By Janeman Latul and Andjarsari Paramaditha
JAKARTA (Reuters) - As Indonesia's economy boomed in recent years, its retailers had a simple formula: open more stores. And more. And more. Minnows became leviathans.
That strategy is now haunting them as the rupiah currency tumbles, inflation accelerates, interest rates rise and growth slows. The country's three biggest retailers are in their weakest cash position since the 2008 global financial crisis, just as consumers are tightening their wallets.
Strains on cash flow at Indonesia's biggest high-end retailer PT Mitra Adiperkasa (JKT:MAPI.JK - News), its largest low-end department store group PT Ramayana Lestari Sentosa (JKT:RALS.JK - News) and top mid-tier retailer PT Matahari Department Store (JKT:LPPF.JK - News), along with interviews with shoppers and store managers, suggest a significant slowdown in consumer spending, the main engine of Southeast Asia's biggest economy.
It also points to a likely scaling back in one of the country's biggest growth industries.
Mitra and Ramayana were both cash flow negative in the March and June quarters, the longest stretch since the 2008 crisis. Matahari, controlled by Global private equity fund CVC Capital Partners and Indonesia's Riady family, saw its net cash position hit its lowest in five years in the June quarter.
"We expect consumer spending to be the next shoe to drop in the country's rapidly faltering growth story," said Robert Prior-Wandesforde, director of Asian economic research at Credit Suisse in Singapore.
Another big retailer, PT Modern Internasional (JKT:MDRN.JK - News), has been cash flow negative for the first half of the year, its longest stretch in two years and reflecting the cost of opening more than 120 7-Eleven stores since buying the franchise rights in 2009, with plans to open nearly 380 in the next two years.
"Modern and Mitra are aggressively expanding," said Budi Budar, equity fund manager at Jakarta-based PT Samuel Asset Management. "Perhaps they should put a bit of a brake on their original plans."
Such talk was unheard of a year ago when Indonesia was minting dollar millionaires at a rate of 16 a day, according to consulting firm Capgemini, giving it the fastest-growing ranks of millionaires in Asia. Years of surging palm oil, coal and tin exports brought an influx of foreign investment and ignited a domestic consumption boom in the country of 250 million people.
"WE DECIDED TO SLOW DOWN A BIT"
But as the economic tide turned this year and Indonesia's financial markets swooned, shoppers began to pare back.
Friends and family were showered with fewer gifts, for instance, in the recent Eid al-Fitr holidays, the biggest festival in the world's largest Muslim country that is marked by lavish feasts, family gatherings and generous spending.
"Prices have gone up, but our incomes have stayed at the same level," said Misnah, a 25-years old woman shopping in a Jakarta store, who like many Indonesians goes by one name.
"We usually give a little money or clothes or toys to our nieces and nephews during Eid, it's the tradition. But personally I bought fewer things than last year for example."
A near-daily procession of grim statistics doesn't help.
Data on Monday showed the trade deficit widening to a record high of $2.31 billion in July and inflation quickening to a four-and-a-half year high of 8.79 percent in August.
On Thursday, the central bank announced a half-percentage point increase in benchmark interest rates to defend a currency that has nose-dived nearly 13 percent this year. Jakarta's main stock index is off 19 percent in the past three months, as economic growth slows and demand slackens for Indonesia's commodities exports, especially from China. Foreign investors are in retreat as the U.S. Federal Reserve signals an end to easy money.
"We have felt the cost pressure ever since the first quarter," said Fetty Kwartati, Mitra Adiperkasa corporate secretary, in an interview. Profitability, she said, is down as rising operating expenses exceed revenue growth.
The sliding rupiah has hit hard. Mitra imports 50 percent of its merchandise and passes those costs to customers, the wealthiest of whom can absorb 10-15 percent price increases, says Kwartati.
