Indonesia Retail Report

Q4 2011www.businessmonitor.com

retail report

iSSN 2040-9117published by Business Monitor international ltd.

iNDoNeSiaINCLUDES BMI'S FORECASTS

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INDONESIA RETAIL REPORT Q4 2011 INCLUDING 5-YEAR INDUSTRY FORECASTS BY BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2011

Indonesia Retail Report Q4 2011

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary ......................................................................................................................................... 5

SWOT Analysis ................................................................................................................................................. 7

Indonesia Retail Business Environment SWOT ...................................................................................................................................................... 7 Indonesia Political SWOT ...................................................................................................................................................................................... 8 Indonesia Economic SWOT ................................................................................................................................................................................... 9

Market Overview ............................................................................................................................................. 10

Current Trends.......................................................................................................................................................................................................... 11 Key Players ............................................................................................................................................................................................................... 15

Industry Forecast Scenario ........................................................................................................................... 17

Retail Growth Outlook .............................................................................................................................................................................................. 17 Table: Indonesia Retail Sales Indicators, 2008-2015 .......................................................................................................................................... 17 Table: Retail Sales Breakdown By Key Segment, 2011f ....................................................................................................................................... 19

Macroeconomic Outlook ........................................................................................................................................................................................... 19 Table: Indonesia Economic Activity, 2008-2015 ................................................................................................................................................. 21

Regional Retail Outlook ................................................................................................................................. 22

Asia Pacific Retail Outlook ....................................................................................................................................................................................... 22 Table: Asia Pacific Retail Sales, 2008-2015 (US$bn) .......................................................................................................................................... 22 Table: Asia Pacific Retail Sales By % Share, 2008-2015 .................................................................................................................................... 23 Table: Asia Food Consumption, 2008-2015 (US$$bn) ........................................................................................................................................ 25 Table: Asia Pacific Macroeconomic Outlook, 2008-2015 ................................................................................................................................... 27

Business Environment Outlook .................................................................................................................... 29

Asia Pacific Retail Business Environment Ratings.................................................................................................................................................... 29 Table: Asia Pacific Retail Business Environment Ratings ................................................................................................................................... 29

Indonesia’s Retail Rating .......................................................................................................................................................................................... 30 Limits To Potential Returns ................................................................................................................................................................................. 30 Risks To Realisation Of Returns .......................................................................................................................................................................... 31

Mass Grocery Retail ....................................................................................................................................... 32

Indonesia Mass Grocery Retail Industry SWOT .................................................................................................................................................. 32 Market Overview ...................................................................................................................................................................................................... 33

Table: Structure Of Indonesia’s MGR Sector – Estimated Number Of Outlets, 2005-2010 ................................................................................. 36 Table: Structure Of Indonesia’s MGR Sector – Sales By Format, 2005-2010 (IDRbn) ....................................................................................... 36 Table: Structure Of Indonesia’s MGR Sector – Sales By Format, 2005-2010 (US$mn) ...................................................................................... 36 Table: Average Annual Sales By Format, 2010 ................................................................................................................................................... 36

Industry Forecast Scenario ....................................................................................................................................................................................... 37 Table: MGR Sales By Format, 2009-2015 ........................................................................................................................................................... 39 Table: Grocery Retail Sales By Format, 2011 And 2020 (%) .............................................................................................................................. 39

Industry Developments.............................................................................................................................................................................................. 39

Consumer Electronics ................................................................................................................................... 43

Indonesia Consumer Electronics Market SWOT .................................................................................................................................................. 43 Market Overview ...................................................................................................................................................................................................... 44



Industry Forecast Scenario ....................................................................................................................................................................................... 45 Table: Consumer Electronics Sales Overview, 2008-2015 (US$mn) ................................................................................................................... 46


Automotives .................................................................................................................................................... 49

Indonesia Autos Industry SWOT .......................................................................................................................................................................... 49 Market Overview ...................................................................................................................................................................................................... 50

Indonesia: Top 10 Vehicle Sales By Brand, 2009-2010 ....................................................................................................................................... 50 Industry Forecast Scenario ....................................................................................................................................................................................... 51

Production And Sales ........................................................................................................................................................................................... 51 Table: Autos Production And Sales, 2008-2015 .................................................................................................................................................. 51 Trade ................................................................................................................................................................................................................... 52 Table: Autos Exports And Imports, 2008-2015 (CBUs) ....................................................................................................................................... 52


Country Snapshot: Indonesia Demographic Data ...................................................................................... 55

Section 1: Population ................................................................................................................................................................................................ 55 Table: Demographic Indicators, 2005-2030 ........................................................................................................................................................ 55 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 56

Section 2: Education And Healthcare ....................................................................................................................................................................... 56 Table: Education, 2000-2005 .............................................................................................................................................................................. 56 Table: Vital Statistics, 2005-2030 ........................................................................................................................................................................ 56

Section 3: Labour Market And Spending Power ....................................................................................................................................................... 57 Table: Employment Indicators, 2001-2006 .......................................................................................................................................................... 57 Table: Consumer Expenditure, 2000-2010 (US$) ................................................................................................................................................ 57 Table: Average Annual Manufacturing Wages, 2000-2012 ................................................................................................................................. 58

BMI Methodology ........................................................................................................................................... 59

How We Generate Our Industry Forecasts ............................................................................................................................................................... 59 Sources ..................................................................................................................................................................................................................... 60



Executive Summary

The Q411 BMI Indonesia Retail Report forecasts that the country’s retail sales will grow from

IDR1.39trn (US$133.89bn) in 2011 to IDR2.30trn (US$222.41bn) by 2015. Strong underlying economic

growth, the world’s fourth largest population (which is growing), rising per-capita incomes and the

continued development of organised retail infrastructure are key factors behind the substantial growth

forecast in Indonesian retail sales.

Indonesia’s nominal GDP is forecast to be US$819.6bn in 2011, and BMI predicts average annual GDP

growth of 6.1% through to 2015. With the population forecast to increase from 235.7mn in 2011 to

247.5mn by 2015, GDP per capita is predicted to grow 65% by the end of the period, reaching US$5,739.

Tourism plays a large part in the health of the Indonesian retail industry, with Bali – the jewel in the

country’s tourism crown – generating 30% of national tourist revenue, an estimated US$3bn a year.

Increasing access to credit among domestic consumers is also a boon to the industry, with data from Bank

Indonesia (BI) showing that a total of 13.22mn credit cards were in circulation in the country to October

2010, up from 12.13mn to October 2009.

Food consumption is forecast to be US$69.54bn in 2011, rising to an expected US$109.20bn by 2015, an

increase of 57.0%. The mass grocery retail (MGR) sector, which is still developing, will achieve even

more substantial growth – BMI forecasts sales will rise by 64.4% to US$54.4bn by 2015 on the back of

the formation of a larger, high-spending middle class with the disposable income and the inclination to

shop in modern retail outlets.

Other retail sub-sectors forecast to show healthy growth over the period include over-the-counter (OTC)

pharmaceuticals, with sales forecast to grow by 55.3%, from US$1.85bn in 2011 to US$2.88bn by 2015.

Automotive sales are expected to increase by 36.0%, from US$11.68bn in 2011 to US$15.89bn towards

the end of the forecast period; with aggregate levels of car ownership of just 1.3%, there is considerable

scope for expansion.

Consumer electronic sales are predicted to rise by 51.0%, from US$8.86bn in 2011 to US$13.37bn by the

end of the forecast period. A projected compound annual growth rate (CAGR) of 13% is expected to be

one of the highest in the region; while computer sales are predicted to show faster growth than almost

anywhere within the Association of Southeast Asian Nations (ASEAN) over the next few years, albeit

from a lower base.



Retail sales for the BMI universe of Asian countries in 2011 are a forecast US$3.13trn. China and India

are predicted to account for nearly 91% of regional retail sales in 2011, and by 2015 their share of the

regional market is expected to be more than 92%. Growth in regional retail sales for 2011-2015 is

forecast by BMI at 71.6%, an annual average 14.4%. India should experience the most rapid rate of

growth, followed by China. Indonesia’s forecast market share of 4.3% in 2011 is expected to decrease

slightly, to 4.1% by 2015.



SWOT Analysis

Indonesia Retail Business Environment SWOT

Strengths Indonesia is South East Asia’s largest economy, with nominal GDP exceeding US$700bn in 2010. It is the world’s fourth most populous country, with about 235mn people. It offers investors a vast market in which to do business.

Indonesia is a founding member of the Association of South East Asian Nations (ASEAN). As a member of ASEAN’s Free Trade Area (AFTA), it is committed to lowering tariff and non-tariff barriers to trade.

Average annual GDP growth of 6.1% is predicted by BMI between 2011 and 2015. With the population expected to increase to nearly 248mn people by 2015, GDP per capita is forecast to grow 65% by the end of the period, reaching US$5,739.

Weaknesses Corruption remains a major problem. Indonesia was joint 110th out of 178 countries in Transparency International’s 2010 Corruption Perceptions Index, in which a low ranking denotes a higher degree of corruption.

Indonesia’s excessive bureaucracy makes it a difficult place to do business. Among Asian economies, Indonesia has the longest period to start a business; 76 days. Labour laws are also considered excessive.

The 70% of Indonesian workers employed in the informal sector earn only a quarter of the average salary in the formal sector.

Opportunities The Yudhoyono administration has gradually been reforming the business environment, particularly by strengthening the legal system and fighting corruption. If sustained, this would boost investor interest in Indonesia.

Indonesia has been amending its debt and banking regulations since 2008, with the aim of attracting Islamic financial activities.

The value of the retail segment is forecast by BMI to grow from IDR1.39trn (US$133.89bn) in 2011 to IDR2.30trn (US$222.41bn) by 2015.

While the urban population accounted for less than 48% of the total population in 2005, the UN forecasts it will reach nearly 59% by 2015.

Threats High profile business disputes between the government and foreign investors demonstrate that even after investments are up and running, there is still scope for legal problems or obstacles posed by legal wrangling.

Security threats are a concern for investors. Despite several of its top leaders being arrested in recent years, the radical Islamist militant group Jemaah Islamiah (JI), which was responsible for the 2002 Bali bombings, remains active. There is also a low-level threat from separatist rebels and intercommunity tensions.

Despite ongoing expansion of the organised retail sector, low income levels mean the majority of the population continues to shop at traditional stores.



Indonesia Political SWOT

Strengths Indonesia managed a successful transition to democracy in 2004. In addition, the 2009 parliamentary and presidential elections passed by peacefully, signalling the consolidation of the democratic process.

The military’s role in politics has gradually been reduced. The prospects of a military coup, which seemed a real possibility in the late 1990s and early 2000s, have diminished substantially.

Weaknesses Indonesia’s domestic political scene is characterised by a proliferation of minority parties, and formal and informal coalitions are necessary to govern and legislate. Moreover, the efficiency of state institutions is encumbered by bureaucracy and corruption.

Indonesia’s cultural and ethnic diversity saw the archipelago wracked by separatist rebellion and ethnic violence in the late 1990s and early 2000s, which took great efforts to bring to heel. In the event of a new economic crisis, calls for regional secession could re-emerge.

Opportunities President Susilo Bambang Yudhoyono’s Democratic Party had a strong showing in the 2009 parliamentary elections. Coupled with a strong mandate following his re-election in the same year, the implementation of policies in the legislature should potentially become less problematic.

Indonesia’s status as the world’s most populous Muslim country leaves it well positioned to speak out on global Islamic issues, and act as a bridge between the Middle East and the Asia Pacific region.

Threats JI poses a lingering threat to security in Indonesia. JI is blamed for a series of attacks including the Bali bombings of October 2002, and other such incidents including the Jakarta bombings of July 2009.

The fact that Indonesia subsidises basic goods means that when the government raises prices, there is a risk of public unrest, or at least a political backlash.



Indonesia Economic SWOT

Strengths Indonesia’s location between the Indian and Pacific Oceans and its adjacency to major East-West trade routes make it an important economy in the region.

A large, low-cost supply of available labour resources.

Weaknesses Indonesia’s economy is not growing fast enough to reduce unemployment. Although it has been decreasing, the unemployment rate is still relatively high, at 7.1% in February 2010. Many are forced to work in the informal sector.

Indonesia’s physical infrastructure is considered substandard. The archipelagic nature of the country makes it difficult to weave national infrastructure together.

Opportunities Indonesia could attract much-needed foreign investment by strengthening its business environment, particularly through reform of its unreliable legal system.

Indonesia stands to benefit from the rise of Islamic financing, having adopted new legislation in early 2008 designed to tap into this rapidly expanding sphere.

Threats Production at Indonesia’s ageing oil fields has been in decline since the mid-1990s. Thus, the country has become a net importer of crude oil in recent years, adding downward pressure on its current account position, though the resumption of the Cepu field in late 2009 may change this.

Indonesia is perceived as one of Asia’s riskier destinations. This leaves the economy vulnerable to sudden capital outflows at times of risk aversion, potentially leading to sharp swings in the strength of the rupiah.



Market Overview

Despite the growing prevalence of modern retail in Indonesia, the majority of people, especially those

living in rural areas, still shop at traditional retail outlets such as street markets and kiosks. BMI estimates

that traditional retail still accounts for 78% of total grocery sales in Indonesia, with this figure far higher

in lower-income rural areas and far lower in the major urban centres.

However, as Indonesia’s consumer base becomes more affluent, BMI believes that the modern retail

sector will continue to erode the market share of traditional retail. By 2018, the traditional retail sector is

likely to contribute only 57% to the country’s overall grocery retail sales.

