THE FASTEST GROWING DISTRIBUTION CHANNEL IN INDONESIA
The Modern Trade channel is the fastest growing distribution channel for consumer goods companies in Indonesia. With around 25.000 stores (2014) it is a powerful force to recon. Today modern retailers are not only expanding their business in large cities, such as Jakarta and Surabaya, but also moving out of town to secondary cities beyond provincial capitals and even to the eastern islands of Indonesia which are generally unexplored and under-served.
According to a study by AC Nielsen in 2007, the number of traditional markets in Indonesia decreased by 8% per annum, while modern trade grew by 31.4% per year. Based on data from the Association of Indonesian Market Traders (IKAPPI), the number of modern retail outlets has soared from 11,927 in 2007 to 36,000 in 2015, with convenience store or mini-markets being the sector’s fastest growing segment which had increased 400% in the last 10 years. Meanwhile, during the same period, the number of traditional markets have shrunk from 13,550 in 2007 to 12,000 in 2015.
Latest power house in Modern Trade expansion in Indonesia’s are the mini-markets. They allowed to set up their own distribution channels and sell directly to residential areas, thus competing with independent retail shops (R1, R2 & R3) which source their goods from the traditional markets.
Meanwhile, in the downtown area, larger modern retail establishments such as hypermarkets and supermarkets are not only offering more convenient shopping experiences but also merging it with entertainment, dining, and recreational facilities. Additionally, modern retailers are more adept at creating sales and funding promotional strategies to attract shoppers.
3 categories of Modern Trade outlets
National Key Accounts
Nationally operates retail chains with outlets all over Indonesia. They have their own Trading Terms, comprising of a variety of fees (space rental, listing fees, etc.), discounts and rebates. These can be quite complex and deal with matters such as returns allowances, discounts, promotional funds, rebates and distribution fees as well as incidental fees for new store openings and in-store activities. Typically a Key Account Manager will negotiate this on behalf of a principal in one package which relates perceptually to the yearly sales target.
Regional Key Accounts
Almost identical to National Key Accounts but they operate exclusively in a certain area or niche market. Trading Terms with these accounts may look different from the National Key Accounts due to the relatively small number of outlets. Smaller means less bargaining power.
Local Modern Accounts
Locally owned which usually do not have sophisticated trading terms. A Local Modern Account isn’t necessarily a small player though as in some cities the absence of national competitors means the opportunity exist for local tycoons to build their own retail empire. The best Local Modern Trade Accounts are highly professionalized Supermarkets which in some cases can outperform the outlets of National Key Accounts.
Modern trade accounts based on assortment
- Hypermarkets – Big outlets, with everything from washing machines to a pack of bubblegum.
- Supermarkets – Primarily a large sized food stores with about 50.000 different SKU’s on their shelves.
- Mini Markets – The fastest growing category in modern trade segment, have high penetration in residential areas, more and more replacing traditional retail outlets as the number one choice to shop. A mini market usually is not that much more expensive than a traditional market but the perception they built (clean, AC cool, well managed) naturally have slight impact on pricing.
- Convenience Stores – A relatively new concept which was born of necessities and proved to be a bull’s eye for Modern International (eg. Seven Eleven). With emphasis on ready to consume F&B with small area dedicated to selling consumer goods like Mini Markets, the new concept became very popular and became a favorite hangout place.
Today modern retailers are not only expanding their business in large cities, such as Jakarta and Surabaya, but also moving out of town to secondary cities beyond provincial capitals and even to the eastern islands of Indonesia which are generally unexplored and under-served. This circumstances attracts overseas investors, new players like Japanese AEON, Korean Lotte, Brits Courts and Swedish IKEA emerges side by side with local giants like Matahari Group, Trans Group and Hero Supermarket. Besides the fact that Indonesia is a huge market, the penetration rate of modern market is still relatively low (12%) compared to Thailand, Malaysia, and Singapore that has reached 42%, 53%, and 70%, respectively. This means that there is still plenty of room for modern retailers to grow, especially in the regional areas.