Mixed Outlook for Indonesian Retail

oxfordbusinessgroup.com--Expectations that rising incomes among Indonesia's burgeoning middle class will generate a retail boom were boosted by rosy end-of-year sales results. However, the upward trend is threatened by both global and domestic trends.

A Bank Indonesia (BI) survey published in January revealed that retail sales surged 14% year-on-year (y-o-y) in November, the fastest growth since July. The survey of 650 retailers in 10 major cities also predicted that December sales would increase 18.3% over the same month in 2012.

This result was in line with a steady climb in the central bank’s consumer confidence index over the last quarter of the 2013, which reached 116.5 at the end of December, up from 107.1 at the beginning of October.

“Consumers are more confident about economic conditions over the next six months, citing positive sentiment about their income, job availability and business activities,” the central bank said in November.

Recent financial statements suggest that retailers were doing well in the second half of last year, with third-quarter results from eight companies showing revenue growth of between 9% and 27%.

Singapore-based Lippo Malls Indonesia Retail Trust said its gross revenues increased to nearly $30m in the third quarter of 2013, up 13.6% from the same period in 2012, attributing the increase to "contributions from six new malls acquired in 4Q 2012 and the positive rental reversions within the existing malls ".

Demographic trends support growth

Such expansion underlines confidence in the market, underpinned by demographics. Boston Consulting Group (BCG) is projecting the number of middle class and affluent consumers (MACs) – which currently stands at 74m — may reach 141m people in 2020.

“These consumers are the sweet spot of this market,” said Vaishali Rastogi, a BCG partner and coauthor of the report, published last year. “They’re beginning to move beyond basic necessities to products that offer greater convenience and comfort, such as home durables, white goods, cars and financial services.”

However, despite the expectations and planned opening of several major malls over the next five years, not all observers see 2014 as an easy ride for retail.

“For 2014, in light of the incoming election and probable rupiah instability, it is quite likely that customer loyalty will go out the window in certain areas of the market as consumers become more concerned with the pricing of goods and value for money,” Paulus Ong, the president-director of Pongs Home Store Indonesia, told OBG.

Growth on the outskirts

Faced with an uncertain outlook in Jakarta, international and domestic retail firms are turning to the relatively untapped market of smaller cities and the capital's outskirts, according to Fernando Repi, spokesperson for department store operator Matahari Putra Prima. “Modern retail is still lacking in second-tier cities when in fact, people there have experienced economic and, therefore, income upgrades,” he told the local media in December.

It is a misperception that Indonesia's economic growth centers around Jakarta, wrote the McKinsey Global Institute in a December 2012 report. "Many other cities are growing more rapidly, albeit from a lower base. [...] These include Medan, Bandung and Surabaya as well as parts of Greater Jakarta".

The sentiment was echoed by the findings of BCG.

"Indonesia currently has 12 cities with more than 1m MACs. By 2020, however, this number will roughly double, to 22 cities with more than 1m MACs, including emerging cities such as Palembang, Makassar, Batam, Semarang, Pekanbaru and Padang.”

The lack of international retail giants in the country can be explained by the geographic fragmentation, according to research released last December by Deloitte. "Middle class consumers in Indonesia still show a strong preference for shopping at convenient locations near their homes, meaning that convenience stores and mini-markets continue to be the main destination for many."

The fact that retailers are identifying new sales strategies rather than losing confidence in the country reflects long-term optimism based on the country’s fundamentals. This suggests that while macroeconomic trends will buffet the sector in 2014, its future outlook beyond this year remains positive.