| |
Indonesian supermarket takes on foreign
giants
By Bill Guerin
Indonesia's largest supermarket chain PT Hero
Supermarket plans to open three hypermarkets on the
outskirts of Jakarta this year to stem a steady drop in
the chain's market share against very strong competition
from foreign retailers.
Hero already covers
Jakarta and other major centers of population in the
regions with its 90 supermarkets, 25 convenience stores,
and 38 pharmacies. The supermarkets bring in some 90
percent of sales revenue from a wide range of fresh
food, groceries, and electronic goods. In the first nine
months of 2002 sales rose 19 percent to Rp667 trillion
(about US$74.8 billion) but soaring costs, particularly
after a 15 percent hike in electricity prices, have
taken their toll.
Higher sales were offset by
increasing cost of sales, just as in the full year in
2001 when sales rose 20 percent to Rp298 trillion, but
were hit by increased operating expenses, up to Rp338.76
billion from Rp265.06 billion. Last year's net profit
fell to Rp61.89 billion from Rp67.89 billion in 2000
while sales rose to Rp1.989 trillion from Rp1.692
trillion the previous year. Cost of 2001 sales rose to
Rp1.538 trillion from Rp1.319 trillion in 2000 pushing
its net operating profit lower at Rp81.45 billion,
compared with Rp82.65 billion the year before.
The main mover in the company, director Steve
Sondakh, has long yearned to take on the giants. When he
was chairman of the Association of Indonesian Retailers
(Aprindo) in 1998 he said the Jakarta city
administration had made a big mistake in allowing
foreign hypermarkets to operate in the city center.
Aprindo backed this up with figures that showed the
hypermarkets had caused a decline of 80 percent in
business turnover of local retailers within a radius of
five kilometers.
This was in 1998 and the
association's view at the time was that foreign
hypermarkets could sell at significant discounts to
local retailers because they were willing to suffer
losses to gain market share. Also, of course, they had
plenty of available capital, something Indonesian
companies lack.
Aprindo accused the foreign
raiders of selling hundreds of products below cost as a
way to drive local retailers out of business claiming
that local fresh markets and small stores nearby were
suffering a significant loss of customers.
Continent, for one, denied the charges. PT
Contimas Utama Indonesia, which controlled the
hypermarket before it merged with Carrefour in 2000,
said there was no dumping involved. Continent was able
to offer low prices by accepting lower margins in return
for higher volume, it said, adding that Indonesian
consumers benefited from such stores as they could pay
less for a wide range of products in a time of economic
crisis.
Aprindo now represents some 300
retailers nationwide, including Hero and other major
chains such as Matahari, Ramayana, Pasaraya and Sarinah.
The two main hypermarket groups, Makro and Carrefour,
are not members of Aprindo.
France's Carrefour,
the world's second-largest retailer, took the plunge and
entered Indonesia at the height of the Asian financial
crisis. Carrefour opened its first two outlets when, in
June 1998, the Indonesian government eliminated many
restrictions on foreign retail operations. It was
closely followed by another giant French player,
Continent, with three outlets.
New government
regulations, part of the original letter of intent
commitment with the International Monetary Fund, had
allowed foreign retailers for the first time ever to
open stores in Indonesia. The floodgates had been
opened.
This followed one of the blackest
periods in contemporary Indonesian history when Jakarta
was hit by four days of rioting, looting and arson that
began on May 13 and resulted in damage of Rp2.5
trillion.
Hero suffered a loss of Rp140 billion.
Six of its outlets were burned to the ground and 20
looted. Two thousand employees lost their jobs but the
looted branches all opened up three days later.
Hero went on to make a record operating profit
of US$10.2 million in 1999, an 11 percent increase over
1998.
When the French parent companies merged in
a $16.5 billion deal under the name Carrefour, Continent
stores disappeared, leaving five Carrefour outlets.
After the merger, the number of Carrefour's outlets in
Jakarta has now increased to seven, with approximately
3,500 employees, or about 400-450 employees per outlet.
Makro Asia arrived on the scene in Indonesia in
1991 under a management-cooperation agreement with SHV
Holdings in the Netherlands. The first outlet opened in
Jakarta in September 1992 and in the next four years
nine stores were opened. During the 1998 riots Makro
lost one store but that has been reopened and they have
since have opened three more stores: in Semarang,
Surabaya and Medan.
Hong Kong-based Dairy Farm
International Holdings Ltd (a subsidiary of Jardine
Matheson Holdings Ltd), which operates supermarkets
around the region, owns 32 percent of Hero, with the
founding Kurnia family still with a majority stake of 40
percent, and the public holding the remainder.
The company opened its first outlet 30 years ago
in 1972 and went public once they owned 24 supermarkets.
Hero used the money to pay back bank loans and launch an
aggressive campaign of expansion but only with
supermarkets.
Last year Hero opened its first
ever hypermarkets - one outside Surabaya, Indonesia's
second-largest city, and another outside Jakarta.
