The mantra of rising affluence tied to a growing middle class has long underpinned Indonesia’s attraction as an investment destination. The wealthier people are, the more likely they will want to consume luxury goods and services and adopt Western lifestyles, rather than simply consume to stay alive.
Busy office-workers with families also have less time or inclination to wander around wet-markets and mom-and-pop stalls for their weekly shop. The food quality can vary and there is no guarantee that they will find the product they want.
Sensing that Indonesia is turning into a nation of more discerning consumers, some domestic retailers are responding by offering greater shopping convenience and more branded goods. Among them is Salim Group, a conglomerate with business interests ranging from food and beverage to banking, telecommunications and property.
Recognising just how Indonesia is changing, it restructured three of its consumer retail assets in June 2013 and injected them with equity to finance expansion. The Indonesian conglomerate channelled its stakes in Indomaret mini-market owner Indomarco Prismatama, bread and cake maker Nippon Indosari Corpindo, and Kentucky Fried Chicken franchise operator Fast Food Indonesia into listed internet services firm Dyviacom Intrabumi (DNET).
The transaction was a backdoor listing of these consumer businesses and followed a rights issue by DNET, which provided additional equity to finance the expansion of Indomaret stores in particular. After the deal, DNET’s name was changed to Indoritel Makmur Internasional.
Alex Wreksoremboko, who as president director of Indoritel is the company’s chief executive, is especially enthusiastic about the prospects for Indomaret.
“We reckon that as people get richer they spend more money on brand-name food and drinks. Just as important, they want the convenience of minimarket stores that open early and close late, and also appreciate the fact that they are clean and air-conditioned – in contrast to many traditional, old-fashioned shops,” said Wreksoremboko in a phone interview with FinanceAsia.
An Indonesian national, Wreksoremboko was previously a banker with Citi Securities in Jakarta where he advised medium-sized Indonesian firms. He has also been head of the strategic group development team at Indonesian cigarette maker Sampoerna and spent a few years as an entrepreneur after starting his professional life as an analyst at securities firms in Singapore and Indonesia.
“Consumers’ tastes are changing and so are their habits as years of strong economic growth in the country are creating a busy middle class with more cash to spare,” said Wreksoremboko.
According to global consulting and market research firm Frost & Sullivan, disposable income per capita in Indonesia will increase at a 10.4% compound annual growth rate (CAGR) from 2012 to 2015, while monthly consumer spending of between Rp4 million and Rp8 million will rise from 28.5% of the country’s 274 million population in 2012 to 63% by 2017.
Frost & Sullivan, who have an office in Jakarta among 40 offices worldwide, estimate that sales at minimarkets, supermarkets and hypermarkets in Indonesia was only $60 per capita in 2012, much lower than in the Philippines ($102), Malaysia ($206) and Thailand ($325).
But sales are growing quickly. Between 2008 and 2012 the number of these three types of outlets grew at a CAGR of 18.5% CAGR, and the number of minimarket stores alone grew at 26.5% CAGR according to Frost & Sullivan.
Indomaret marginally edged out rival Alfamart for minimarket dominance, with both chains having around 30% market share.
By the end of 2013, Indomaret had nearly 1,600 stores, said Wreksoremboko. Minimarkets are the “winning modern retail formula,” he said, pointing out that they take a higher percentage of sales (54% in 2013) than supermarkets and hypermarkets combined because of their convenience and price parity with the larger stores.
Indomaret is planning to open 20% more stores each year up to the end of the decade. The expansion will stretch across the archipelago and is supported by 19 IT- driven distribution centres, each servicing between 500 and 600 stores, with 100 to 110 trucks manoeuvring through congested roads to restock inventory daily, said Wreksoremboko.
More fried chicken
The other two consumer companies within Salim Group-controlled Indoritel, Nippon Indosari and Fast Food, are planning to expand into underpenetrated markets.
Bread sales per capita in Indonesia are $5 compared with $8 in Malaysia, $29 in Hong Kong and $34 in Singapore, Frost & Sullivan estimated.
Nippon Indosari’s Sari Roti brand has a 92% share of the mass-produced market, and Wreksoremboko expects increased sales through Indomaret’s expanding network, which will challenge the dominance of regional brands. Almost 70% of Sari Roti bread is sold from minimarkets, supermarkets and hypermarkets, and two-thirds of that percentage through minimarkets.
Currently, the firm has eight factories with 24 production lines. It plans to open a further three new factories in the archipelago’s most populous island of Java and in Kalimantan, the Indonesian part of Borneo, and six more production lines to increase capacity from 3.4 million pieces of bread a day to 4.3 million. Sari Roti is also developing healthier products that contain dietary fibre, high calcium content and omega 3 fatty acids to suit new lifestyle choices.
But, as in the West also, junk food has its fans in Indonesia. FAST is Indonesia’s leading quick-service-retail (QSR) chain and operates the KFC franchise from YUM! KFC has an 85% market share of chicken-based QSR in the country, according to Frost & Sullivan.
FAST added more than 50 new restaurants in 2013 and it in- tends to open 30 more each year between 2013 and 2015, focusing on a free-standing format rather than in shopping malls be- cause it is cheaper. However, the company is burdened by the high initial fee ($50,000) it has to pay YUM! for each new store opening – which it is currently negotiating to lower.
Costs are the major constraint on rising profits at all three companies.
A 32% increase in the average minimum wage in Indonesia (compared with a 14.5% increase in 2012) ratcheted up labour costs as a proportion of sales to 18% last year (14% in 2012) at the FAST restaurants and increased labour costs by 1.9% at the Indomaret stores.
It aims to increase productivity in the three firms by cutting back staff numbers and forcing remaining employees to take on additional tasks, Wreksoremboko said.
Indeed, higher costs are not going to restrain Indoritel’s expansion plans for its consumer enterprises. It envisages a future where more and more Indonesians will shop at minimarkets, eat mass-produced bread and hang out at fast food restaurants.