The margins of Indonesian traditional retailers are coming under greater pressure from the ongoing spread

of modern retail. With smaller-scale supermarkets (minimarts) and convenience stores springing up

quickly across Indonesia’s capital of Jakarta, traditional retail operators are struggling with declining

sales opportunities as consumers switch to the greater variety and cheaper range of products on offer in

modern retail stores.

Although the local Jakarta government is taking steps to address concerns about the crowding-out of

independent retailers, we believe the ongoing expansion of the mass grocery retail (MGR) sector is an

inevitable consequence of continued foreign direct investment (FDI) in the sector and urbanisation, which

could drive traditional retailers out of business over the coming decades.

The retail industry was opened to foreign investment in 1998, after the government signed a letter of

intent with the IMF to revive the country’s ailing economy. Soon after the 1998 liberalisation, many big

foreign retailers began to invest in Indonesia, particularly in the hypermarket sector. Retailers are keen to

target a large urban population that made up more than half of the total in 2010.

Franchising is an important element of the wider Indonesian retail market. Indomart led the way in the

mid-1990s, while Mitra Adi Perkasa (MAP) has licences for Sogo, Debenhams, Marks & Spencer

(M&S), Topshop, Kinokuniya, Starbucks, Krispy Kreme, Zara, Next and Massimo Dutti. MAP is

the anchor tenant of several luxury malls in Jakarta and Surabaya.

MAP operates more than 600 stores in Indonesia with a total floor space of between 300,000sq m and

400,000sq m. It recorded a 52% rise in operating profit during the first half of 2010, and has allocated

IDR350bn (US$40.3mn) for capital expenditure to expand by up to 40,000sq m and open at least 23 new

outlets, according to the Jakarta Globe. The company said it believed its potential market was ‘within the

huge and growing population of middle-class consumers’.



The Jakarta Globe reported recently that MAP was to close the Harvey Nichols outlet at the Grand

Indonesia Shopping Town, only two years after it opened. The Globe pointed out that the Jakarta store

opened at ‘perhaps the worst possible time – October 2008, just as the global economy entered its worst

tailspin in decades’.

Talking to the newspaper Purwoko Sartono, a retail analyst at Panin Securities, said that while the

Indonesian retail market was highly attractive to many international companies, premium retail players

tended to struggle because of the relatively low per-capita income.

However, Akhmad Nurcahyadi, an analyst at BNI Securities, said the opening was a simple case of bad

timing. ‘The failure of Harvey Nichols does not necessarily mean that the premium-class retail stores will

follow in the struggle as well, but I do think that Harvey Nichols has a relatively slow business turnover,

with their super-premium products, and a huge space that is burdening their business costs,’ he said.

According to a report by the Indonesian Franchising and Licensing Society (WALI), the number of

foreign franchising outlets increased by about 8% in 2005 alone.

Laura Ashley, the British furniture and clothing chain, is set to open its first stores in Indonesia in H211

through franchise partners.

Current Trends

Retail expansion is focused on Indonesia’s five main cities: Jakarta, Bandung, Semarang, Surabaya and

Medan. The greater Jakarta area, known as Jabotabek, includes the satellite cities of Bogor, Depok,

Bekasi and Tangerang and is home to about 18mn people, making it one of the largest metropolitan areas

in the world.

In 2006, 50 of the 90 modern shopping centres in Indonesia were in Jakarta. New malls continue to open,

with one of the most recent and grandest mixed-use complexes being Grand Indonesia, near the Selamat

Datang Monument. It includes the Grand Indonesia Shopping Town, which, with more than 250,000sq m

of retail space across eight levels, is the biggest shopping centre in central Jakarta.

Other shopping centres in Jakarta include Pejaten Village, Pacific Place, Pondok Gede Plaza 2, fX, Plaza

Senayan, Setiabudi One, Mall of Indonesia, Pluit Village, Mal Kelapa Gading 3 and Plaza Indonesia.

The Jakarta property market felt the effects of the global recession in 2009, with demand in Q1 down

sharply across almost all sectors and commentators not expecting to see any improvement until 2010.



In April 2009, property consultancy firm Jones Lang LaSalle Indonesia (JLLI) chair Lucy Rumantir

said the global economic downturn had pushed the property market to its ‘lowest ebb’ with all segments,

and particularly retail space, seeing falling demand in the first quarter of 2009. JLLI head of research

Anton Sitorus said that in Q109 only 25,000sq m of the 63,000sq m of mall space available for rent was

taken by tenants. This brought the overall occupancy rate down to 82%, from about 84% in 2008.

Anchor/big tenants that opened new branches during Q409 included Best Denki, Gramedia and Central

World by Fun World in Central Park; Farmers Market in fX; Muji in the Plaza Indonesia extension;

Electronic Solution in eX; Boutique KTV in Plaza Senayan Arcadia; and Happy World in Graha

Cijantung.

These followed Q209 openings by Raja Electronic Superstore in Mall of Indonesia, Best Denki in Pluit

Village, Electronic Solution in Pejaten Village, Matahari Department Store (MDS) in Mal Taman

Palem and Gramedia in Pluit Village and Pejaten Village.

Global real estate company Cushman & Wakefield estimated in its Q310 Jakarta Retail Report that total

retail centre space in Jakarta as of Q310 stood at 3,532,600sq m. Two retail centres were completed

during the quarter: Gandaria City in South Jakarta; and Tanah Abang Blok B in central Jakarta.

Colliers International estimates that, over the next three years, upcoming retail space will total more

than 500,000sq m, as international retailers increasingly target the country. According to A.T. Kearney’s

2011 Global Retail Development Index (GRDI), Indonesia is the 16th most desirable destination for

investment in retail, up from 22nd in 2009. ‘Increased per capita incomes and continued development in

the organised retail infrastructure are boosting food retail sales,’ it says. ‘Other retail sectors are also

poised for growth – consumer electronics sales, led by computers, are predicted to rise 13% year-over-

year for the next five years.’

In the 2010 GRDI, Kearney forecast that sales through organised retail outlets would grow 20% in the

next five years, due to a growing middle-income population and food retail market in large cities such as

Jakarta, Surabaya and Bandung, as well as the province of Bali.

‘With more tourism and an expatriate population, demand for imported Western foods is growing. Large

retailers such as Carrefour Indonesia, Matahari Putra Prima and Hero Supermarkets have increased

sales by selling private-label products, offering store promotions and expanding to less saturated regions.’

Matahari Putra Prima expects to overtake Carrefour as the country’s largest retailer by sales as early as

2012, according to the Wall Street Journal.



Carmelito Regalado, president of Matahari’s food business, said he expected revenue to rise more than

20% a year for the next five to 10 years because of demand from Indonesia’s growing middle class.

‘As Indonesians reach that income threshold, spending habits begin to change,’ he told the newspaper.

‘The wealth is spreading all over the islands.’

Matahari will add 22 hypermarket stores in 2011 to its total of 52, Mr Regalado said. The company plans

to add 16 stores in 2012, and about 15 a year after that.

Indonesia’s middle class, which comprised 1.6mn people in 2004, ballooned to about 50mn in 2009 and

will triple to 150mn by 2014, according to investment bank PT Nomura Indonesia.

‘As household incomes increase, consumption moves beyond the basics of food, shelter and clothing and

expands into consumer durables, electronics, health care, education services and financial services,’

Yougesh Khatri, senior economist at Nomura Indonesia, wrote.

Much of Indonesia’s wealth is concentrated, along with its population, on the island of Java. But Matahari

has seen growth in smaller towns on far-flung islands as well. Incomes are rising for farmers, miners and

plantation workers on the islands of Sumatra, Kalimantan and Sulawesi along with the prices of rubber,

palm oil, cocoa and coal. Matahari plans to open stores in places as far away as Ambon and Irian Jaya at

the eastern end of its archipelago.

Although Jakarta remains the centre of the Indonesian retail industry, domestic and international retailers

are targeting secondary cities such as Semarang, Makassar, the cities in Jabotabek (Bogor, Depok,

Tangerang and Bekasi), Solo, Denpasar, Yogyakarta, Palembang, Pekanbaru and Samarinda.

MasterCard is bullish about the prospects for Indonesia, forecasting a continued rise in consumer

spending in the country. The Q310 MasterCard Worldwide Consumer Confidence Index, conducted over

the March-April 2010 period and with a forward-looking time horizon of May-October, said that

Indonesia’s consumer confidence remained in the optimistic territory. ‘Retail sales are expected to grow

strongly again [in 2010], and likely in the range of 15% to 20%,’ said the report.

The new Index combines findings from the MasterCard Worldwide Index of Consumer Confidence with

six other key factors that affect consumer spend: household income; household indebtedness; interest

rates; equity market; property prices; and consumer price inflation.

‘In markets like … Indonesia … the rise in spending capability this year is expected to be particularly

strong,’ said MasterCard Worldwide economic advisor (Asia/Pacific) Yuwa Hedrick-Wong.



Indonesia posted the second biggest increase in purchases of major household appliances among nine

East Asian markets as of October 2010, reported BusinessWorld in December. Based on the GfK Retail

Panel – a survey monitoring product sales by major Asian retailers – units sold in Indonesia surged by

42.3% year-on-year (y-o-y) in the 10 months to October 2010.

In January 2011, real retail sales expanded 20.1% over the same month the year before, according to

Bank Indonesia (BI)’s Retail Sales Survey (RSS). FocusEconomics reported that the reading represented

a slight slowdown over the robust 21.8% increase registered in December, but marked the 17th

consecutive month of double-digit growth in retail sales. As was the case in previous months, clothing

sales led the expansion, increasing by an impressive 65.4% over January 2010.

Despite the robust growth, annual average growth in real retail sales fell for a fourth consecutive month,

from 26.3% in December to 24.8% in January. According to the RSS, retailers anticipate that sales will

continue increasing in the short term, which bodes well for private consumption in the coming months.

BMI notes that Indonesia has got off to a flying start in Q111, registering real GDP growth of 6.5% y-o-

y, driven by private consumption and investment. We continue to hold a sanguine outlook for the

economy, noting that food and energy prices may moderate in the coming months, providing a boost to

the domestic consumer.

Private consumption growth reached 4.5% y-o-y, ticking up slightly from 4.4% in the preceding quarter.

In the coming months, we believe that high prices in the food and energy components should continue

easing, allaying fears that consumer spending may be curtailed. This has already played out, with

headline CPI dipping down from a peak of 7.0% y-o-y in January to 6.2% y-o-y in April. As such, we are

not unduly concerned about rising core inflation (which ticked up to 4.6% y-o-y in April), and view it as a

sign of a healthy economy.

Beyond the coming quarters, we believe that the accumulation of capital through an investment boom will

raise productivity and wages, supporting private consumption growth over the longer term (see

Macroeconomic Outlook).

The promising outlook for the economy and consumer spending means that retailers are feeling bullish

about 2011, reported the Jakarta Globe in March. Yongky Susilo, retail service director of Nielsen

Indonesia, cited ‘the growing economy, distribution improvement, consumers’ willingness to spend,

bullish advertising and new product entry’ as the factors that would boost retail growth in 2011.

The Globe reported that electronics distributors shared the optimism. ‘Companies such as Intel Indonesia

and Sony Indonesia are rushing to secure their place in the region’s largest economy,’ it said. Santhosh



Viswanathan, country manager at Intel Indonesia, forecast that the personal computer market in Indonesia

would grow by at least 30% in 2011.

Meanwhile, Satoru Arai, Sony Indonesia’s president director, told the newspaper that the company’s

business had grown by about 65% since 2000, and that Indonesia would become one of its biggest

markets in South East Asia.

With more people expected to switch to flat-screen TVs, the company plans to launch 23 models of the

Sony Bravia in Indonesia in 2011. ‘As the country’s economy grows, people will start spending money on

more high-quality products,’ Arai said.

Key Players

In the MGR sector, multinational retailers include Carrefour of France, Delhaize of Belgium and Lotte

Shopping of South Korea.

German wholesale giant Metro Group announced in March 2011 that it would open the first of about 20

planned retail outlets in Indonesia by 2012. Chief executive officer Eckhard Cordes said in a press

statement that over the past few years Asian countries, including Indonesia, had emerged as potential

targets for retailers seeking to expand their businesses. ‘With … a fast-growing economy and strong

domestic consumption, Indonesia offers abundant potential for our retail business,’ said the company.

In June 2011, Frans W H Muller, chief executive of the Asian division of Metro’s wholesale chain Metro

Cash & Carry, told the Jakarta Globe that Metro Group plans to invest as much as US$430mn in the next

three years to establish 20 wholesale retail outlets in Indonesia.

The company plans to open six Metro Cash & Carry stores in major cities across Bali and Java by next

year. Each store will have between 5,000sq m and 7,000sq m of sales space at an investment of between

EUR10-15mn, Mr Muller said. Metro Group will partner with the Jakarta-based Sintesa Group for the

company’s expansion.

In the non-food sector, the Star reported in March 2011 that Malaysia-based department store operator

Parkson Holdings had entered into a 90-day ‘exclusivity agreement’ with Tozy Bintang Sentosa for the

purpose of developing and expanding in Indonesia. Tozy Bintang Sentosa operates six retail stores under

the brand names of Centro Lifestyle Department Store and Kem Chicks in Indonesia, and is reportedly

opening two more outlets in 2011.



Local players in the Indonesian retail market include Alfa Retailindo, Matahari Putra Prima, Hero

Supermarket, Ramayana Lestari and Para Group.

Other leading domestic retailers listed on the Indonesia Stock Exchange include Mitra Adiperkasa

(franchisee), Catur Sentosa Adiprana (speciality stores) and Gunung Agung (book stores).