Though consumer spending is forecast to fall
sharply next year, Hero is planning to invest some $5
million to open the three new hypermarkets. The money
will come from internal cash and no borrowing is planned
at this stage of the expansion.
Makro is also
expanding, with about two or three new outlets a year.
Its president director, Simon Collins, said that from
the very beginning, the aim has been to join forces and
grow together with Indonesia's small-to-medium-scale
businesses.
Makro said each new store needs an
investment of between $5 million and $7 million
including land, building and equipment, which suggests
that Hero's $5 million for three outlets will not go
far.
There are currently more than 527
supermarkets in Indonesia, most of them in Jakarta, the
greater Jakarta area (Botabek) and Surabaya. However,
with a total population of some 208 million people,
supermarket penetration remains very limited,
representing only one supermarket for nearly 500,000
people.
Tesco (UK) is rumored to be ready to
move into Indonesia, Starmart, a convenience store
chain, have 38 stores in prime locations within Greater
Jakarta and Giant (US) has already opened a hypermarket
in Jakarta. The latter group has been highly successful
in Malaysia and Singapore.
Although retailers
unable to find the right strategies in this testing
sector will not survive there is certainly good money to
be earned. Industry analysts say the biggest margin in
the Indonesian retail industry is earned by department
stores with about 35 percent, followed by convenience
stores in prime locations, which can expect to make a 25
percent margin.
Supermarkets such as Hero come
next and earn a 20-22 percent margin. Below these are
hypermarkets, usually in a prime location, with a lot of
staff, which need to make about 17-20 percent, and at
the bottom of the tree is the Makro-type operation, cash
and carry wholesaler, which makes about a 9 percent
margin.
Makro's 12 units have 7,000-10,000
square meters of sales space and employ some 250
employees in each outlet, targeting retailers rather
than consumers, they say.
Certainly Makro is the
only large retail enterprise requiring registration, and
they charge a small monthly fee, but many shoppers
include Makro in their rounds when searching for
bargains in food and non-food goods. Makro's
high-volume, low-price, no-frills, cash-and-carry
wholesale operations thus represent as much of a threat
to Hero as Carrefour.
"We have to continue
expanding otherwise our market share will continue to be
eaten up by foreign competitors," Sondakh said last
month when announcing the expansion plans.
Sondakh has cited the dominance of foreign
hypermarkets in Taiwan, where they swept out local
retail companies in six years, as one reason Indonesian
retailers need to fight back.
Makro has many
domestic small and medium-sized businesses as its
suppliers though Hero has for long been using this style
of win-win alliance to cut down on distribution and
networking costs, particularly with fresh produce.
Makro is not aimed at end users and the concept
is not retailing but modern wholesaling. "We really
don't compete with hypermarkets such as Carrefour or
Hero," said Collins. The biggest competitor for Makro,
he says, is the traditional market.
Makro also
believes that their existence does not threaten local
markets but actually helps local small players. Collins
makes the point that the ease with which Makro obtains
approval and licenses shows there is no opposition from
traditional businesses.
Aprindo has been
pressing the government for a zoning law that would
regulate the number of retailers running similar
businesses in the same area. It complains not only about
major groups but also others such as Indomaret and Super
Indo.
Indomaret has 650 outlets around the
country and Super Indo has almost 60 outlets in Jakarta
and other cities such as Bandung, Yogyakarta, Surabaya
and Palembang.
Indonesians spent about Rp200
trillion on retail products in 2000 and the sector grew
more than 20 percent in 2001. Some Rp35 trillion of this
went to modern retail outlets, including Hero premises
and Rp165 trillion was spent at traditional markets and
community shops.
The absence of effective zoning
laws and lack of regulation in the retail business means
that the foreign entrants pose a major threat to local
operators.
"With the lack of regulation, foreign
retailers are likely to triumph over local retailers,"
Sondakh said recently.
The battle lines are
clear, Indonesia versus foreign operators. Hero is still
a local company as Ipung Kurnia, Hero's president and
the eldest son of the company's founder, is proud of
pointing out and tries to promote a home-grown image
"regardless of who the shareholders are".
Sector
growth this year is expected to be below 10 percent but
however testing the forthcoming battle between the local
Hero and its foreign competitors, Indonesians are
certain to reap the benefit of increased shopping
convenience at competitive prices. Those with money to
spend, that is.
Indonesia's middle class, the
hypermarkets' target market, has been hardest hit by the
crisis but seems to be spending as though there were no
tomorrow. Despite the likelihood of serious economic
hardship in the coming months in the aftermath of the
October 12 bombings in Bali, throngs of shoppers can be
seen regularly at traditional markets and in shopping
malls and super/hyper markets.
A recent study by
market research firm ACNielsen said that consumers
bought retail products at the same rate as they did
prior to the 1997 economic crisis though Indonesia's
retail business is ranked only seventh out of 10 Asian
countries outside Japan.
(©2003 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
|
| |
|
|
 |
|
