The Indonesian retail market is tipped for astronomical growth, but cashless payments will be key to realising its potential

As major retailers leverage improved infrastructure to expand their operations, Indonesia is predicted to enjoy double-digit growth in both offline and online retail markets over the next decade. Cashless payments will be key to realising its future economic potential.

By Preetam Kaushik

Retail markets are often touted as an indicator of an economy’s health. When families have money to spend on consumer goods, they are likely experiencing some level of economic security.

ASEAN’s outlook looks good. After a decade of consistent economic growth, retailers are in the midst of a boom period. No nation typifies the health of the region’s retail market better than Indonesia. 

The largest nation in the region in terms of population and geography, Indonesia’s retail markets have seen unprecedented growth in recent years and show no signs of slowing down. What are the factors behind this growth? And what does it mean for the ASEAN region as a whole?

It starts with the Indonesian middle class

The middle class drives consumption in every economy, particularly in consumer retail markets. There is no better engine of economic growth than a strong and expanding middle class.

With a population of 270 million, Indonesia is the third most populous nation in Asia, behind only China and India. In Southeast Asia, it dwarfs the population of its ASEAN neighbours. The Philippines, which comes the closest, still has only 110 million citizens.

A 2017 World Bank study put the size of the Indonesian middle class at around 20% of the population. That is almost 55 million people, more than the entire population of countries like Myanmar, Malaysia, and South Korea.

The study also reported that 45% of the population are part of an “aspiring class.” These are citizens that are no longer poor but have not quite reached middle-class status in terms of spending capacity, lifestyle, and economic security. The increased purchasing power of the middle and aspiring classes is a dream come true for Indonesian retailers.

The retail market is expanding faster than the gross domestic product (GDP)

Market research indicates that the growth of the Indonesian market will hold steady at around 6% CAGR until 2023. However, this is a conservative estimate. Other studies indicate a CAGR of 7.2%, climbing as high as 13.8% by 2024. Given the massive expansion possibilities afforded by the population’s increased purchasing power, this is not too outlandish a number.

In the past, Indonesia’s retail sector was concentrated in major centres like Jakarta and Denpasar (capital of Bali) in the past. This has changed in recent years, with regional cities in Bali, Sulawesi, and Sumatra becoming focal points of strong retail growth.

As the market in big metropolitan areas eventually reached a saturation point, leading to increased competition, rising costs and lower profit margins, investors looking for better returns pushed into smaller towns and cities.

These smaller towns and cities are attracting the attention of Indonesian retail giants. Cities like Bandung, Semarang, Surabaya, Medan, and Manado have shown excellent retail growth rates according to recent Bank Indonesia figures.    

There is a strong consolidation in the retail market

Indonesia’s geography led to a highly fragmented retail market. Each island in the archipelago had local players. Smaller stores dominated the retail landscape. Improved communications and infrastructure development have since transformed Indonesian retail.

An Alfamart minimarket at Ancol, Jakarta, Indonesia.
Photo: Rantemario

Big brand retail operations are spreading their operations across the islands. Indomaret and Alfamart are the two biggest brands capitalising on the new age of connectivity. In 2013, Indomaret had around 8100 stores, while Alfamart had 8500. Since then, these two companies have been on an expansion spree in the Indonesian market, adding new stores at the rate of 1,200 a year or more.

Indomaret now boasts more than 16,900 locations, making it one of the largest retail chains in the entire Southeast Asian economic zone. Alfamart, though slightly behind with 10,300 stores, has an overseas presence in the Philippines as well.

e-Commerce is starting to make its presence felt

There are an estimated 100 million internet users in Indonesia, and that figure is rising with each passing year. According to McKinsey, at least 44 million of those will be regular online shoppers within the next two to three years. The Indonesian online market could be worth US$53 billion by 2025.

If these projections are accurate, Indonesia will dominate ASEAN’s digital economy, accounting for 40% of all transactions by 2025. The Indonesian government has a far more ambitious plan to expand the e-commerce sector size to US$114 billion by 2020.  But given the current growth figures, these plans may be over-ambitious, even with drastic action. 

With around US$11 billion in sales in 2018, online sales account for roughly 4% of Indonesia’s total retail market. But with a userbase of 100 million and rising, the potential for growth in online retail far exceeds anything offline retail can generate.

According to eMarketer figures for 2018, Indonesia is the second-fastest-growing e-commerce market in the Asia Pacific region, with an annual sales growth of 32.9%. Only the Chinese behemoth is growing faster, with an annual growth rate of 34.3%.

Cashless payments hold the key

Electronic payment methods like prepaid cards, e-wallets, and mobile banking will have a large role to play in the future of Indonesian retail. For starters, if the retail sector hopes to fully realise the potential of its e-commerce sector, it will need electronic payment solutions.

Even in offline retail, the convenience offered by mobile payments is considerable, to both merchants as well as shoppers. Faster payments and increased security will benefit offline shoppers as much as their digital peers.

Studies have shown that people who use these payment methods tend to shop more, especially in small retail transactions involving relatively cheaper goods. In a market like Indonesia, where retail is dominated by mini-markets and convenience stores, such payments will help boost sales volumes in daily essentials, groceries, and food and drink. 

Such retail transactions already account for most of the payments made using app-based wallets in Indonesia, according to a recent study by Snapcart. As more and more consumers adopt these as their primary form of payment method, it will have a significant impact on retail growth.

The overall outlook for retail in Indonesia remains firmly positive. Retail fortunes are intrinsically linked to rising prosperity levels. And given the seemingly unstoppable rise of the Indonesia middle class, the fortunes of the Indonesia retail industry look very rosy indeed.