Retail keeps 'em coming despite uncertainty

Retail keeps 'em coming despite uncertainty OR Uncertainty no stop to retail expansion

Randy Witular Hendarsyah Tarmizi Jakarta Post Jakarta

With a population of more than 215 million, Indonesia continues to beckon to retailers even as the country's economic fundamentals remain woefully uncertain. The impressive population size is one of the main factors attracting investors, and was probably the reason French hypermarket chain Carrefour ignored worrisome economic fundamentals to open its first outlet in Jakarta in 1998 at the height of the country's multidimensional crisis. Rani Sofyan, a retail analyst at Bahana Securities, acknowledged the importance of demographics, but said long-term prospects of the retail business mostly depended on economic fundamentals. Uncertainties resulting from the government's policies often cause problems, evident from the hike in telephone and electricity rates and fuel prices early this year which, although later revoked, had a lasting impact on the retail sector. Many retailers have been forced to review their expansion plans due to price hikes that will not only reduce consumer spending but also raise their operating costs. Rani said that although the growth of the country's gross domestic product (GDP) remains low at between 3.5 percent and 4 percent, the retail sector would continue to increase thanks to continued growth in household consumer spending. "Unlike in developed countries, in Indonesia the larger part of the people's incomes is still spent on daily needs. This explains why the retail business continues to grow despite some difficulties." According to data provided by the Central Bureau of Statistics (BPS), household consumption expenditure rose by 17 percent to Rp 1,137 trillion (about US$133.75 billion) in 2002. The deputy chairman of the Association of Indonesian Retailers (Aprindo) for organizational affairs and public relations, Rudy Sumampou, said the retail sector's development would depend on the outcome of the general election next year. "If the general election can create a pro-economy cabinet, the retail sector will easily return to its golden age before the crisis." He said a new government must learn from the weakness of its predecessor. The government of Megawati Soekarnoputri has been widely criticized for failing to respond to the crises besetting the country. The decision to simultaneously increase fuel, electricity and telephone rates was only one example of the government's lack of understanding about fostering a dynamic business climate. "Promoting a conducive business climate should become the first priority of the incoming government, or else the business uncertainties will continue," Rudy said. There is no recent official data on the growth of the country's retail sales but Rudy estimated that total retail sales reached about Rp 200 trillion (about US$23.5 billion) in 2002. He said about 20 percent of the total sales came from modern retailers such as hypermarkets, supermarkets and department stores. "Last year, the total retail sales rose by 10 percent but it is still far below the average 20 percent booked before the crisis. Hopefully, the business will grow by 15 percent beginning next year," he added. The Indonesian retail sector enjoyed its golden era in 1996 but was hit hard by the financial crisis which rocked the country beginning in 1997 and peaked in 1998. Local retailers also fell victim to the mass riots in May 1998, as hundreds of department stores and retail outlets were burned during the unrest which led to the resignation of authoritarian leader Soeharto. In 1999, when local retailers were in the midst of consolidation measures to stay in business, the government removed the retail sector from the negative investment list, a move that allowed foreign retailers to operate in the country without restriction. The regulation provided more leeway for foreign retailers such as Sogo, Makro and Carrefour to strengthen their footholds in the local market. But for local retailers, their commanding presence is viewed as a threat to survival, particularly the expansion of the French hypermarket. Richard Santosa, head of corporate, promotion and public relations division of PT Ramayana Lestari Sentosa, which operates Ramayana department stores in Indonesia, describes the growth of the hypermarket as a "giant killer" for smaller retailers. With greater capital at their disposal, foreign hypermarkets have few problems competing with capital-strapped local firms. "To get a very cheap price, huge retailers such as Carrefour have at least 100,000 items, while smaller stores are only able to provide around 40,000 items," Richard said. Carrefour spokesman Triyono P said the hypermarket was doing nothing wrong in its Indonesian operations. "As long as our location is not in violation of the law, the government has issued permits for us to operate our stores." But Rudy and Richard shared the view of the need to impose restrictions on foreign hypermarkets. In fact, Aprindo proposed that the government restrict the operation of a hypermarket to the outskirts of the city to allow smaller retailers to compete. The proposal has received no response. Rudy recognized that the imposition of barriers against the operation of foreign hypermarkets would be against the government's commitment to adopt the ASEAN Free Trade Area (AFTA), which came into effect this year. But he said local retailers must be given the priority to take advantage of the growing retail markets. "There should be a regulation either in the form of a ministerial decree or a provincial regulation to prevent the local retailers from being swallowed up by foreign retailers." With globalization, competition cannot be avoided, and only those offering inexpensive, high-quality products will win over buyers. "Most local retailers understand this phenomena but they need much more time to be ready to compete head to head with foreign retailers, which are not only superior in technology and human resources but also capital," Rudy says. To anticipate fiercer competition, local retailers such as Matahari and Hero Supermarket have formulated more customer- oriented marketing strategies, which emphasize the need to provide more competitive prices. Hero has tied up with Malaysian retailer Giant to jointly operate a hypermarket in Tangerang targeted at medium and upper market segments. Matahari is endeavoring to strengthen its operations not only by opening new outlets but also changing its marketing concept. The local retailer will continue to focus on the one- stop shopping concept through its two retail units, Matahari Department Store and Matahari Supermarket, but with an emphasis on superior service. "We have to be able to provide good service and continue to improve performance, otherwise we'll be booted out of the market," Matahari spokesman Danny Kojongian said. Rani said that competition, which is now centered in Jakarta, would gradually shift to provinces outside Java because of expanding business activities with the implementation of the autonomy law. "The retail market in Jakarta has been saturated. Rich provinces are now becoming the centers of future growth," she said. Matahari and Ramayana have opened a number of outlets in cities outside Java as part of their expansion program. Ramayana, which currently has 80 stores, plans to open five new outlets in Sumatra and Kalimantan this year.

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