Regulating hypermarket proliferation

Fajar Hidayat, Jakarta

The hypermarket concept, which combines a supermarket and a department store in a gigantic retail facility with a wide range of products under one roof, including full lines of fresh groceries, apparel and appliances, was pioneered by the French retail group Carrefour.

This group opened its first hypermarket in 1962 in Sainte- Genevihve-des-Bois near Paris. In the nineties, the group started to expand its business to Asia, including Indonesia, where Carrefour, in 1998, opened its first outlet in Jakarta.

Currently, Carrefour has eleven outlets in Greater Jakarta and another four in Bandung, Surabaya, Medan and Palembang. They will open twenty-five new stores this year. Hero supermarket, which is in partnership with Malaysia-based Dairy Farm, has followed in Carrefour's footsteps and now they have ten Giant hypermarket stores. Domestic retailer Matahari has also jumped on the bandwagon with its Hypermart -- the brand name of its four hypermarkets.

The proliferation of these large, convenient and relatively inexpensive stores, certainly has greatly worried traditional market retailers. According to The Indonesian Traditional Market Retailer Association (APPSI), over the last five years, around 400 traditional market kiosks in Jakarta have closed down. This figure did not include kiosks in the seven traditional markets that were closed by the Jakarta administration for various reasons.

The APPSI has responded by urging the Jakarta administration to stop issuing new licenses for hypermarkets in the city center.

The government seems responsive to the traditional market retailers' demands, as evidenced by Minister of Trade Mari E. Pangestu's remarks that the government was studying the problems to seek an appropriate solution.

The government is preparing better regulations to enable hypermarkets and traditional markets to complement each other in sound market competition.

However, the government rulings on traditional markets and hypermarkets should only be guidelines for regional administrations. In the proposed presidential decree, to be issued later this year, regional administrations will have more power to issue permits for hypermarkets based on the region's development planning.

Hypermarket proliferation, particularly in big cities, reflects a significant change in shoppers' behavior, life-style and needs. Because of their hectic daily activities, upper-middle income shoppers prefer efficiency and convenience in shopping by satisfying all of their routine needs with one-stop shopping. They favor the shopping atmosphere in nice, clean locations, offering a wide range of products with competitive prices -- all the while providing modern and convenient facilities.

Hypermarkets can accommodate these shoppers' needs. The hypermarkets have lured the shoppers by stressing variety and quality as much as price, with upscale touches such as in-store butchers and a vast array of groceries and other items.

As a result, more shoppers have been turning their backs on traditional markets, because these markets cannot provide a competitive shopping atmosphere. In traditional markets, consumers usually have to haggle with dozens of retailers in different kiosks just to buy one shirt or one kilogram of rice, and some of the service is sub-standard. The uncomfortable condition of the traditional markets is a factor too; most are dirty, unventilated, crowded and not always safe.

Traditional markets are facing tough competition, not only from hypermarkets, but also from smaller types of modern market retailers, i.e. standard-size supermarkets and minimarkets. There is a trend whereby upper-middle income shoppers in big cities prefer hypermarkets for their monthly shopping, supermarkets for weekly shopping and minimarkets for daily shopping.

Traditional market retailers are facing a "double squeeze" situation, i.e. lack of efficiency, and innovation in their market niche, along with competition pressure from modern retailers.

Subsequently, a loss of market share is a logical consequence that has to be understood and dealt with by traditional markets. A survey by AC Nielsen revealed that the market share at traditional markets in Indonesia was 69.6 percent in 2004, down from 78.1 percent in 2000. Meanwhile, the share of modern markets reached 30.4 percent, up from 21.8 percent in 2000.

This development reflects the consequence of the market economy mechanism in Indonesia's retail sector. The mechanism rests upon the fundamental principle of consumers' freedom to choose among competing products and services, and the freedom of producers and traders to start or expand a business.

However, by allowing the traditional market retailers to go out of business could have a damaging impact because they create many job opportunities and stimulate small-scale entrepreneurship in society. For those reasons, the government should protect traditional market retailers.

However, the government policy should not only be "protection- driven", which could make the traditional market retailers spoiled by the protection and unenthusiastic to improve their services or quality. The policy should also be "market-driven", to force traditional market retailers such as business units to survive in a competitive environment. The combination of a protection-driven and market-driven policy will produce appropriate government regulations able to control hypermarkets' expansion and simultaneously empower traditional markets.

Banning hypermarkets from operating outside provincial capitals, as proposed in one of the stipulations in the government draft presidential decree, is not wise. Several cities that are not capitals have significant numbers of upper-middle income residents, like Tangerang, Bekasi, Bogor, Depok, Surakarta, Malang, Balikpapan, etc. And the fact is, hypermarkets are now thriving in most of those cities.

When hypermarkets are allowed to exist in a city, other regulations could be imposed. For example, a hypermarket must be located at least two kilometers away from traditional markets, have a maximum area of 5,000 to 8,000 square meters, and the service coverage ratio should be restricted to one hypermarket for, say, every 250,000 people.

The writer is a senior researcher on economic policies and business at The Indonesian Institute -- Center for Public Policy Research.