In a Smartkarma Originals Series of Insights on ASEAN Retail, we seek to determine which retail formats are winning out in the battle for consumer attention. The Indonesian grocery retail industry is changing over the past decade. Traditional retail share, which is dominated by over 5mn Warung (traditional mom-and-pop shop), is declining from a dominant 90% to 80% (including cigarettes). FMCG companies that we speak to gave us a rough range of 20-30% of sales derived from modern retail outlets. This change is driven by the rapid growth in the minimarkets, a duopoly that are expanding 3,000-4,000 outlets per year at its peak.
In this insight, we will discuss the reason to minimarket successes, the players in the industry, impact from e-commerce expansion, and the minimarket growth potential going forward. We also spent time speaking with Nielsen to understand the latest consumer behavior and made several visits to different minimarket, supermarkets, and hypermarkets, as well as Warungs to understand the dynamics offered by each format.
The minimarket concept is grown locally and were first seeded by two of the most prominent FMCG players in the market Hm Sampoerna (HMSP IJ) and Indofood Sukses Makmur Tbk P (INDF IJ) back in 1990s. Knowing the Indonesian shopping habits in the traditional mom and pop shop (Warung), the minimarket is created as an improved version of the local warung, focusing on daily necessities (egg, rice, oil) and the fastest moving goods (instant noodle, cigarette, bread).
Our channel checks with the neighbors suggest that key reasons for them to go to minimarkets are: 1) convenience / location, 2) pricing / promotion, 3) queue time, and 4) less temptation. With a smaller more nimble format, minimarket can open literally anywhere in the neighborhood, close to the residential area. The duopoly structure between Alfamart and Indomaret give them a lot more bargaining power compared to the super/hyper. Minimarkets have been able to secure cheaper prices even compared to hypermarkets that often offer bulk discounts.
The minimarket share is currently led by Indomaret (INDF affiliated company). As Alfamart started to streamline their expansion to lower down their debt level, Indomaret is currently leading with over 17k outlets nationwide. Alfamart is lagging behind at 15k outlets and has cut back expansion to below 1,000 stores since 2018. The biggest barriers to entry is location. With Alfamart and Indomaret seemingly present at every corner, it would be hard for any new brand to penetrate the market.
With Indonesia entering the digital era, and online retailing is rapidly gaining share (between 4-6% of retail sales based on various sources), the minimarkets can both benefit and lose from the aggressive expansion of the e-commerce giants. The easiest benefit to tap from the e-commerce player is through cash payment handling. Top C2C e-commerce Tokopedia for example accepts all types of payments, including cash, from all major minimarket outlets.
As the e-commerce players are looking for new source of growth, the third largest e-commerce Bukalapak.com is branching out to directly supply goods to over 5mn Warungs across the country. The initiatives are popularly known as the Mitra (partner) program. The Mitra program aims to cut the distributor and wholesaler role by providing an online ordering system through the Mitra program app. The Mitra program unfortunately can be a threat for minimarket growth going forward as it empowers the traditional Warung with better product selections and cheaper pricing.
Other than the Mitra program, the e-commerce players also offer wider selection of FMCG products in their platform at very lucrative prices as traffic puller. In the past 12.12 National Online Sales (Harbolnas) day, we can see up to 80% discounts on some of the FMCG products.
A bulk of the discussions below will be on Sumber Alfaria Trijaya Tbk Pt (AMRT IJ) as we have very limited information from Indomaret’s operation. Indoritel Makmur Internasional (DNET IJ) owns 40% of Indomaret and does not consolidate their books. DNET is a holding company owned by the Salim Group that has stakes in the KFC franchise Fastfood Indonesia (FAST IJ) and Sari Roti Nippon Indosari Corpindo (ROTI IJ).
AMRT is on track to achieve 8% SSG in FY19, a major recovery from the decade low 1.5% in FY17 and 5.5% in FY18. As AMRT streamlines their store expansion, cutting store openings to 400-600 stores per year over the next 3 years, we expect SSG to remain strong and hovers between 5-10% coupled with 2-3% spatial growth.
AMRT’s EBIT margin has been slipping from 2.7% in 2014 to 1.8% in FY18 as opex growth exceeds SSG. To fully pass on fixed costs increases, we estimate that AMRT needs to book at least 7% SSG. FY19 is the first year since 2014 for the SSG to exceed the 7% mark, hence the year to expect EBIT margin to improve. Given the steep seasonality, 9M19 consolidated EBIT margin is recorded at below 1%. A big chunk of the supporting incomes from suppliers’ rebate will come in the fourth quarter of the year.
AMRT’s fee-based income has been growing by more than 40% Cagr over the past 5 years, contributing to more than 30% of EBIT. As more services are added, and as consumers adopt digital transactions, AMRT’s fee-based income growth still has a long way to go.
Negative FCF has been a problem in the past where net gearing reached 1.3x in FY17 and net interest expenses make up more than 60% of EBIT. As AMRT streamlines their store openings and close down non-performing stores, we saw a big jump in FCF in FY18 that allows AMRT to deleverage their balance sheet. AMRT paid almost IDR3tn worth of debt in FY18, reducing their net gearing ratio to 0.4x in FY18 and to 0.2x in FY19.
We expect SSG to moderate to 6% level while store expansion is kept at 2% addition every year, resulting to a total of 8% revenue growth until 2022. This, coupled with 10bps expansion in GPM every year, and 8% opex growth is on track for 17-19% EBIT growth per year. We expect fee-based incomes to continue its high teens growth trajectory, lifting net profit growth to 21-25% over the next three years. Risk to our numbers is working capital and economic growth. A 1-day swing in the company’s cash cycle affects its working capital by about IDR200bn.
We have a buy recommendation with 19% upside to our blended target price.
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