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Antagonism between traditional and modern retailers is
inevitable as competition in the retail sector intensifies amid
economic recovery and the mushrooming of retail outlets in major cities.
Such heightened competition will consequently cut profit margins and
force less competent retailers out of the market. This has raised the
issue of the survival of small retailers.
Over the years, the government has been accustomed to producing
policies to help protect these small retailers. One such policy is the
recent presidential decree stating that foreign investors are allowed
to own 100 percent stakes only in supermarket businesses (based on a
minimum store size of at least 400 square meters).
This means that the small retail segment remains off limits to foreign
investment. Please note that the definition of small retailers are
those that have retail space of less than 400 square meters, which
applies to most traditional retailers.
Before we analyze retailer competition in depth, we would like to first
address the ambiguity regarding the definition of small and big
retailers.
Judging by store size, however, such a definition could become blurred
as it would be quite possible for these large retailers to develop an
extensive network of small stores. By doing this, they could gain
control of the market within certain areas, while at the same time
reaping the benefits associated with being a small retailer.
We believe that the appropriate way to define a small or large retailer
is based upon factors such as capital and product-procurement measures.
Based on these, we believe that the new regulation may prove
ineffective in its capacity to protect smaller retailers.
Judging from the current conditions, these small retailers are indeed
reprofiling their presence within the market by focusing on their main
strengths: identifying the needs of consumers and their high
sensitivity towards changes in the behavior of modern retailers.
Furthermore, we believe that the huge number of these small traditional
retailers will help the manufacturers of fast-moving goods reach their
customers. One of the main strengths of small retailers is their
convenient locations, which provide increased accessibility to
customers.
Although the typical store size of these establishments can be as small
as less than four square meters, crammed with food and a hodgepodge of
household items, their convenient locations encourage shoppers to visit
these small kiosks or warung multiple times during a single day or week.
Another important note is that these small retailers need to focus on a
better product mix -- a mix that cannot be matched by the modern
retailers. As customers tend to buy perishable items from wet markets
or fruit stalls, these retailers need to build a sense of freshness to
strengthen their competitive edge against the big retailers.
On the other hand, the tight competition among big retailers could
become something of a blessing for small retailers. Success will depend
on how they perceive and act on this.
As an example, the majority of small retailers take advantage of the
hefty promotional discounting offered by big retailers. This means that
the procurement of items on promotion should ensure better margins as
opposed to those sourced directly from suppliers.
As the typical customers who shop at warung are different to those who
shop at the big retail establishments (i.e., supermarkets), small
retailers can still sell their products at premium.
Now, we turn our attention to the big retailers. Be assured that the
competition at this level is far more severe than the traditional to
modern retail scene.
Fashion retailers such as branded boutiques bear a 60 percent tax
imposed on their goods, which consists of 40 percent luxury tax, 10
percent import duty and 10 percent value added tax.
These high taxes have made retailers struggle to compete with
"semi-legal" imports, while at the same time discourage foreigners from
shopping domestically. Apart from the tight competition, retailers also
have to struggle with a dwindling customer base.
Moreover, in cooperation with various financial institutions and
suppliers, these modern retailers are offering hefty promotional deals
at cut-throat margins to gain the upper hand against other retailers.
This strategy may only be suitable for big retailers that have sizeable
sales volumes (i.e., hypermarkets), while mid-size retail outlets will
most likely suffer losses.
The aggressive growth of hypermarkets is believed to be based on the
notion that they have succeeded in fulfilling the ever-changing demands
of shoppers, while, in turn, the competition has benefited consumers by
offering lower prices, greater choice and high-quality products.
In a nutshell, we believe that intensifying competition within the
retail sector is inevitable.
Gaining a competitive edge means understanding the consumer and his or
her needs, focusing on a competitive pricing policy, providing the best
service quality and convenience, and ensuring the right product mix.
One might be more important than the other, depending on the type of
retailer and whom they are aiming at, in making them stand out among
the rest.
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