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.