Analysis on Indonesia’s retail market landscape and opportunities for Vietnam.

The total trade between Vietnam and Indonesia has grown significantly in the past 5 years and retail is the frontline for Indonesia and Vietnam products. Indonesia’s retail sector is projected to witness a Compound Annual Growth Rate (CAGR)  of 13.8% by 2024 which makes Indonesia have the potential to develop a retail market even for foreign companies. In this article, we are going to discuss Indonesia’s retail market through a market landscape and a comprehensive review of the investment opportunities.

HIPPINDO Webinar Series: Vietnam – Indonesia Economic & Retail Latest Updates

The relationship between Indonesia and Vietnam has been running in several business sectors, one of which is the retail industry which is very developed until now. Through several business actors in the industry, HIPPINDO  as an organization that aims to advance the business of tenants in shopping centers including retail companies, held an event to gather the latest updates in the retail market.  

Indonesia and Vietnam have shown growth through these several years. As one of the most promising markets among Asian countries, Indonesia’s retail market is projected to reach USD 294.37 billion during 2021-2025. And for Vietnam, the COVID-19 pandemic has brought new customers to large modern trade formats which leads the retail market to become a strong contender for business investment in Asia on key macroeconomics. However, Vietnam’s Growth Domestic Product (GDP) dropped in 2020 to its lowest level in many years but is still expected to grow back in 2021.

According to Mr. Budi Harjo Iduansjah as the Chairman of HIPPINDO, retail is the frontliner for both Indonesia and Vietnam products. There are some ways to develop the retail industry nowadays. Accelerating digital transactions through sustainable promotion and supporting local brands and also Small Medium Enterprises (SMEs) could be the best way in raising retail standards. Digitalization plays an important role because there is a gain in online-used mobile applications especially in e-commerce, media, and food delivery have offset the contraction in travel and transport.

Indonesia’s Retail Market

The retail market is defined as an industry that sells products and services that have been added value to fulfill personal, family, group, or end-user needs. Most of the products sold are the fulfillment of daily needs, ranging from food to household needs.

On the back of its large population and rising middle class with higher household buying power and increasingly modern shopping habits, Indonesia’s retail market remains one of the most promising markets among Asian countries. Thus, Indonesia’s retail sector is projected to witness a Compound Annual Growth Rate (CAGR)  of 13.8% by 2024 (Mordor Intelligence, 2020).

Market Landscape

Indonesia’s retail market makes a big contribution against the GDP amounting to 12.83% in Q3 2020 from the trade side and 57.31% from the consumption side. As a developing country, the growth rate of Indonesia’s retail market is influenced by the strength of people’s purchasing power, the increase in population, and also the need for the community to fulfill consumption products (Soliha, 2008). This industry is segmented into a few sectors such as food and beverage (F&B), electrical and electronics, apparel and footwear, and partly home improvement and household products with all online or offline distributor channels.

Market research indicates that the growth of the Indonesian market will hold steady at around 6% CAGR until 2023. Other studies indicate a CAGR of 7.2%, climbing as high as 13.8% by 2024 (Asean Today, 2019). Given the massive expansion possibilities afforded by the population’s increased purchasing power. However, household consumption has slowed down in the past two years, which is a great concern, as household consumption has been the biggest driving factor for the economy, and is of greater importance than investment, exports, and government spending. But, Indonesia’s retail sales grew just 2.6% in December 2020 (Mordor Intelligence, 2020). 

CT Corp., PT Erajaya Swasembada Tbk, PT Hero Supermarket Tbk, PT Lion Super Indo, PT Multipolar Tbk, PT Ramayana Lestari Sentosa Tbk, PT Sumber Alfaria Trijaya Tbk, PT. Circleka Indonesia Utama, PT. Indomarco Prismatama and PT Mitra Adiperkasa Tbk are some of the major market participants. Although the expansion of the retail landscape will offer immense growth opportunities, factors such as underdeveloped infrastructure are likely to pose a challenge for the market vendors (Technavio, 2021). 

Retail Market amidst the COVID-19 Pandemic Situation

The Indonesian Shopping Center Management Association (APPBI) revealed that many retailers and malls or shopping centers have died or closed operations due to the impact of the COVID-19 pandemic (Detik, 2021). Indonesian consumers remained pessimistic in July and August 2020 as the coronavirus-induced layoffs in early 2020 recorded people’s confidence in the economy, according to a consumer confidence index (IKK) survey by Bank Indonesia. In September 2020, there are more or less 1.5 million workers who worked in the retail industry that had to be laid off from their jobs which also had an impact on people’s purchasing power in this industry (CNBC Indonesia, 2020).

However, as Indonesian consumer perspectives rose at the end of July and August 2020 compared to the slump in the second quarter, there were improvements in purchases of food, beverages, and tobacco in July, according to the survey of around 700 retailers across 10 major cities (The Jakarta Post, 2020). In another sector, Fernando Repi, as Deputy Chairman of the Indonesian Retail Entrepreneurs Association (Aprindo), said that sales of clothing retail stores fell by 80%. which was caused by the large number of shops that closed during the coronavirus pandemic to comply with large-scale social restrictions by the government (Bisnis, 2020).

The easing of large-scale social restrictions provides an opportunity for the retail industry to start its business from the third quarter of 2020, and if this momentum is maintained until the end of 2021 with covid-19 conditions increasingly under control and successful vaccine distribution, retail has the potential to grow significantly.

