Jakarta retail sector stays attractive

Jakarta retail sector stays attractive

By Nada Muljadi and Stephen Doe

JAKARTA (Reuter): As instructed by President Soeharto on April 23, the government is to issue a regulation after the election banning big retailers from opening new stores in towns classified as Dati II, the term for the next biggest residential area after a city and/or provincial capital.

Existing stores already opened in Dati II can still operate, but with a requirement to cooperate closely with the local merchants.

Big retailers

The top 15 retailers in Indonesia earned 65 percent of total revenue in 1994. This increased to 85 percent of total retail sales in 1995.

Increasingly, local merchants are being squeezed out by the invasion of big retailers. Big retailers, who have the advantages of economies of scale and more efficient operations, commonly use their own suppliers. They also adjust their product mix according to local tastes and preference, while ensuring that their merchandise is affordable to local consumers.

Balancing

This new regulation is intended to help local merchants and to eventually result in a more even distribution of wealth. Big retailers which have already been granted permits to open stores in Dati II prior to the announcement of the ban believe that it is unlikely that their permits will be revoked since in many cases they will already have made commitments towards the preparation of those stores. We believe it will take some time (possibly five years) before the new regulation is fully effective. The enforcement of the regulation will be the responsibility of the municipality government in each Dati II. To ensure the effectiveness of the new regulation, close cooperation between the big retailers, local merchants and the government will be necessary.

Impact

Whether the effect on the big retailers is good or bad will depend on what the target market of the company is and how the regulation is put into place. The exact details are unknown at this point, but basically the regulation will limit the expansion programs of big retailers on Java -- the main location target for their expansion -- especially those with a fashion-dominated product mix like Matahari and Ramayana.

Both Matahari and Ramayana have expansion strategies outside of Jakarta in order to tap unsaturated retail markets and at the same time establish a wider store network throughout Indonesia.

Small towns which have living standards comparable to Jakarta (such as Bogor, Timika and Balikpapan) are proposed to be exempted under the regulation. A proposed quid pro quo is an income tax break for those retailers who cooperate successfully with local merchants.

Matahari

Twenty-nine (35 percent) of Matahari's 81 stores in operation are currently located in Dati II. Matahari plans to open a further seven stores, of which six will be in Dati II but with permits already granted before the ban was announced. Matahari targets the middle-upper market, meaning that the majority of its target market live in larger cities.

We believe that as an established retailer, with its stores already spread out in most cities in Indonesia, the ban is not a serious threat to Matahari. Additionally, when the regulation takes effect, Matahari's existing stores in Dati II will have less competition from other big retailers.

As for future expansion, Matahari can concentrate on opening stores in Dati I (the capital cities of provinces) -- bigger cities where most of its customer base lives -- outside Java.

Hari Darmawan, the founder of Matahari, has said that the company plans to open franchise stores in Dati II which local merchants will operate with under Matahari's assistance in management strategy.

Ramayana

Eighteen (32 percent) of Ramayana's 55 stores are currently located in Dati II. Planned expansion in 1997 and 1998 was to open four stores in each year in Dati II, for which the government has already granted permits.

The ban will have a more serious effect on Ramayana as most of its customer base lives in such areas and most Ramayana stores located in Dati II such as the Batam island, Riau, and Cilegon, West Java, have been a big success. A possible positive scenario for Ramayana would be to supply its merchandise to local stores in Dati II, albeit at lower margins but boosting volumes.

Hero Supermarket

Seven (11 percent) of Hero Supermarket's 664 outlets are located in Dati II. As Hero aims at the middle-upper market and future expansion is targeting Jakarta and surrounding areas, the effect of the ban is unlikely to be felt for the next five years.

Still attractive

The proposed regulation has been greeted with skepticism from retailers and praise from the public. We believe that the effect for the big retailers is not as negative as some felt when the ban was first announced. The new regulation may result in a slowdown in expansion on Java, but on the bright side, opening stores outside Java reduces rental and setting up costs which will eventually boost overall productivity.

We maintain our recommendation of BUY for Matahari, HOLD for Ramayana, and SELL for Hero.

Notes: Nada Muljadi, retail research analyst and Stephen Doe, head of research of Asia Equity, Jakarta. The views expressed in this article represent the views of the authors only. They should not be seen as reflecting the views of Reuters.