Matahari is Indonesia’s largest retailer, operating 80 department stores, 38 hypermarkets, 29

supermarkets, 46 health and beauty centres and more than 90 family entertainment centres nationwide. It

was announced in January 2010 that UK-based private equity firm CVC Capital Partners was to acquire

a 91% stake in MDS worth IDR7.2trn (US$768mn), Indonesia’s largest ever private equity deal. The

relatively high value of the purchase of the 88-outlet network has been attributed to the country’s

sustained economic growth, rapid middle-class emergence, improved political stability and strong recent

retail sales growth.

Matahari has reportedly dropped the sale of its chain of 52 hypermarkets, although it remains open to

selling a majority stake. It has been suggested that Matahari made the decision due to lower-than-

expected bids; but, in our view, the very enticing domestic retail growth story prompted Matahari to

reconsider the sale.

US retail giant Wal-Mart, France’s Casino Guichard-Perrachon and South Korean retailer Lotte

Shopping were among some of the strongest contenders for Matahari’s hypermarket business, and these

retailers could yet jump at the chance to acquire a majority interest in Matahari’s Hypermart, with

Indonesia’s robust retail growth opportunities proving too great to ignore.

International retailers and brands in Indonesia include Toys R Us, Early Learning Centre, Jade, Brioni,

Mango, Sony Centre, Gc, Diane Von Furstenberg, Kate Space, Giordano, Harvey Nichols, Prada,

Louis Vuitton, Levi’s, G2000, Adidas, Nike and Reebok.

Meanwhile, Bali-based jeweller John Hardy is opening a lavish 22sq m store in the prestigious Plaza

Indonesia shopping mall in Jakarta in partnership with the Masari Group.



Industry Forecast Scenario

Retail Growth Outlook

Strong underlying economic growth, an enormous and expanding population (the world’s fourth largest,

after China, India and the US), rising per capita incomes and the continued development of organised

retail infrastructure are key factors behind the substantial forecast growth in Indonesia’s retail sales. The

population’s steady adoption of consumerism will also contribute to a trend that is likely to see the value

of the retail segment grow from a forecast IDR1.39trn (US$133.89bn) in 2011 to IDR2.30trn

(US$222.41bn) by 2015.

Table: Indonesia Retail Sales Indicators, 2008-2015

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

Retail sales (IDRbn) 952,713 1,084,067 1,239,349 1,386,580 1,564,176 1,778,527 2,023,308 2,303,285

Retail sales (US$bn, fixed 2008 FX rate)

97.65

104.68

119.67

133.89

151.04

171.74

195.37

222.41

Retail sales (US$bn, forecast FX rates)

97.65

104.68

136.45

157.57

179.79

210.48

243.77

282.61

Retail sales as % GDP 19.3 19.3 19.3 19.2 19.3 19.5 19.7 19.9

Retail sales per capita (IDR) 419,060 471,475

533,014

588,301

655,068

735,590

826,862

930,526

Retail sales per capita (US$)

429.5

455.3

514.7

568.1

632.5

710.3

798.4

898.5

Total retail sales growth (IDR)

16.1

13.8

14.3

11.9

12.8

13.7

13.8 13.8

Per capita retail sales growth (IDR)

7.8

6.0

13.1

10.4

11.3

12.3

12.4 12.5

Private final consumption (IDRbn)

2,999,957

3,290,843

3,641,997

4,038,100

4,494,405

5,045,150

5,674,078

6,393,438

Private final consumption (US$bn)

307

318

401

459

517

597

684 784

Private final consumption (IDR, real growth % y-o-y)

19

10

11

11

11

12

12 13

f = BMI forecast. Source: Indonesian Retail Merchants Association, BMI

Indonesia’s nominal GDP is forecast to be US$819.57bn in 2011, and BMI predicts average annual GDP

growth of 6.1% through to 2015. With the population forecast to increase from 235.7mn in 2011 to

247.5mn by 2015, GDP per capita is predicted to grow 65% by the end of the period, reaching US$5,739.



Tourism plays a large part in the health of the Indonesian retail industry, with Bali – the jewel in the

country’s tourism crown – generating 30% of national tourist revenue, or an estimated US$3bn a year.

Increasing access to credit among domestic consumers is also a boon to the industry, with data from BI

showing that a total of 13.22mn credit cards were in circulation in Indonesia to October 2010, up from

12.13mn to October 2009.

In terms of total retail sales, there is a lack of official government or UN spending data. We have

therefore used a percentage of private final consumption as a proxy for retail sales and forecast a figure of

IDR1.39trn (US$133.89bn) in 2011. We expect retail sales to rise to IDR2.30trn (US$222.41bn) by 2015,

largely as a result of the expected increase in private final consumption.

BMI forecasts that in 2011 retail sales will be worth 19.2% of nominal GDP. By the end of the forecast

period we expect that to be a 19.9% contribution to GDP.

Food consumption is forecast to be US$69.54bn in 2011, rising to an expected US$109.20bn by 2015, an

increase of 57.0%. The mass grocery retail (MGR) sector, which is still developing, will achieve even

more substantial growth – BMI forecasts sales will rise by 64.4% to US$54.4bn by 2015 on the back of

the formation of a larger, high-spending middle class with the disposable income and the inclination to

shop in modern retail outlets.

Other retail sub-sectors forecast to show healthy growth over the period include over-the-counter (OTC)

pharmaceuticals, with sales forecast to grow by 55.3%, from US$1.85bn in 2011 to US$2.88bn by 2015.

Automotive sales are expected to increase by 36.0%, from US$11.68bn in 2011 to US$15.89bn towards

the end of the forecast period; with aggregate levels of car ownership of just 1.3%, there is considerable

scope for expansion.

Consumer electronic sales are predicted to rise by 51.0%, from US$8.86bn in 2011 to US$13.37bn by the

end of the forecast period. A projected compound annual growth rate (CAGR) of 13% is expected to be

one of the highest in the region; while computer sales are predicted to show faster growth than almost

anywhere in the ASEAN over the next few years, albeit from a lower base.

According to UN data, in 2005 39.8% of the Indonesian population was in the 20-44 age range. This is

forecast to increase to almost 41% by 2015. This growing segment of the population is a key element for

future retail spending. The proportion of the population classified by the UN as economically active was

65.7% in 2005 and should reach almost 69% by 2015. While the urban population accounted for less than

48% of the total in 2005, the UN predicts that it will reach nearly 59% by 2015.



BMI forecasts unemployment to be 6.6% in 2011, and to end the forecast period at 6.0%. A combination

of higher employment, strong underlying economic growth, a large and expanding population, rising per

capita incomes and the continued development of organised retail infrastructure support our positive view

of retail sales development.

Table: Retail Sales Breakdown By Key Segment, 2011f

Market share (%) Estimated value (US$bn)

Food & drink 51.9 69.54

Automotives 8.7 11.68

Consumer electronics 6.6 8.86

OTC pharmaceuticals 1.4 1.85

f = forecast. Source: BMI

Macroeconomic Outlook

Running On the Domestic Engine

Indonesia is off to a flying start, registering real GDP growth of 6.5% y-o-y in Q111, driven by private

consumption and investment. We continue to hold a sanguine view on the economy and caution upside

risks to our 5.9% and 5.8% real GDP forecast in 2011 and 2012 respectively.

Indonesia registered robust real GDP growth of 6.5% year-on-year (y-o-y) in Q111. This figure is highly

impressive considering the high base effect in Q110 and underscores our view that domestic demand (in

particular, investment-led demand) will drive the economy strongly in 2011. We continue to hold a

sanguine outlook for the economy noting that food and energy prices may moderate in the coming

months, providing a boost to the domestic consumer. Meanwhile, given the strong Q111 print, we also

caution upside risks to our 5.9% and 5.8% real GDP growth forecast for 2011 and 2012 respectively.

No Sign Of Slowing Down

We are encouraged by the fact that growth in Indonesia continues to be driven by domestic factors as it

renders the economy less vulnerable to a potential slowdown in China and the US in H211. To be sure,

gross fixed capital formation (GFCF) growth reached 7.3% y-o-y in Q111 and was a key driver,

contributing 1.7 percentage points (pp) to real GDP growth, behind headline growth. At this point, we

continue to see growth momentum in GFCF build and this can be seen by the robust loan growth numbers

seen over the last few months. Indeed, overall loan growth reached a 22-month high of 24.2% y-o-y in

January before maintaining at a similar level in February. From a banking survey done by Bank Indonesia



(BI) for Q111, respondents indicate that demand for loans has been helped by improving business

prospects. Positively, demand for new loans was driven by a spike in demand for investment credit,

suggesting room for further output growth down the line.

Over the coming quarters, we do not foresee significant headwinds for investment growth and believe that

BI will only embark on gradual monetary normalisation this year. BI has shown a deep reluctance to

utilise the BI rate to curb consumer price inflation (CPI) and has kept the BI rate pat at 6.75% after raising

it up 25 basis points (bps) just once in February since the global financial crisis. In our view, even if

headline inflation declines with lower energy and food prices, BI cannot afford to ignore rising core

inflation. As such, we project that BI will be pushed to hike rates by another 50bps (we are below

consensus in our call) in 2011 as core inflation ticks towards the BI’s upper limit of 5.0%. With

accommodative monetary policy likely for the medium term, we expect GFCF growth to maintain at

8.5% in 2011 and 2012.

Private Consumption Growth Well Supported

Private consumption growth reached 4.5% y-o-y, ticking up slightly from 4.4% in the preceding quarter.

In the coming months, we believe that high prices in the food and energy components should continue

easing, allaying fears that consumer spending may be curtailed. This has already played out with headline

CPI dipping down from a peak of 7.0% y-o-y in January to 6.2% y-o-y in April. As such, we are not

unduly concerned about rising core inflation (which ticked up to 4.6% y-o-y in April) and view it as a

sign of a healthy economy. Beyond the coming quarters, we believe that the accumulation of capital

through an investment boom will raise productivity and wages, supporting private consumption growth

over the longer term.

Net Exports Becoming A Smaller Driver Of Growth

Indonesia’s net exports rose by 2.8% y-o-y in Q111, down from 6.1% in the preceding quarter. The sharp

narrowing in net export surplus was due to a 15.6% surge in imports compared to a 12.3% increase in

exports. In our view, the narrowing net export surplus trend is set to continue over the longer term with

the country starting to register a deficit position by 2016. With high capital needs from investment and a

stronger rupiah, we believe that imports of both capital and consumption goods will outpace export

growth. We forecast net exports to contribute 0.8pp to headline growth this year and project the figure to

continue declining to 0.5pp in 2012. That said, although net exports will play a smaller role in

contributing to headline growth, we believe that the domestic economy will be more than able to make up

for the shortfall.

Broad-Based Growth across Sectors

Due to the resource boom, there have been fears that Indonesia may suffer from the ‘Dutch’ disease as

non-resource related sectors become marginalised. We do not see this happening. Indeed, an analysis by



sectors within Indonesia reveals that growth has been broad-based and there has not been any strong skew

towards resources. By our calculations, average growth in the tertiary sector has been the strongest

(averaging 8.4% y-o-y on a quarterly basis since Q108) followed by the secondary sector (6.8%) and the

primary sector (3.4%). For the most recent quarter, the ‘manufacturing’, ‘trade, hotels and restaurants’

and ‘transportation and communication’ sectors were the top three contributors to headline growth.

Slow Reforms Still Holding Back Growth

Indonesia’s growth has been held back by the government’s inability to enact reforms on several key

issues. Of utmost importance is the land acquisition bill, which has constrained infrastructure

development. According to the secretary to the planning ministry, Syahrial Loetan, the bill should be

finished by mid-2011. However, given the numerous delays this bill has faced, we are not particularly

optimistic about the deadline. Should the bill be successfully passed in mid-2011, we would have to

revise up our Indonesia’s growth on account of better investment prospects.

Table: Indonesia Economic Activity, 2008-2015

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

Nominal GDP, IDRbn 2 4,948,688.3 5,603,870.9 6,422,918.3 7,212,213.4 8,090,119.2 9,109,713.8 10,266,216.0 11,577,695.5

Nominal GDP, US$bn 2 507.2 541.1 707.1 819.6 929.9 1,078.1 1,236.9 1,420.6

Real GDP growth, % change y-o-y 1,2 6.0 4.6 6.1 5.9 5.8 6.2 6.3 6.4

GDP per capita, US$ 2 2,231 2,353 3,041 3,477 3,894 4,459 5,055 5,739

Population, mn 3 227.3 229.9 232.5 235.7 238.8 241.8 244.7 247.5

Industrial production index, % y-o-y, ave 2 3.1 1.5 4.3 4.2 5.0 5.3 5.8 6.0

Unemployment, % of labour force, eop 2 8.4 7.9 7.2 6.6 6.2 6.0 6.0 6.0

f = BMI forecast. Note: 1 Base year = 2000. Source: 2 BMI/IMF, 3 World Bank/BMI



Regional Retail Outlook

Asia Pacific Retail Outlook

From a forecast value of US$3.13trn in 2011, based on BMI’s Asia Pacific retail universe of China, Hong

Kong, India, Indonesia, Malaysia, the Philippines and Singapore, regional retail sales are expected to

grow by nearly 72% between 2011 and 2015 to reach US$5.36trn (based on forecast foreign exchange

rates). Unsurprisingly given its strong forecast economic growth, China will continue to dominate the

regional retail landscape. However, India is expected to achieve the strongest rate of retail sales growth in

the region over the forecast period with 95.5%.