As Indonesia's middle class grows, Mitra has expanded. So, too, has its debt, which has risen five times since 2011. In the first five months of this year, Mitra opened 106 new stores. Another 244 will be opened this year but next year's plans will be scaled back. Mitra is targeting revenue growth of 20 percent next year, down from 25 percent in 2013, and reducing capital spending for next year, Kwartati said.
"We decided to slow down a bit after the heavy expansion this year."
A stroll through Mitra's sleek Galeries Lafayette, a new 12,500 sq. ft. high-end French department store in central Jakarta, underscores her point. Managers at three out of four of its shops told Reuters sales were down since it opened in May.
At the French luxury clothes store, Yves Saint Laurent, sales have fallen as much as 8 percent in the last few months, said Sinta Ningsih, a sales manager. And at the female shoe store, Noe, turnover has steadily dropped. "Now the store is only crowded on weekends," said Heru Triyanto, a Noe employee.
Some Mitra stores, including fast-food franchise outlets Burger King and Domino Pizza, are loss-making and will continue to hurt its balance sheet, according to four analysts who track the company closely. And its luxury sales outlets could face pressure from a government plan to raise taxes on imports of luxury goods to narrow a near-record current-account deficit.
Mitra's stock price has tumbled 48 percent from this year's high in May to trade at about 14.86 times next year's earnings, making it cheaper than the Indonesian retail sector average of about 21 times. In June, it announced plans to raise 1.8 trillion rupiah in a rights issue to strengthen liquidity, but this has been postponed due to market volatility.
NOT JUST THE RICH
The slowdown, however, isn't limited to just the affluent.
Ramayana, the country's biggest discount retailer, faces similar problems.
"The rise of prices due to inflation and central bank's rate hike are definitely putting pressure on consumers' buying power and that affects our business," said Setyadi Surya, a director at Ramayana, which operates in 42 Indonesian cities and targets the middle- to lower-income market. "We did not predict the weakening in the rupiah and the rate hike. But I hope this will not be a prolonged issue."
Ramayana's net cash position declined 26 percent over the first half of the year to 861.68 billion rupiah. It will go ahead with plans to build eight new stores this year but says achieving its sales target of 8.5 trillion rupiah and profit target of 506 billion rupiah will be tough. "If we can get 90 percent of the target then it will be more than good," said Surya.
In central Jakarta's usually bustling business district, the lunch-time crowd at Ramayana's Robinson chain outlet store is noticeably smaller. And those who are shopping, are buying less. "It was very crowded in here last year, but now an average customer comes in to buy perhaps three shirts compared with five shirts last year," said Yulis, a store manager.
Ramayana's stock price has dropped 38 percent since April to 990 rupiah to trade at 13.85 times next year's earnings. That makes Ramayana, like Mitra, a bargain compared to the Indonesian retail sector average.
Not all Indonesian retailers, however, are poised for tough times. Electronic retailers, such as PT Electronic City Indonesia (ECII.JK), may benefit from the scrapping of a 10 percent tax for white goods products announced on August 23 as part of a broad fiscal stimulus package.
"We will see a consumption shift phenomenon in expense pattern to buying low-end goods from expensive products," said David Sumual, economist at PT Bank Central Asia in Jakarta.
Smaller retailers may also find solace as the country heads into a general election next year - a period when the government and political parties typically pump a significant amount of money into the economy.
"I believe the elections will definitely have an impact on the economy because consumption will be increasing as we get closer (to 2014)," said Hasto Kristianto, deputy secretary general of PDI-P, one of the country's biggest political parties.
Some parties have already started spending in relatively small amounts on local elections this year. The big political parties are expected to start a wave of populist spending in September that will reach its peak in March 2014 when the country votes for its next leaders.
While most political funds are spent on radio, television and print advertisements, the parties also host large public meetings where food, drink and small gifts like T-shirts are distributed.
(Additional reporting by Rieka Rahadiana, Kanupriya Kapoor, Fathiya Dahru and Viriya Paramita in Jakarta; Writing by Jason Szep; Editing by Raju Gopalakrishnan)