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.