Table: Asia Pacific Retail Sales, 2008-2015 (US$bn)

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

China 1,561.92 1,835.33 2,097.40 2,423.72 2,784.97 3,186.49 3,632.85 4,134.04

Hong Kong 35.10 34.86 37.16 40.29 42.27 44.13 46.17 48.19

India 298.62 326.22 380.24 411.28 480.30 589.75 701.27 804.06

Indonesia 97.65 104.68 119.67 133.89 151.04 171.74 195.37 222.41

Malaysia 34.81 33.96 38.77 51.79 58.48 65.48 72.39 79.44

Philippines 27.14 28.54 28.82 29.19 29.61 30.05 30.52 31.03

Singapore 28.28 28.12 31.17 35.11 37.31 38.97 40.92 42.61

Regional total 2,083.52 2,391.70 2,733.23 3,125.27 3,583.97 4,126.62 4,719.48 5,361.77

Regional annual retail sales growth, % 26.1 14.8 14.3 14.3 14.7 15.1 14.4 13.6


In growth terms India beats China, with its retail sector forecast to grow by 95.5% between 2011 and

2015 compared with 70.6% for China. Speaking at the National Retail Federation convention in New

York in January 2011, Richard Hyman, strategic advisor for accounting firm Deloitte, said global retail

sales are forecast to grow by US$6.1trn over the next five years but 66% of that growth will come in

developing markets such as China and India.

The lowest forecast growth markets in BMI’s retail universe are the Philippines with 6.3% and Hong

Kong with 19.6%. It should be noted, however, that while these growth forecasts are small in comparison

with their regional peers, they still reflect considerable sector dynamism.



Table: Asia Pacific Retail Sales By % Share, 2008-2015

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

China 75.0 76.7 76.7 77.6 77.7 77.2 77.0 77.1

Hong Kong 1.7 1.5 1.4 1.3 1.2 1.1 1.0 0.9

India 14.3 13.6 13.9 13.2 13.4 14.3 14.9 15.0

Indonesia 4.7 4.4 4.4 4.3 4.2 4.2 4.1 4.1

Malaysia 1.7 1.4 1.4 1.7 1.6 1.6 1.5 1.5

Philippines 1.3 1.2 1.1 0.9 0.8 0.7 0.6 0.6

Singapore 1.4 1.2 1.1 1.1 1.0 0.9 0.9 0.8


MasterCard expects a continued rise in consumer spending in the region. The Q310 MasterCard

Worldwide Consumer Confidence Index, which took place in March-April 2010 and had a forward

looking time horizon of May-October, showed that consumer confidence improved in eight out of the 14

markets in the survey, which includes all the countries in BMI’s Asia Pacific retail universe.

MasterCard said: ‘The overall picture of the region is … one of robust optimism. It appears that there is

some evidence that consumers in the Asia Pacific have shrugged off the impact of the 2008-2009 global

financial crisis with renewed confidence.’

The H210 Index, conducted between September and November 2010, found that consumers continued to

be optimistic but cautiously so. Although experiencing a marginal dip from the last survey, the index

score for consumer confidence was the second highest across the region in the last two years.

Across the Asia Pacific region, which comprises 14 markets, overall consumer confidence remained

modestly optimistic with a score of 68 out of 100, marginally lower than six months previously (69.1) but

higher than the year before (66.3), when the region was beginning to recover from the effects of the

global financial crisis.

‘The scores indicate that while consumers may perceive the worst of the crisis as behind them, they are

still wary in their outlook for the months ahead,’ said Yvette Oh, group executive for market development

in Asia Pacific, the Middle East and Africa at MasterCard Worldwide.

‘This perception could be in large part due to the uncertainties caused by inflation, the various tightening

measures that governments across the region are implementing, and the general slowdown in growth that



the region is seeing post-crisis. Nevertheless, it is encouraging to see that consumer perceptions about the

economy, employment and quality of life are among the most positive in recent years.’

Respondents from Singapore (86.1) and the Philippines (80.1) were the second and third most optimistic

in the region respectively. The growth engines of the region, China (79.4) and India (73.0), remained

positive in their outlook, although the score for China was lower than six months previously (83.0) and

the year before (85.3). The score for India, on the other hand, rose from 68.2 six months previously and

68.8 a year earlier.

Consumer sentiment in the Philippines (80.1) was at its most positive since 1997. Respondents’ outlook

on their quality of life (80.5) and the economy (83.6) were the highest scores recorded since the country

was included in the survey in 1995.

In A.T. Kearney’s latest Global Retail Development Index (GRDI), India and China have occupied the

top three places for several years, yet both fell in 2011, which the authors admitted ‘may come as a

surprise to our readers’.

‘While these countries are large and growing, on a relative basis, several Latin American markets

outshine both India and China,’ they said. ‘And as retailers continue to enter India and China –

particularly in tier 2, 3 and 4 cities where consumers are increasingly accepting global brands, have rising

disposable incomes and are becoming more discerning in their tastes – in several instances, traffic to

stores has yet to meet expectations.’

However, the report said that the outlook for South East Asia remained bright, with increased domestic

demand and exports, stabilising retail sales and improving consumer confidence. ‘Grocery remains the

region’s most important sector, accounting for almost two-thirds of total organized retail sales,’ said the

GRDI.

A global report on the retail property investment market in China and India shows similar levels of

optimism. According to Jones Lang LaSalle’s Global Market Perspective Paper, impressive growth

statistics are attracting retailers, developers and investors.

German wholesale giant Metro Group announced in March 2011 that it would open the first of about 20

planned retail outlets in Indonesia by 2012. CEO Eckhard Cordes said that over the past few years Asian

countries, including Indonesia, had emerged as potential targets for retailers seeking to expand their

businesses. ‘With a fast growing economy and strong domestic consumption, Indonesia offers abundant

potential for our retail business,’ he said. In the last 15 years, Metro Cash & Carry has also expanded

into China and India.



Table: Asia Food Consumption, 2008-2015 (US$$bn)

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

China 151.3 156.8 174.9 196.4 223.7 253.7 289.1 330.1

Hong Kong 11.7 11.7 11.9 12.1 12.3 12.5 12.6 12.9

India 169.2 172.1 188.7 198.3 226.5 271.3 314.4 352.2

Indonesia 53.6 53.7 64.9 69.5 78.5 86.7 97.1 109.2

Malaysia 12.2 11.8 13.4 14.7 15.5 16.3 17.1 18.0

Philippines 28.6 28.7 30.7 33.8 36.3 38.7 41.8 45.5

Singapore 6.8 6.7 7.2 7.5 7.5 7.7 7.9 8.1

Regional Total 433.4 441.47 491.7 532.3 600.4 686.9 780.06 875.89


In its Q210 Greater China update, global real estate consultancy Knight Frank reported encouraging

supply and demand indicators. In Beijing, the Cuiweilu Capital Mall and Chaoyang JoyCity opened,

adding 56,000sq m and 230,000sq m of space to the prime retail market respectively. In Guangzhou,

retail space grew by 10% quarter-on-quarter; while in Shanghai retail supply reached 265,000sq m, with

new malls opening in the districts of Luwan, Putuo, Pudong and Huangpu.

The emergence of a middle class in Asia is having a significant effect on retail sales in the region. The

Financial Times highlighted the changing views of Arthur Kroeber at Dragonomics, who in 2006 poured

cold water on the ‘fairytale’ of a Chinese middle class on anything like an American scale. At the time, he

estimated that just 20% of urban Chinese households, or 110mn people in a country of over 1bn, had

significant discretionary spending power. However, Dragonomics now estimates that 300mn people, 23%

of the population, have significant discretionary spending and live in cities large enough to be accessible

by big companies.

The outlook for the grocery retail industry, the largest segment of regional retail, largely follows the same

pattern as the overall retail sector, with India, China and Indonesia as the most dynamic markets in

growth terms, and Singapore and Hong Kong bringing up the rear.

A look at regional food consumption growth by market shows that India is forecast to outperform China

by a small margin between 2011 and 2015, with growth of 66.6% ahead of 66.3%. India’s MGR forecast

of 200.6% growth between 2011 and 2015 is also much higher because of its relatively low starting point.

The majority of grocery retail in China already takes place through formal, organised channels, whereas



in India the organised sector accounts for a very small proportion of the grocery retail market, hence the

immense growth levels being forecast.

Key Growth Drivers

The trends driving regional retail sales growth are broadly the same across each market in the region, with

the degree of influence perhaps altered depending on the maturity of the market. The main drivers of

regional retail growth can generally be defined as economic growth, favourable population demographics

and increased industry investment.

Economic Growth

Between 2011 and 2015, BMI forecasts regional GDP per capita to increase from US$3,683 to US$5,923.

Given its links to the West, Asia was initially badly hit by the global economic crisis but its recovery has

been remarkable, with domestic demand and export-driven economies estimated to have returned to

strong growth in 2010. A positive five-year economic forecast, ignoring the threat of a renewed

slowdown on the back of unwinding regional fiscal stimulus (see Risks To Outlook), should contribute to

healthy wage growth and sustained middle class expansion, which are major contributors to retail sales

growth.

Population Growth

BMI does not expect regional population growth to be explosive during the forecast period. Largely due

to a drag from China, which is forecast population growth of just 2.2% by 2015, regional population

growth is forecast at just 3.8% between 2011 and 2015. But even if these numbers are not soaring, the

make-up of the population is attractive. Asia has generally favourable age demographics, with a large

young population that is susceptible to modern retailing and appears set to sustain sales for some time.

Urbanisation

Economic growth has fuelled urbanisation across Asia as rural dwellers move to cities in search of

higher-paid employment. This has been a major fillip for the urban-centric retail sector, dramatically

increasing the size of its potential customer base and delaying the inevitable, enormously costly move

into secondary and tertiary towns and cities. Such favourable geographic demographics have caused

urban real estate prices to soar, but the benefits of a captive, high-spending urban customer base outweigh

the downsides for now. Accounting for 36% of the total population in 2000, China’s urban population is

estimated to have accounted for 45% in 2010. The urban population is estimated to have increased from

42% to 53% of the total in Indonesia, from 62% to 68% in Malaysia and from 28% to 30% in India.

Growth In Organised Retail

Most prevalent in grocery retail but affecting all sub-sectors of the industry to some extent, sales in higher

value organised retail have cannibalised sales in traditional retail, pushing up the overall value of the



sector. An increase in this could eventually result in higher value premium concepts cannibalising sales in

mass-market retail outlets, particularly among upper income groups.

Westernisation

Increased exposure to Western consumption habits has fuelled consumerism in developed and emerging

Asia. As well as stimulating interest in a wider range of modern retail concepts, Western influences may

also have pushed up the value of the retail goods being sold.

Multinational Investment

Related to Westernisation, increased multinational involvement in the Asian retail sector has had a

positive impact on sales. Not only has multinational investment meant a faster pace of store openings, it

has also meant the introduction of retail best practices that support sales. Many multinational retailers

have learnt the hard way in Asia about the importance of tailoring offerings to meet local consumption

preferences, but they have also contributed many ideas of their own to the local market. One example is

slick distribution systems that enable individual vehicles to transport fresh and frozen food items, greatly

increasing the range and value of produce a store can sell.

Tourism

Most relevant in Hong Kong, China and Singapore, but increasingly applicable to other regional markets,

tourism provides a boost to regional retail sales, particularly sales of luxury items. The Asian countries in

our retail universe are popular tourist destinations among Westerners, as well as being popular stopover

destinations for travellers to Australia. Tourism is particularly supportive of sales in the jewellery and

apparel sectors. After being hurt by the global economic slowdown in 2009, regional tourist arrivals

returned to growth in 2010, to the benefit of the retail sector.

Table: Asia Pacific Macroeconomic Outlook, 2008-2015

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

Regional GDP per capita, US$ 2,494.4 2,707.0 3,166.0 3,682.5 4,160.6 4,703.7 5,285.8 5,923.1

Average regional GDP growth, % 23.1 9.6 18.1 17.5 14.1 14.1 13.4 13.1

Population, mn 2,821.1 2,848.2 2,875.4 2,904.3 2,932.8 2,960.8 2,988.5 3,015.7


Risks To Outlook

A slower than expected economic recovery remains the biggest risk to our regional retail outlook. With

China being such a dominant player in regional sales, a slower recovery there would pose the greatest risk

to derailing growth. This is not our core scenario and earlier trade data suggest that the Chinese recovery



is well under way, although fears about the impact of monetary tightening and potential yuan appreciation

present downside risks to our outlook.

While consumerism is well established in mature regional retail markets such as Singapore, Hong Kong

and to a slightly lesser extent in China, this is not the case in most of the region’s emerging markets.

Here, any prolonged slowdown would lead to consumers turning back to cheaper traditional forms of

retail where substitute products are available. As discussed above, a return to growth is likely to mean

shoppers trade up again, but the availability of cheaper substitutes continues to pose a threat to organised

retail in times of weak consumer confidence.

Although it stimulates the sector in general, the rise of discounting and its extension beyond grocery retail

could be a threat to retail sales values over the forecast period, if not to volume sales. Price wars became a

mainstay of the mainstream grocery retail sector throughout the economic downturn and the extension of

this trend into homeware or apparel could undermine retail profit margins. This is not our core scenario,

however, as Asian consumers have only recently been convinced that discount food can be better value

rather than just cheap – a perception that is unlikely to extend to other channels for the time being.



Business Environment Outlook

Asia Pacific Retail Business Environment Ratings

The attraction of the Asia Pacific retail market to potential investors is based on the region’s population

size and growth prospects, the relative immaturity of many of the markets in the region and the potential

for the organised retail sector to enlarge its share of overall retail sales. Offsetting these factors are

generally high levels of country risk in key markets.