Vietnam Investment Opportunities in Indonesia’s Retail Market

From 2017 to 2019, total trade between Indonesia and Vietnam increased significantly. In 2019, the total bilateral trade of both countries reached USD 9.07 billion, an increase of 7.10% from the previous year. This demonstrates the two governments’ attempts to improve bilateral trade over the last three years. Despite having a trade deficit with the rest of the world, Indonesia has a trade surplus with Vietnam, which has grown year after year. With that in mind, both the Indonesian and Vietnamese governments have committed to their utmost to achieve a bilateral trade goal of USD 10 billion in 2020 (Embassy of the Republic of Indonesia in Hanoi, 2019).

In 2019, the committed Foreign Direct Investment (FDI) in Vietnam reached USD 38.12 billion. The top five investments include retail at 1,105 projects of USD 2.58 billion investment. This has resulted in a growth in the retail sector in which many Vietnam reach a 27% increase in 2020 (Deloitte, 2020). Thus, it is time for Vietnamese retail companies to tap into Indonesia’s 260.7 million market population. 

Food and Beverages Retail

As the figure of COVID-19 cases increases, food safety concerns have become more common. Despite the lack of official evidence of COVID-19 transmission through food supply chains, consumers have become increasingly concerned about various aspects of food safety.  As a result, the fastest-growing e-commerce market is now online food and beverages retail, which is driving the growth of online grocery retail buying habits (Deloitte, 2020).

retail sector is the largest in Southeast Asia that reached USD 108.84 billion in 2019 with a growth of 8.9% (GAIN Report, 2019). Modern grocery retailers should have more fresh goods and a greater range of imported products to meet customer demands for variety and healthy lifestyle demands as part of Vietnam’s business strategy in entering the Indonesian retail market. For modern stores, fresh goods usually account for around 20% of sales. As the demand for fresh products grows, Vietnamese retailers can broaden their product offerings or open newly formatted supermarkets dedicated to fresh products.

Clothing and Footwear Retail

Clothing and footwear is the second largest retail market in Indonesia, accounting for 12% of total sales in 2016. Sales in the sector totaled IDR 465.3 trillion (USD 31.9 billion). Clothing was the most common segment in 2016, accounting for 85.2% of total sector revenues. The growing middle class and household consumption are primarily to blame for the expansion. Additionally, festive seasons such as Ramadan and Eid-Fitr boost sales in the sector regularly.

During the period of 2016 to 2021, revenues in the clothing and footwear sector is expected to rise at a CAGR of 13.6%, reaching IDR 880.2 trillion (USD 60.4 billion) by 2021. Growth is projected to be pushed by a stable economy, increased buying power, and low inflation between 2016 and 2021. Vietnamese retail businesses in the fashion industry could tap into Indonesia’s apparel and footwear retail market easily now more than ever through . For instance, Viatnamese businesses could enter through Zalora, a leading B2C shopping retailer that offers fashion products from leading local and international brands. The targeted consumers of this platform are people aged 25–35 years.

What to Know Before Entering Indonesia’s Retail Market

Commercial Retail

Demand for retail space is already high, and it is expected to get even higher in 2021. Retail space occupancy in malls hovered around 85% to 86%% in 2016, and it’s expected to rise to 1% to 2% yearly. Food and beverage rooms, malls, home furnishings, and entertainment are all in high demand. For example, average rents in Jakarta increased 5.2% year on year (YoY) to IDR 599,000 (USD 44.81) per square (sq) meters per month, while rents in Greater Jakarta increased 7.4% YoY to IDR 368,000 (USD 27.51) per sq meters per month (Colliers International, 2020). 

Vietnamese retail businesses could tap into Indonesia’s retail market starting in other big cities beside Jakarta such as Yogyakarta, Surabaya, Pekanbaru, Bandung, Makassar, Medan, and Samarinda. 

Retail Regulations

Regulations have been passed in the last decade to aid the expansion of modern retail. Following numerous protests from traditional market retailers, the government limited the number of licenses issued to new convenience stores and enacted urban planning regulations under Presidential Regulation No. 112/2007, which included operating hours, zoning, distribution and supply, and other logistics activities.

However, in 2016, Presidential Regulation No. 44/2016 overrode Presidential Regulation No. 39/2014, easing many of the limits on foreign investment in retail spaces. This new law, among other items, requires department stores with fewer than 2000 sq meters of retail space to receive up to 67% of their financing from international sources. This would mean that Vietnamese investors can also contribute up to 33% of funding to supermarkets smaller than 1200 sq meters and minimarkets smaller than 400 sq meters (OBG, 2019).

BRIGHT Indonesia as Your Local Partner

With the many opportunities that Indonesia’s retail market has to offer for the rising retail industry of Vietnam, it is crucial to find the right local partner who can help Vietnamese businesses interested in entering Indonesia’s retail market.

BRIGHT Indonesia can help Vietnamese enterprises in entering Indonesia’s retail market through services such as Market Insight Research, Business Partnership Engagement, Business Registration and Establishment, Business Incubation and Accelerator. The services can help Vetnamese retail enterprises to:

1. Analyze the opportunities and obstacles of Vietnamese companies’ desirable retail industry on the Indonesian market through comprehensive market research.
2. Secure the agreement between Vietnamese companies and future Indonesian retail business partners.
3. Register and establish Vietnamese retail products and companies in Indonesia. 
4. Obtain the and stay permit for your Vietnamese employees such as expatriates utilization plan (RPTKA), expatriates utilization permit (IMTA), and limited stay permit (KITAS).
5. Establish Vietnamese retail business initial team in Indonesia and Indonesian office by providing shared office space, appoint accounting and taxation service providers, give access to mentorship and investors, as well as logistical and technical resources. 

For more information, email info@brightindonesia.net.

Co-written by Gianina Amira Zahra