventures will launch commercial production this year," he noted.
Sunjoto also said that within two years, the company will set up about 100 franchises with small businesses and cooperatives as an implementation of the Jimbaran Declaration on partnership with small businesses.
"The franchises will be established in cooperation with the Association of Young Businessmen and will handle direct selling."
Commenting on his long-term plans, Sunjoto said "We want to become a world-class fashion retailer."