Three of the world’s most populous countries, China, India and Indonesia, are in the region and growing

urbanisation is contributing to the expansion of retail markets in many Asia Pacific countries. In China,

for instance, urban retail sales accounted for nearly 68% of total retail sales in 2009, according to the

Chinese National Bureau of Statistics.

Table: Asia Pacific Retail Business Environment Ratings

Limits of Potential Returns Risks to Realisation of Returns

Retail

Market Country

Structure Limits Market

Risks Country

Risk Risks Retail Rating Rank

China 73 50 61 55 56 55 59.5 1

Indonesia 52 60 56 65 42 51 54.5 2

India 63 40 51 60 59 59 54.0 3

Hong Kong 30 58 44 70 83 78 54.0 4

Malaysia 50 43 46 70 56 62 50.9 5

Philippines 44 45 44 70 45 55 47.5 6

Singapore 33 43 38 75 58 65 46.0 7

Scores out of 100, with 100 highest. The Retail business environment rating is the principal rating. It comprises two sub-ratings, Limits of potential returns and Risks to realisation of returns, which have a 70% and 30% weighting respectively. In turn, the Limits rating comprises Retail Market and Country Structure, which have an equal weighting and are based on growth/size/maturity of the retail industry (Market) and the broader economic/socio-demographic environment (Country). The Risks rating comprises Market Risks and Country Risk, which have a 40% and 60% weighting respectively, and are based on a subjective evaluation of barriers to entry and the regulatory environment (Market) and the industry’s broader country risk exposure (Country), which is based on BMI’s Country Risk Ratings. The ratings structure is aligned across all industries for which BMI provides business environment ratings, and is designed to enable clients to consider each rating individually or as a composite. For a list of the data/indicators used, please see the end of the report. Source: BMI



Retail sales growth forecasts for 2011-2015 range from 6% for the Philippines to 96% for India.

The rapid construction of organised retail infrastructure (ie the Western concept of chain outlets,

department stores, supermarkets, etc) is also a key factor behind regional retail growth. In India,

organised retail’s share of the total retail market is forecast to double from 5% to 10% by 2015.

China and Singapore occupy the top and bottom places of the business environment league table

respectively, with the former scoring 13.5 more points than the latter, reflecting the vast differences in

market size and development status. Indonesia is in second place but has India and Hong Kong snapping

at its heels, each only half a point behind. The maturity of the Hong Kong market means that it is unlikely

to challenge for a higher place in the rankings, but the enormous potential of the Indian market is likely to

mean it overtakes Indonesia in the table over the short to medium term.

Malaysia is in fifth place while the Philippines and Singapore are some way adrift, both with ratings

scores of less than 50.

At the bottom of the table, Singapore will struggle to move higher due to the small size of its market and

limited growth prospects.

Indonesia’s Retail Rating

Indonesia is ranked second, below only China, in BMI’s Retail Business Environment Ratings, thanks to

its vast market size and excellent growth prospects. Its 235mn-strong population (forecast to rise to

248mn by 2015) makes it one of the world’s most populous nations, while retail sales are forecast to

increase by 66% between 2011 and 2015. However, India is less than a point behind Indonesia in the

ratings, and could challenge for second place over the medium term due to the even greater size of its

market and growth potential.

Limits To Potential Returns

Retail Market

On the basis of retail data alone, Indonesia falls to third place. It scores well for market entry potential,

reflecting the fledgling status of its retail industry. It also garners a good rating for real sales growth

potential, but these advantages are offset by low scores for the value of retail sales and retail sales per

capita.



Country Structure

In the country structure sub-rating, Indonesia tops the league table. Within the sub-rating, it scores highly

for the size of its population and spending capacity, although it is marked down for its small urban

population and limited spending power of the top 10% of earners.

Risks To Realisation Of Returns

Market Risks

Indonesia falls to fifth place, above China and India, in the Risks to the Realisation of Returns section of

our ratings. It achieved only a moderate score for ease of market entry and regulatory environment,

reflecting its need for further infrastructure investment if retailers are to expand successfully into rural

areas, as well as the time consuming legislation in the operating environment.

Country Risks

Indonesia’s broader country risk environment is even more challenging, dropping it to the bottom of the

table in this sub-category. It scores highly in the area of economic volatility, although this advantage is

offset by moderate ratings for short-term political rating, short-term economic rating, market orientation

and long-term policy continuity. Indonesia also has very low scores for long-term inflation, financial risk,

institutions and physical and labour infrastructure.



Mass Grocery Retail

Indonesia Mass Grocery Retail Industry SWOT

Strengths The size of the population makes the modern retail sector highly attractive to investors, both local and international.

Consumers led by price, rather than loyalty, are highly susceptible to certain aspects of modern retailing, private labelling, price promotions and bulk selling.

Strong competitive levels and the presence of a number of large players means that dynamism remains strong and that even smaller players can compete at some level.

Weaknesses Despite ongoing expansion of the mass grocery retail sector, low income levels mean that the majority of the population continues to shop at traditional stores and outdoor markets.

Retailers are notoriously controlling of suppliers’ pricing policies, thus restricting their business practices and profitability to some extent.

Government interference in retail planning, particularly at the profitable large-scale hypermarket level, continues to frustrate expansion-oriented retailers.

The poor state of the country’s infrastructure remains a barrier to growth.

The competition commission seems to be coming down increasingly hard on foreign retailers.

Opportunities Government interference in hypermarket planning should encourage growth in the medium-sized supermarket sector and the convenience sector.

Private label goods are increasingly popular with price-conscious consumers and represent a means of appealing to a wider range of income groups.

Price sensitivity creates strong opportunities in the discount retail sub-sector.

There is the potential for larger retailers to achieve rapid expansion by acquiring any of the numerous smaller industry players present in the market.

Robust domestic demand will continue to drive Indonesia’s economy in the coming years.

Threats New planning legislation aimed at protecting traditional markets looks likely to prevent hypermarket openings in high-footfall urban centres.

Should Wal-Mart enter the Indonesian market as rumoured, consolidation in the sector would likely be rapid, potentially pushing out many of the industry’s smaller players.

Rising inflationary pressures are dampening retailers’ margins, and smaller-scale retailers are likely to be squeezed the most amid an inflationary environment.



Market Overview

Despite strong growth in the prevalence of modern retail in Indonesia over the review period, traditional

retail – in the form of small, independent grocery stores and open-air markets – continues to play a strong

role in the country. BMI estimates that traditional retail still accounts for some 77% of the country’s total

retail sales in 2009, with this figure far higher in lower-income rural areas and far lower in the country’s

major urban centres. The pace with which modern retail has eroded the market share of traditional retail

in recent years has accelerated as MGR operators have acknowledged that the best way to attract

consumers is to provide what they would expect at a market – ie large fresh product ranges and low

prices, albeit in a far more hygienic and convenient environment.

With the exception of the discount store sector, which has yet to have an impact on MGR sales in

Indonesia, all modern retail formats are present in the country. The absence of the discount format may be

the result of the absence of a strong multinational presence – only Carrefour has a renowned discount

offering and, with the exception of China, it has not introduced it in Asia. However, local players are

beginning to realise the potential of the sector, with Matahari Putra Prima unveiling a Cut Price-

branded discount banner and with PT Hero Supermarket stepping up the pace of expansion of its Mitra-

branded discount model.

Regardless, hypermarkets remain the strongest sales format in the country and have consequently

attracted the most investment, followed by the supermarket sector and the fledgling convenience store

sector. The strength of the hypermarket, as opposed to the more traditional supermarket, has been a

consequence of its expansion inside major urban centres. Traditionally, hypermarkets are constructed on

the edge of urban centres and are not therefore as easy to develop as smaller supermarkets, but this

statement has not been so true of Indonesia. However, this is set to change as a result of impending

government legislation, which will reduce the comparative strength of the hypermarket sector by making

construction and expansion far more challenging for retailers, especially within towns and cities.

As the Indonesian economy has developed, so has demand for convenience and added-value products and

services among wealthy urban consumers. However, traditional eating habits still dominate in the

country, while price remains an important purchasing determinant, even within upper-income groups. The

most successful retailers have been those that have combined consumer demands for convenience and

premium products that fulfil their aspirational values, with traditional, healthy, fresh foods and low prices.

Large fresh-product sections have therefore been popular, as have packaged and branded versions of

traditional foods – such as convenient rice and noodle ready-meals. A demand for low prices has also

made private labelling popular in Indonesia, and consumers are inclined to perceive it as good value,

rather than as cheap – a problem that has been encountered elsewhere in the region.



Moving away from consumer trends and considering retailer trends, two themes dominate – those of

aggressive negotiations with suppliers over price and the importance of local sourcing. Competitive

pricing is such an important feature of a retailer’s strategy in Indonesia that they bargain hard with

suppliers to secure prices so that they can offer consumers low prices without sacrificing profitability.

This has had a detrimental effect on small and medium suppliers in the country, who feel the pressure to

have their goods stocked in modern retail outlets, due to the importance of these as a sales channel, but

cannot afford the terms imposed by these firms.

French giant Carrefour has found itself in trouble with the competition commission concerning this issue

in the past. On a more positive note, however, Carrefour has also been one of the key protagonists in

bringing produce sourced in Indonesia to a wider audience. The company, like its rivals, has adopted a

local approach to sourcing in Indonesia, in a bid to build local consumer acceptance, and the contacts

made as a consequence of this have provided opportunities for the promotion of Indonesian stock in the

company’s international stores.

In Indonesia, the departure of Netherlands-based SHV Makro will further stimulate dynamism in what is

now a fast-consolidating market. This led to an investigation by the Business Competition Supervisory

Commission (KPPU), which in November 2009 ruled that the Carrefour’s enlargement was anti-

competitive and ordered the French retailer to sell the 75% stake it acquired in Alfa Retailindo. Though

Carrefour has since had this ruling overturned, the KPPU filed an appeal for the reversal of this decision

in March 2010.

Following Carrefour’s acquisition of PT Alfa Retailindo, its rivals PT Hero Supermarket and PT Matahari

Putra Prima had embarked on aggressive bouts of organic expansion in a bid to consolidate their

respective second and third positions. All three firms were expected to be interested in the sale of Makro.

However, South Korean retailer Lotte Shopping, a subsidiary of conglomerate Lotte Group,

successfully acquired a 75% stake in the Indonesian subsidiary of Makro, with Lotte’s Singaporean

affiliate Lotte Shopping Holdings Pte landing the remaining 25% stake.

Following initial speculation that Matahari was planning to offload its supermarket and hypermarket

businesses, more recent rumours suggest that the company only intends to divest a stake in its

hypermarket business. Should this prove true, Matahari’s stake sale could have a significant impact on the

Indonesian retail landscape with multinational retailers such as Wal-Mart using this as an opportunity to

gain instant access to Indonesia’s high-growth retail sector.

Another key feature of the Indonesian MGR industry is the looming threat of government interference

and the introduction of restrictive store opening regulations. Numerous pieces of legislation have been

discussed in the past, relating to store sizes and their proximity to major towns.



Despite government efforts to ease the spread of modern retail in Indonesia, smaller-scale supermarkets

and convenience stores have developed rapidly throughout Jakarta, and this could be partly attributed to

excessive bureaucratic regulations and the government’s failure to enforce its legislative regulations.

Getting a permit to operate stores in Indonesia requires securing the approval from three city agencies and

a recommendation from the head of the local neighbourhood, and these cumbersome procedures may

have prompted retailers to use fake permits for the operation of their stores.

The government’s failure to enforce its legislative regulations may have been another driving factor

behind the shift towards modern retail stores. In 2006, then-Jakarta governor Sutiyoso issued a ban on the

opening of new mini-markets, but this has not stopped modern retailers from opening more stores in the

country, causing the number of minimarts to reach 1,186 at present from the November 2006 number of

525.

Clearly, these changing dynamics of the Indonesian retail landscape are threatening the market share of

traditional retailers. Minimarts and convenience stores offer greater product variety and cheaper prices

thanks to their stronger bargaining power and supply chain efficiencies, and their proliferation has

inevitably eaten into the traditional retailers’ consumer base. According to Hasan Basri, the chairman of

the All-Indonesia Market Traders Association, at least nine traditional markets in Jakarta have shut down

their operations over the past four years due to intensifying competition from modern retail operators such

as Indomaret, Alfamart and Circle K Indonesia.

Although the issue of sector crowding and its impact on traditional retailers are now firmly in the sights

of the local government, government efforts to control the expansion of modern retail stores are unlikely

to derail the development of the formal food retailing sector. In a bid to weed out stores operating

illegally, Jakarta governor Fauzi Bowo has ordered an inventory of licensed stores and will demolish or

shut down stores that fail to meet regulatory requirements.

Eventually, however, it would only be a matter of time before the domestic retail landscape is dominated

by modern retail stores. Government efforts toward easing modern retail expansion should provide some

reprieve for traditional retailers but the ongoing influx of foreign direct investments and urbanisation will

continue to encourage the proliferation of modern retail.



