Fitch Ratings-Jakarta-02 September 2016: Evolving regulations will continue to pose a major risk to the credit profiles of modern Indonesian retailers in the next two to three years, according to Fitch Ratings. The rapid growth of the modern retail format in the recent years – minimarket supermarkets, and hypermarkets – has prompted the government to introduce new regulatory frameworks.
One such example is an October 2012 Minister of Trade regulation that requires operators with more than 150 stores to franchise at least 40% of its stores within five years, a policy aimed at limiting monopolistic practices among modern retailers. We are not aware of any plan by the authorities to impose monetary penalty on retailers that fail to comply, though we believe this regulation will add uncertainty to Indonesia’s operating environment as the 2017 deadline for compliance draws near. We believe complying is challenging because success also hinges on factors that are beyond a retailer’s control – such as availability of potential franchisees, suitable location and capital.
Nonetheless, this rule has not slowed the expansion of modern retailers, which has expanded to account for 16% of total retail market in 2015, from 14% in 2012.
Fitch believes Indonesian modern retailers are also susceptible to changes in regulations governing industries related to fast-moving consumer goods, food and beverages and tobacco.
A case in point was the Minister of Trade’s decision in April 2015 to ban the sale of alcoholic drink in mini markets. While this had little impact on mini-market operators, such as that of PT Sumber Alfaria Trijaya Tbk (Alfamart, AA-(idn)/Stable) due to the small contribution of sales from alcoholic drinks, the ban had a major impact on convenience-store operators, such as PT Modern International Tbk (MDRN, not rated), for whom alcoholic-drink sales had accounted for 15% of sales. This led to sharp drop in MDRN’s 2Q15 same-store-sales growth that, ultimately, forced its 20 stores in Jakarta to close within a year of the rule.
More recently, there had been some talk in early 2016 of a higher excise tax on plastic bottles and packaging. We believe this regulation, if implemented, would affect the sales of plastic bottled drinks – which in general contribute to more than 5% of modern retailers’ sales.
Fitch Ratings Indonesia