Table: Structure Of Indonesia’s MGR Sector – Estimated Number Of Outlets, 2005-2010

2005 2006 2007 2008 2009 2010

Supermarkets 2,652 3,173 3,830 4,297 4,801 5,252

Hypermarkets 502 644 747 798 900 973

Convenience stores/mini-markets 2,758 3,337 3,953 4,334 4,871 5,299

Total MGRs 5,912 7,154 8,530 9,429 10,572 11,524

Source: BMI

Table: Structure Of Indonesia’s MGR Sector – Sales By Format, 2005-2010 (IDRbn)

2005 2006 2007 2008 2009 2010

Supermarkets 50,395 60,304 72,788 81,653 91,233 99,849

Hypermarkets 63,242 81,099 94,145 100,496 113,478 123,379


Total MGR Sales 137,353 170,099 200,930 219,415 246,607 268,687

Source: Statistics Indonesia, Company information, Trade press, BMI

Table: Structure Of Indonesia’s MGR Sector – Sales By Format, 2005-2010 (US$mn)

2005 2006 2007 2008 2009 2010

Supermarkets 5,185 6,613 7,943 8,369 8,810 10,993

Hypermarkets 6,507 8,893 10,274 10,300 10,958 13,584


Total MGR Sales 14,132 18,653 21,927 22,489 23,813 29,581

Source: Statistics Indonesia, Company information, Trade press, BMI

Table: Average Annual Sales By Format, 2010

US$mn IDRmn

Supermarkets 2.09 19,011.64

Hypermarkets 13.96 126,802.96

Convenience stores/mini-markets 0.94 8,578.70

Total MGRs 2.57 23,315.42

Source: BMI




Between 2011 and 2015, BMI is forecasting a compound annual growth of 11.3% growth in the

country’s MGR sector to reach IDR456.9trn (US$54.4bn).

Supermarkets will be the growth outperformer, sales forecast to climb by a compound annual

growth rate of 11.8% to IDR174.0trn (US$20.7bn) by 2015.

Despite strong growth in the prevalence of modern retail in Indonesia over the review period, traditional

retail, in the form of small, independent grocery stores and open-air markets, continues to play a strong

role in the country. However, modern retail outlets like supermarkets and convenience stores are

springing up quickly across Indonesia’s urban cities and we believe an ongoing expansion of the mass

grocery retail sector is an inevitable consequence of continued foreign direct investment (FDI) in the

sector and urbanisation, which could drive traditional retailers out of business over the coming decades.

We maintain our view that the Indonesian consumer market can offer consumer goods manufacturers and

retailers growth opportunities on par with those available in the so-called BRIC states of Brazil, Russia,

India and China. We like the long-term domestic demand story of Indonesia, and believe that there are

going to be very exciting opportunities on the MGR side, as rising consumer affluence drives modern

retailing growth.

Meanwhile, inbound investment in the Indonesian MGR sector will remain strong over the coming years,

and provide another strong impetus to MGR sales. The Indonesian MGR sector’s potential is borne out by

continued expansionary investment from both local and foreign MGR players. Although Indonesia’s retail

legislative regulations are rather restrictive and cumbersome – getting a permit to operate stores in

Indonesia requires approval from three city agencies and a recommendation from the head of the local

neighbourhood – this has not deterred foreign retailers from setting up shop in the country’s MGR sector.

Global retail giant Carrefour has already established over 60 hypermarkets and around 16 supermarkets in

the country. Underlining the opportunities it sees in the Indonesian MGR sector, South Korean retailer

Lotte Shopping, a subsidiary of conglomerate Lotte Group, acquired a 75% stake in the Indonesian

subsidiary of Makro in 2008, with Lotte’s Singaporean affiliate Lotte Shopping Holdings landing the

remaining 25% stake.

With modern retail outlets springing up across urban centres, the issue of sector crowding, particularly

with regards to traditional retailers, is attracting the attention of local governments. According to Hasan

Basri, the chairman of the All-Indonesia Market Traders Association, at least nine traditional markets in

Jakarta have shut down their operations over the past four years due to intensifying competition from

modern retail operators such as Indomaret, Alfamart and Circle K Indonesia . In a bid to weed out modern



retail stores operating illegally, Jakarta governor Fauzi Bowo has ordered an inventory of licensed stores

and will demolish or shut down stores that fail to meet regulatory requirements.

While the Indonesian government could potentially take a tougher stance on regulating the spread of

modern retail across the country by imposing stricter zoning requirements, for instance, this is unlikely to

derail the development of the formal food retailing sector. We believe modern retailers, local and foreign

alike, are willing to overlook the investment risks and continue committing resources to tap on the

rewards on offer in the sector, further encouraging the spread of modern retail.

Indeed, Indonesia remains firmly on retailers’ radars and market players have already unveiled major

expansion plans for the years to come. Carrefour Indonesia plans to set up 20 new outlets each year as it

seeks to exploit the high-growth potential of the domestic retail market. Following speculation that

Indonesian MGR player Matahari intends to divest a stake in its hypermarket business, US-based retailer

Wal-Mart is rumoured to be in talks with Matahari on a possible partnership to develop Matahari’s

hypermarket chain in Indonesia, which could involve the former acquiring a significant stake in the latter.

Should the rumours prove founded, dynamism in the Indonesian MGR sector will witness a considerable

boost, as Wal-Mart exercises its financial muscle to exploit the sector’s growth potential.

It is therefore only a matter of time before the domestic retail landscape is dominated by modern retail

stores, in our opinion, and government efforts will only provide limited reprieve for traditional retailers

against the ongoing influx of FDI. With this in mind, we are currently forecasting 53.4% growth in

Indonesia’s MGR sales to 2015.

With the exception of the discount store sector which has yet to have an impact on MGR sales in

Indonesia, all modern retail formats are present in the country. Supermarkets will continue to enjoy the

strongest growth, with sales forecast to grow by 56.5% to 2015. The supermarkets’ relatively smaller

store format (as compared to hypermarkets), coupled with the ongoing uncertainty as to whether the

Indonesian government would pass on legislation on curbing hypermarket store openings have prompted

new market entrants to look to the supermarket sector as a more viable means of growth.

The convenience sub-sector is likely to attract strong attention from MGR players as well, given that there

would be much less interference in the sector from regulators. The convenience store format will also

continue to benefit from the increasingly demanding nature of Indonesia’s urban residents, and from its

ability to expand in crowded towns and cities where saturation restricts the expansion of larger formats.

As a case in point, within 10 years we expect the convenience store format to be one of the only modes of

expansion available for retailers within the centre of Jakarta.



Table: MGR Sales By Format, 2009-2015

2009 2010 2011f 2012f 2013f 2014f 2015f

Supermarkets (IDRbn) 91,233.40 99,849.12 111,158.87 123,652.43 138,344.86 155,007.63 173,965.21

Hypermarkets (IDRbn) 113,477.90 123,379.28 136,418.89 150,072.82 166,330.98 184,972.28 206,467.15

Convenience stores (IDRbn) 41,895.73 45,458.56 50,338.10 55,452.81 61,509.02 68,464.64 76,511.88

Total MGR sector (IDRbn) 246,607.03 268,686.95 297,915.86 329,178.06 366,184.85 408,444.55 456,944.24

Total MGRsector growth, IDR (% chg y-o-y) 12.39 8.95 10.88 10.49 11.24 11.54 11.87

Supermarkets (US$bn) 8.81 10.99 12.35 13.89 15.72 18.02 20.71

Hypermarkets (US$bn) 10.96 13.58 15.16 16.86 18.90 21.51 24.58

Convenience stores (US$bn) 4.05 5.00 5.59 6.23 6.99 7.96 9.11

Total MGR sector (US$bn) 23.81 29.58 33.10 36.99 41.61 47.49 54.40

f = BMI forecast. Source: Statistics Indonesia, company information, trade press, BMI

Table: Grocery Retail Sales By Format, 2011 And 2020 (%)

2011f 2020f

Organised/MGR 23 32

Non-organised/independent 77 68


Industry Developments

Massive Retail Potential Attracting the Sights of Global Retailers

Making progress in emerging markets (EMs), particularly in Asia, is at the epicentre of German

wholesale giant Metro’s growth strategy. To be sure, Metro’s fortunes remain closely tied to demand in

Western and Eastern Europe. Nevertheless, we stress that further expansion into high-growth EMs would

be the best strategy for boosting long-term revenue. We find it unsurprising, therefore that the massive

retail potential in Indonesia has captured the attention of Metro.



Given that Europe as a whole accounted for more than 95% of Metro’s sales in 2010, it is apparent that

the firm has poorer exposure to the faster growing emerging blocks (Asia and Latin America in

particular) than some of its global rivals, such as Carrefour and Tesco. Given our sober outlook for the

eurozone consumer, this overreliance on Europe will continue to drag on Metro’s headline growth and it

is therefore important for the retailer to step up its expansion efforts in EMs.

Representing its latest bid to capitalise on the burgeoning potential in EMs, Metro plans to set up stores in

Indonesia by 2012. Despite the growing prevalence of modern retail in Indonesia, traditional retail will

continue to account for a significant proportion of overall grocery retail sales over the medium term,

given the strong appeal of the traditional retail concept to the country’s vast rural consumer base. A foray

into such a high-growth market would clearly instil considerable dynamism to Metro’s future sales

growth.

In another testament to the attractive growth prospects in the Indonesian retail market, US-based

retailer Wal-Mart is reportedly in talks with Indonesian retailer Matahari Putra Prima on a possible

partnership to develop Matahari’s hypermarket chain in Indonesia, which could involve the former

acquiring a significant stake in the latter. Having circled the Indonesian mass grocery retail industry for

over a decade now, a partnership with Matahari may well represent an excellent opportunity for Wal-Mart

to enter Indonesia.

While Matahari has reportedly dropped plans for an outright sale of its chain of 52 hypermarkets, it

remains open to selling a majority stake, which could give the buyer control over its hypermarkets,

supermarkets and department stores, and retailers Wal-Mart, Casino and Lotte Shopping were seen as

potential candidates to bid. According to media sources, both Lotte Shopping and Wal-Mart have

expressed interest in the acquisition of a major stake in Matahari, but Lotte Shopping has since dropped

out of the running due to a disagreement over pricing and branding issues.

Wal-Mart is very well positioned in a number of the world’s most promising EMs and is in a strong

position to pursue acquisitions (it is sitting on a lot of cash), and the company’s EM expansion will

continue to be a strategic priority as it looks to reduce its reliance on the US. Indonesia’s domestic

demand credentials, which include a huge youth population, robust long-term economic growth and

increasing consumer spending power, all point to a dynamic outlook for the Indonesian food retail sector,

and this strong growth potential will continue to appeal to an expansion-oriented retailer such as Wal-

Mart.

For Matahari, its willingness to partner with a powerful global player such as Wal-Mart should provide a

strategic capital springboard for it to pursue its growth ambitions. Given Matahari’s decision to drop the

sale of its Hypermart chain, we would expect it to get more aggressive in its future expansions in the



hypermarket sector in order to successfully exploit the sector’s long-term potential. Already, Matahari

plans to launch 12 new hypermarkets per annum to 2015 and aims to usurp Carrefour’s leadership

position in the hypermarket sector by 2012.

However, given the tight margins within the Indonesian MGR sector, Matahari will probably have to

significantly improve its operational efficiencies in order to translate the Indonesian hypermarket sector’s

growth potential into strong margin growth. On this front, Wal-Mart’s massive global scale and retail

expertise should support Matahari in achieving this aim, in our view.

South Korean retailer Lotte has announced plans to target expansion in Russia and China as growth

opportunities at home begin to dry up, according to the Wall Street Journal. The firm plans to increase its

overseas sales to 30% of total sales over the next eight years. Lotte has also announced plans to invest in

stores in Indonesia.

Traditional Retailers Facing Greater Pressure On Market Share

The margins of Indonesian traditional retailers are coming under greater pressure from the ongoing spread

of modern retail. With smaller-scale supermarkets (minimarts) and convenience stores springing up

quickly across Indonesia’s capital of Jakarta, traditional retail operators are struggling with declining

sales opportunities as consumers switch to the greater variety and cheaper range of products on offer in

modern retail stores.

Despite government efforts to ease the spread of modern retail in Indonesia, smaller-scale supermarkets

and convenience stores have developed rapidly throughout Jakarta, and this could be partly attributed to

excessive bureaucratic regulations and the government’s failure to enforce its legislative regulations.

Getting a permit to operate stores in Indonesia require securing the approval from three city agencies and

a recommendation from the head of the local neighbourhood, and these cumbersome procedures may

have prompted retailers to use fake permits for the operation of their stores.

The government’s failure to enforce its legislative regulations may have been another driving factor

behind the shift towards modern retail stores. In 2006, the-then Jakarta governor Sutiyoso issued a ban on

the opening of new mini-markets, but this has not stopped modern retailers from opening more stores in

the country, causing the number of minimarts to reach 1,186 at present from the November 2006 number

of 525.

Clearly, these changing dynamics of the Indonesian retail landscape are threatening the market share of

traditional retailers. Minimarts and convenience stores offer greater product variety and cheaper prices

thanks to their stronger bargaining power and supply chain efficiencies, and their proliferation has

inevitably eaten into the traditional retailers’ consumer base. According to Hasan Basri, the chairman of



the All-Indonesia Market Traders Association, at least nine traditional markets in Jakarta have shut down

their operations over the past four years due to intensifying competition from modern retail operators such

as Indomaret, Alfamart and Circle K Indonesia.

Although the issue of sector crowding and its impact on traditional retailers are now firmly in the sights

of the local government, government efforts to control the expansion of modern retail stores are unlikely

to derail the development of the formal food retailing sector. In a bid to weed out stores operating

illegally, Jakarta governor Fauzi Bowo has ordered an inventory of licensed stores and will demolish or

shut down stores that fail to meet regulatory requirements.

Eventually, however, it would only be a matter of time before the domestic retail landscape is dominated

by modern retail stores. Government efforts toward easing modern retail expansion should provide some

reprieve for traditional retailers but the ongoing influx of foreign direct investments and urbanisation will

continue to encourage the proliferation of modern retail.



Consumer Electronics

Indonesia Consumer Electronics Market SWOT

Strengths High growth potential with 2011-2015 projected consumer electronics CAGR of 11%.

Relative lack of penetration in key product categories, with PC penetration of about 1.5%. This is among the lowest in South East Asia.

Rising incomes and falling prices are increasing affordability for tech-literate middle classes of key products such as LCD TV sets and digital cameras.

Weaknesses Marked income disparities mean market size is limited, with low incomes restricting demand outside major cities.

Smuggled goods account for an estimated 40% of the consumer electronics market, and the price-sensitive market requires vendors to focus on mass market products.

Weak information and communication technology (ICT) infrastructure continues to restrict growth of consumer electronics demand, with underdeveloped telecoms infrastructure, due to years of government control and slow progress in deregulation.

Bad roads, electricity shortages and security issues complicate distribution.

Opportunities Government cuts in import tariffs and VAT on some electronic have boosted the market.

Rapid growth in mobile subscriber penetration should result in penetration passing 100% in 2011, driving the handsets market.

Smartphones and 3G mobile will be a growing opportunity, with smartphones to comprise around 10% of handset sales in 2011.

Addressable market for digital TV sets is estimated at about 30mn, with demand for LCD and plasma TV sets as consumers upgrade to colour and more advanced models, and local production increases.

Computer sales are predicted to show faster growth than almost anywhere in ASEAN over the next few years, although from a lower base. Notebook PCs and netbooks will increase their share of PC sales to about 35% by 2013.

Small and medium-sized enterprises and education sectors will be important drivers of PC demand.

Threats Government measures may fail to control illegal imports problem.

Global economic slowdown may continue to affect consumer and business sentiment.

Higher production costs as a result of the weak rupiah are pushing up prices.



Market Overview

Indonesia’s consumer electronics market is one of the most untapped markets in Asia. Despite the

challenging nature of distribution in Indonesia due to its archipelagic structure, a PC penetration rate of

less than 2%, mobile handset penetration of less than 100% and digital camera household penetration of

less than 20% represent a continued growth opportunity.

The broad economic context remains constructive for growth in spending on consumer electronics

devices, with an expanding economy lifting millions into a middle class for whom computers are no

longer beyond reach. Indonesia has an estimated 40mn TV households and 150mn mobile phone owners,

and these constitute a substantial addressable market for replacements/upgrades.

With ICT penetration of only 20% and development restricted to richer areas such as Java, the market has

much growth potential. However, Indonesia’s uneven development (and resulting digital divide) is also a

barrier to faster growth within the potentially huge IT market.

Drivers

In the consumer segment, which is relatively small as a proportion of the market, demand should be

fuelled by lower prices and new entertainment and wireless connectivity features, particularly with the

government’s plans to establish fixed wireless networks in major cities. There are also an increasing

number of Wi-Fi hotspots.

The consumer market still largely relies on government initiatives to increase penetration. Computer sales

will also receive a boost from programmes to increase computer penetration in education, as the

government aims to meet its growth targets for this sector. The popularity of lower cost netbook

computers, which were flooding the market in early 2009, will also be a market driver.

The retail sector should contribute to growth due to a greater range of financing options for consumers

and more flexible terms from retailers. A rising replacement rate, continued growth in subscriber

penetration and growing demand for higher-tier phones will also drive spending on mobile handsets. In

the AV category, growing affordability and the introduction of digital TV services will encourage growth

in sales of digital TV sets.

Risks

A number of risks pertain to our forecast scenario. In early 2009, the lower rate of the rupiah against the

US dollar was adding significantly to production costs for many vendors and pushing up prices.

Indonesia’s information society development is highly uneven and there are huge income disparities. The

transport infrastructure in some areas is also underdeveloped. The global economic slowdown may



continue to affect consumer and business sentiment. The grey market for consumer electronics products is

large and government measures may fail to control the significant illegal imports problem.


Indonesia’s consumer electronics

devices market, defined as the

addressable market for computing

devices, mobile handsets and video,

audio and gaming products, is projected

at about US$8.9bn in 2011. This is

expected to increase to US$13.4bn by

2015, driven by growing affordability

of key products and an expanding

number of electronics retail outlets.

In 2011 rising incomes and lower

interest rates and unemployment will

help to drive consumer demand for

electronics products, building on a strong market performance in 2010. Indonesia’s consumer electronics

market is forecast to grow around 19% in 2011, driven by economic growth and strong demand for

smartphones and flat-panel TV sets.

Sales were strong during the 2010 peak Indonesian shopping season of the Idul Fitri holidays boosted by

retailer discounts of up to 20% on LCD TV sets. Private consumption rose by 5.2% year-on-year (y-o-y)

in Q310, the strongest in six quarters, accelerating from 5.0% in the preceding quarter. In the year as a

whole, flat-screen TV sets sales grew by more than 80%, and there was also strong demand for

notebooks.

The Indonesian consumer electronics market remains dominated by consumers in the major cities.

Demand is projected to advance at a CAGR of about 11% through to 2015, but the influx of cheap

Chinese products intensified following the start of the China-ASEAN Free Trade Agreement (CAFTA)

on January 1 2010. The lower prices and increasingly competitive functionality of ‘white-box’ goods will

see such products take an increasing share of this price-sensitive market going forward and limit the

addressable market for established brands.

Computer hardware accounted for about 41% of Indonesia’s consumer electronics spending in 2010.

BMI projects Indonesian PC sales (including notebooks and accessories) of US$2.9bnin 2011, up from

Consumer Electronics Demand

2008-2015

0.002.004.006.008.00

10.0012.0014.0016.00

2008

2009

2010

e

2011

f

2012

f

2013

f

2014

f

2015

f

0%

5%

10%

15%

20%

25%

30%

Consumer Electronics Demand (US$bn) LHS

% Change RHS

e/f = estimate/forecast. Source: BMI



US$2.6bn in 2010. Computer hardware CAGR for the 2011-2015 period is forecast at about 17%, driven

by a low PC penetration rate of about 1.5%. Home users will account for a growing share of demand,

rising to more than 60% by 2015.

AV devices accounted for about 34% of Indonesian consumer electronics spending in 2010. Indonesia’s

domestic AV device market is projected at US$3.0bn in 2011. The market is expected to grow at a CAGR

of 10% between 2010-2015, to a value of US$4.3bn in 2015. The gradual launch of digital TV

broadcasting in big Indonesian cities will drive replacement TV set sales.

Mobile handsets accounted for about 26% of consumer electronics spending in 2010, although market

measurement is complicated by the growing popularity of low-cost Chinese brands, which account for an

increasingly large portion of sales. Indonesia’s market handset sales are expected to grow at a CAGR of

8% to 28.2mn units in 2015 as mobile subscriber penetration reaches 145%. Sales remain dominated by

mass market phones, but in 2011 Indonesian operators will look to releases of Android-based

smartphones to drive revenues growth

Table: Consumer Electronics Sales Overview, 2008-2015 (US$mn)

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

Total consumer electronics devices demand 5,580 6,010 7,475 8,860 9,875 11,193 11,812 13,374

Computers 2,425 2,548 3,156 3,596 4,132 4,667 5,501 6,483

AV and gaming 1,927 1,872 2,585 2,989 3,480 3,976 3,742 4,336

Communications 1,227 1,591 1,734 2,275 2,263 2,551 2,569 2,554



China-ASEAN Free Trade Agreement (CAFTA)

In December 2009 Indonesian consumer electronics producers and distributors were expecting the launch

of CAFTA. The agreement was due to be effective from January 1 2010. However, electronics was one of

303 business sectors (out of 2,500) that the Indonesian government warned was not ready to participate in

the agreement amid fears of more cheap Chinese mobile handsets and AV products flooding the market.

The Association of Indonesian Businessmen called for the government to postpone the implementation of

the agreement for up to three years for some sectors, but in practice there was little that could be done to

delay the start of the new era for Indonesian trade with China.



Tax Incentives For Electronics Manufacturers

In September 2009 the government proposed to provide a 30% income tax incentive in 2010 for

investments in six key industrial sectors. Investments will cover business expansion or plant construction

in special regions. The six segments include electronics as well as OLED TVs and four others. The

recommendations were passed by the Ministry of Industry to the Ministry of Economic Affairs for

inclusion in the revised Government Regulation on Income Tax Facility for Investments in Special

Sectors and/or Regions.

The government took export potential and domestic market potential into account when selecting the

segments that were considered to have strong growth prospects. One specific objective by the government

is to develop the analogue TV set industry towards OLED technology.

Import Duty Concession

In H109 the government’s initiative of helping the electronics sector by paying the duty on imported

components and parts appeared to have only moderate success. According to the Department of Industry,

as of the end of May 2009, only about 12 companies applied for the facility, with only about IDR100bn

dispersed. Companies that received the facility included Panasonic and Sharp.

The government intended to support the local electronics industry in the global economic downturn by

absorbing duties of 5-15% on imported parts. However, the low take-up led the Department of Industry to

question the effectiveness of the scheme, leading to speculation that it may be cut in 2011. Indonesia’s

electronics industry remains heavily reliant on imports for several categories of components that cannot

yet be manufactured domestically.

Rising Production Costs

In early 2009 vendors had to face the challenge of rising production costs due mainly to the falling value

of the rupiah against the US dollar. Typically 50-75% of raw materials components are imported and paid

for in US dollars and vendors such as Sharp have raised prices since Q408. LG, which imports about 50%

of raw materials such as steel, plastic and LCD panels, announced plans to purchase a coal mine in

Indonesia, following a cost-reduction strategy it adopted in a few other markets.

Another factor contributing to rising production costs is rising minimum wage levels in some provinces.

One vendor response to rising costs has been to make internal efficiencies, such as cutting overheads by

up to 10%. Many contract workers in the industry have not had contacts renewed.

Tax And Tariff Reform To Help Electronics Industry

In October 2008 the government announced a packaged of tax and tariff reforms designed to boost the

electronics industry. The measures, which had been long called for by the industry, included the abolition



of the luxury sales tax on certain electronics products and a reduction in import duties on some electronics

components. The government brought forward the changes, originally intended to be introduced next

year, due to the economic crisis.

The government budgeted IDR12.5trn in its 2009 state budget for reductions in duties and VAT.

Abolition of the luxury sales tax should boost sales of products such as LCD and plasma TV sets. The tax

previously applied to digital cameras priced at more than IDR2mn and TV sets larger than 29 inches.

The import reductions apply to 14 different product groups, including digital cameras and auto spare-

parts. Rates will be lowered from 15% to 5% in most cases. The cuts will also apply to components for

digital cameras and video cameras. It is hoped the move will boost local production of products such as

digital cameras and reduce smuggling.

Computers For Schools

The government is launching e-learning initiatives and attempting to use IT as a means to close the

national education gap. The current ratio of PCs to students in public schools is about 1:3,200, and the

government wants to increase this to 1:20. There are about 53mn students in Indonesia’s schools system,

from kindergartens through to senior high schools, so this would require at least 2.5mn computers.

Meanwhile, the new internet-based National Education Network involves 1,000 network points in five

clusters nationwide and is designed to facilitate the use of internet in schools. Despite advances in e-

education, constraints remain due to poor infrastructure and lack of public awareness in a country where

only 20mn people own fixed-line telephones.



Automotives

Indonesia Autos Industry SWOT

Strengths The Astra brand has benefited strongly from tie-ups with Toyota, which continues to lead the market.

The industry is open to foreign investors, which has won the country projects from neighbouring markets such as Malaysia.

Labour costs are low.

Weaknesses Long-standing vulnerability to periodic political instability. Significant swings in the value of the exchange rate make it difficult for producers to

assess costs, particularly with reference to imported components.

Opportunities High vehicle sales are driving growth in financing, particularly through Islamic banking. Long-term prospects for local sales growth are better, due to aggregate levels of car

ownership of just 1.3%.

Threats The government’s fuel price hike could impact upon sales in the long term. Increased exports from India could crowd out Indonesian shipments.



Market Overview

Indonesia: Top 10 Vehicle Sales By Brand, 2009-2010

Manufacturer 2009 2010 % chg y-o-y Market share, %

Toyota Motor 186,687 280,680 50.3 36.7

Daihatsu 77,513 118,591 53.0 15.5

Mitsubishi 61,735 106,483 72.5 13.9

Suzuki 44,689 71,210 59.3 9.3

Honda 39,570 61,336 55.0 8.0

Nissan 21,440 37,542 75.1 4.9

Isuzu 15,236 24,012 57.6 3.1

Hino 11,390 21,297 87.0 2.8

Ford Motor 6,348 8,871 39.7 1.2

Kia Motors 3,195 6,550 105.0 0.9

Source: Gaikindo

Toyota Motor has a considerable advantage, as it led the market in 2010 with sales of 280,680 units, up

50.3% and with more than double the market share of the next brand. Toyota benefits from competing in

the popular MPV segment with its Avanza and Kijang Innova models, joined by the newly launched

Alphard premium MPV. Any potential incentives for hybrid sales would also open the door for its Prius

and Auris hybrid models. It also has an interest in the compact segment through its mini car brand

Daihatsu, which ranked second overall behind its parent in 2010, with sales of 118,591 units, up 53.0%.

The highest growth among the top 10 brands came from Kia Motors, which has capitalised on the growth

of smaller car sales. Both Kia’s growth and sales volume are way ahead of parent Hyundai Motor, which

lay in 14th place after achieving growth of 34.3% to record sales of 3,583 units.




Production And Sales

Table: Autos Production And Sales, 2008-2015

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

Total production (CBUs) 600,628 464,816 702,508 804,496 870,529 947,337 1,032,811 1,123,222

Total sales (CBUs) 603,774 483,548 764,710 891,360 977,670 1,080,766 1,194,676 1,314,351

Motorcycle production (mn CBUs) 6.265 5.884 6.390 6.997 7.648 8.359 9.136 9.968

Motorcycle sales (mn CBUs) 6.281 5.882 6.852 7.901 9.030 10.250 11.582 13.018

Car ownership (‘000 people) 45 48 52 57 62 68 75 82

f = BMI forecast. Source: Organisation Internationale des Constructeurs d’Automobiles, Association of Indonesian Automotive Manufacturers

Despite having one of the largest passenger car markets in South East Asia, commercial vehicles have

been outperforming the industry average in the year so far. Sales of light commercial vehicles,

categorised as less than five tonnes gross vehicle weight (GVW), had already surpassed 2009’s total of

55,373 by August 2010 and finished the year up by 81%, with more than 118,000 units sold. Similarly,

sales of heavy trucks grew 78% to take the segment to more than 100,000 units shifted.

Strong demand for commercial vehicles shows a return to spending for businesses and bears out our view

that the tripling in value of the construction sector over the next five years, as forecast by our

Infrastructure team, will increase truck demand. Our bullish view of the truck market is supported by

related investment such as South Korean tyre producer Hankook’s project to build a new plant in the

country for the production of heavy duty tyres for large trucks and dumpers.

Increased private consumption is having a direct impact on passenger vehicle sales, including SUVs.

With our Asia team expecting private consumption growth to rise again in 2011 to 5.2% from a projected

4.9% in 2010, we expect car sales to rise again in 2011, albeit with more steady growth of 15%.

In Q111, total vehicle sales were performing in line, if not ahead of, our full year forecast. Sales were

29.5% higher year-on-year (y-o-y) at 225,413 units. However, this includes a spike in March when sales

rose 25.2% y-o-y to 82,058 units, compared with 65,555 units in March 2010. Gaikindo attributed this to

panic-buying fuelled by concerns over a potential supply shortage, following the earthquake and tsunami



in Japan, as well as an expected increase in interest rates in the months to come. As a result, we stick by

our more cautious forecast for 2011.

The rapid growth in domestic demand, coupled with 51% growth in vehicle exports in 2010, also pushed

up vehicle production for the year. Passenger car output rose by 41%, to 496,524 units, while output of

total commercial vehicles, including light and heavy trucks and buses, has risen to 205,984 units, up 82%.

This took total production for the year up 51%.

Output for Q111 was up 34% y-o-y, which again is line with our forecast for slower but nonetheless

robust growth in production in 2011. However, as with sales, supply concerns linked to Japan will act as a

downside risk to our forecast scenario, particularly given the dominance of Japanese brands operating in

the country, accounting for around 90% of the market.

Over the longer term, we retain our optimistic view of Indonesia as a regional outperformer and a rival for

Thailand as a vehicle hub. With an increased number of carmakers opting to use Indonesia for domestic

production and exports expected to maintain double-digit growth over the five-year forecast period, we

expect production growth to average 9.8% between 2011 and 2015.

Trade

Table: Autos Exports And Imports, 2008-2015 (CBUs)

2008 2009 2010 2011f 2012f 2013f 2014f 2015f

Auto exports 100,982 56,669 85,796 120,114 148,101 183,053 217,833 253,340

Auto imports 72,646 32,678 76,520 98,711 123,389 150,287 178,842 209,245

f = BMI forecast. Source: Organisation Internationale des Constructeurs d’Automobiles, Association of Indonesian Automotive Manufacturers

Manufacturers have looked to Indonesia as a potential export base for the region and export sales

reflected this ahead of the global economic downturn that kicked in during the second half of 2008 as

exports for 2009 fell 43.8%. By 2010, however, exports had returned to and beyond 2008 levels with

growth of 51% to 76,520 units.

We do expect growth in Indonesia’s vehicle exports to be sustained over the forecast period, particularly

as it wins more production investment. However, it will not be a regional or even global base in the same

vein as Thailand until certain concerns are addressed. Renault-Nissan CEO Carlos Ghosn said in June

2010 when announcing new investment for Nissan that the country has the potential to become an export

base. He referred to the government’s industry target for annual production of one million units in five



years. This is largely in line with BMI’s forecast for just over 1mn units by 2014. However, he added the

country’s ‘difficult’ infrastructure remains an obstacle, as logistical costs are uncompetitive.

Ghosn’s infrastructure concerns should be addressed by plans to spend US$140bn over the next five years

on improving the country’s poor infrastructure. However, the heavy bureaucracy involved in allocating

capital to projects risks causing delays.


Indonesia’s autos industry is

considering adopting the

World Forum for

Harmonisation of Vehicle

Regulations (WP29) global

industry standard. BMI

believes this would help the

country in its bid to become a

regional autos hub. The

government sees component

exports as one of the key

opportunities afforded by the

standard, and has already

nominated four key areas in

which the industry would

adopt the standard.

According to the director-general for transport, telecoms and IT industries at the industry ministry, Budi

Darmadi, the government has chosen tyres, seat-belts, automotive glass and noise emissions to be subject

to WP29, as the industry is ‘already proficient in producing’ these components. The products will require

little in the way of adaptation to make the step from the existing Indonesian National Standards (SNI),

which will still be used as a guideline.

Currently 55 countries use the global standard, which would open up several new markets for Indonesian

component suppliers. The EU’s ambassador to Jakarta, Julian Wilson, said talks are under way to secure

immediate free market access for tyres and other components to Europe, Japan and Australia. Tyre

producers in particular stand to benefit from the agreement, as 75% of the 40mn tyres produced in the

country each year are exported, according to data from the Indonesian Tyre Dealer and Importer

Association.

Opportunity To Grow

Indonesian Component Exports (units)

Source: Gaikindo



Although it will still take time for Indonesia to become a member of WP29 and implement the standards,

BMI believes now is a good time to be considering the move, as the government looks to firm up autos

industry policy. In April 2010 industry minister MS Hidayat said the government was looking for ways

for the industry to become an integral part of the ASEAN Economic Community ‘and not just become a

market for other ASEAN countries’. Hidayat believes the key to developing domestic production is to

build up the supplier segment.

This matches BMI’s view on the importance of building a strong production base, and we believe

adopting the WP29 framework would ensure the quality of the domestic supplier network as it develops

and provide opportunities to spread beyond the domestic and immediate regional market.



-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Population by age, 2005

Male Female

-30.0 -20.0 -10.0 0.0 10.0 20.0 30.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Population by age, 2005:2030 (total)

2030 2005

Country Snapshot: Indonesia Demographic Data

Section 1: Population

Note: Figures in millions. Source: UN Population Division

Table: Demographic Indicators, 2005-2030

2005 2010 2020f 2030f

Dependent population, % of total 34.2 33.3 30.4 30.7

Dependent population, total, ‘000 75,633 78,049 79,630 85,997

Active population, % of total 65.7 66.6 69.5 69.2

Active population, total, ‘000 144,926 156,238 182,239 193,669

Youth population*, % of total 29.1 27.7 22. 8 20.0

Youth population*, total, ‘000 64,359 64,980 59,917 56,019

Pensionable population, % of total 5.1 5.5 7.5 10.7

Pensionable population, total, ‘000 11,274 13,069 19,713 29,978

f = forecast. * Youth = under 15. Source: UN Population Division



Table: Rural/Urban Breakdown, 2005-2030

2005 2010 2020f 2030f

Urban population, % of total 47.9 53.2 62.6 68.9

Rural population, % of total 52.1 46.8 37.4 31.1

Urban population, total, ‘000 106,668 125,346 163,850 192,805

Rural population, total, ‘000 116,114 110,409 98,018 86,861

Total population, ‘000 222,782 235,755 261,868 279,666

f = forecast. Source: UN Population Division

Section 2: Education And Healthcare

Table: Education, 2000-2005

2000/2001 2004/2005

Gross enrolment, primary 115 115

Gross enrolment, secondary 59 62

Gross enrolment, tertiary 15 17

Adult literacy, male, % 94.0 na

Adult literacy, female, % 86.8 na

na = not available. Note: Gross enrolment is the number of pupils enrolled in a given level of education regardless of age, expressed as a percentage of the population in the theoretical age group for that level of education. Source: UN Educational, Scientific and Cultural Organization (UNESCO)

Table: Vital Statistics, 2005-2030

2005 2010 2020f 2030f

Life expectancy at birth, males (years) 64.6 67.0 71.4 73.5

Life expectancy at birth, females (years) 68.6 70.5 75.7 77.9

f = forecast. Note: Life expectancy estimated at 2005. Source: UNESCO



Section 3: Labour Market And Spending Power

Table: Employment Indicators, 2001-2006

2001 2002 2003 2004 2005 2006

Economically active population, ‘000 na na na na 105,802 106,282

– % change y-o-y na na na na na 0.4

– % of total population na na na na 46.8 46.4

Employment, ‘000 90,807 91,647 90,785 93,722 94,948 95,177

– % change y-o-y 1.0 0.9 -0.9 3.2 1.3 0.2

– male 57,131 58,583 59,909 60,582 60,769 61,864

– female 33,676 33,064 30,876 33,141 34,210 33,313

– female, % of total 37 36 34 35 36 35

Total employment, % of labour force na na na na 89.74 89.55

Unemployment, ‘000 8,005 9,132 9,531 10,251 10,854 11,105

– unemployment rate, % 8.1 9.1 9.5 9.9 10.3 10.5

na = not available. Source: International Labour Organisation (ILO)

Table: Consumer Expenditure, 2000-2010 (US$)

2000 2006 2007 2008 2009 2010

Consumer expenditure per capita 416 961 1,195 1,283 1,450 1,802

Poorest 20%, expenditure per capita 175 404 502 539 609 757

Richest 20%, expenditure per capita 900 2,081 2,588 2,778 3,138 3,902

Richest 10%, expenditure per capita 1,185 2,739 3,407 3,657 4,131 5,137

Middle 60%, expenditure per capita 335 774 962 1,033 1,167 1,451

Purchasing power parity

Consumer expenditure per capita 1,570 2,499 2,658 na na na

Poorest 20%, expenditure per capita 659 1,050 1,116 na na na

Richest 20%, expenditure per capita 3,399 5,411 5,755 na na na

Richest 10%, expenditure per capita 4,475 7,123 7,576 na na na

Middle 60%, expenditure per capita 1,264 2,012 2,140 na na na

na = not available. Source: World Bank, BMI



Table: Average Annual Manufacturing Wages, 2000-2012

2000 2006 2007 2008 2009 2010 2012f

Wages, IDR 5,096 11,740 12,717 13,777 14,811 15,881 18,267

Wage growth, % y-o-y 30.15 15.37 8.32 8.33 7.51 7.22 7.28

f = forecast. Source: ILO, BMI



BMI Methodology

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best practice techniques of time series modelling and

causal/econometric modelling. The precise form of model we use varies from industry to industry, in each

case being determined, as per standard practice, by the prevailing features of the industry data being

examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and

encourage the use of objective views, BMI uses a ‘general-to-specific’ method. BMI mainly uses a linear

model, but simple non-linear models, such as the log-linear model, are used when necessary. During

periods of industry shock, for example a deep industry recession, dummy variables are used to determine

the level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model

according to various different criteria and tests, including, but not exclusive to:

R² tests explanatory power. Adjusted R² takes degree of freedom into account.

Testing the directional movement and magnitude of coefficients.

Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value).

All results are assessed to alleviate issues related to autocorrelation and multicollinearity.

BMI uses the selected best model to perform forecasting.

It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s

industry forecasting. Experience, expertise and knowledge of industry data and trends ensures that

analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely

mechanical forecasting process would not.

Within the retail industry such interventions may include, but are not exclusive to significant company

expansion plans; new product developments; change in production that may influence pricing levels;

product taxation; changes in lifestyle and general social trends; the formation of bilateral or multilateral

trade agreements; and development of industry in neighbouring markets.



An Example Of Retail Sales Model

(Retail Sales) = β0 + β1 (Private Final Consumption) + β3 (Inflation) + β4 (Lending Rate) + β5 (Government

Expenditure) + u

Private final consumption should have a positive effect on retail sales. As consumption goes up, retail

sales also increase. Inflation should have a negative effect. As prices go up consumption will go down.

Lending rates should have a negative effect on retail sales. As lending rates go up, spending increases.

Government expenditure should have a positive effect on retail sales. Firstly, government will affect retail

sales directly; secondly, an increase in government expenditure will lead to a general increase in

expenditure.

Sources

Retail sales are the key indicator in this sector. BMI has decided on the following procedure for sourcing

retail sales data: if available, we use retail sales data published by national sources (statistics offices, retail

associations etc). In some instances there may be no specific retail sales data available, but other

indicators that deal with retail, such as turnover of retail enterprises are published. In this case we use

these as a proxy for retail sales.

In cases where no retail data is available from local sources, BMI uses an aggregate of UN household

consumption data as a proxy for retail sales. This data gives the individual consumption expenditure of

households, non-profit organisations serving households (NPISHs) and general government at current

prices. From this data BMI aggregates four different categories to generate a proxy for retail sales:

Food and non-alcoholic drinks.

Alcoholic beverages and tobacco.

Clothing and footwear.

Household equipment and routine maintenance of the house.

In rare instances no local or UN data is available. On these occasions, we use a percentage of private final

consumption as a proxy for retail sales. In order to decide what percentage of private final consumption to

use BMI looks at the ratio of retail sales to private final consumption in a country for which we have data

and which has similar properties to the country for which we are missing data. In doing this we assume

that countries with similar macroeconomic characteristics have similar consumption patterns.

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