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As Competition Heats Up, Indonesians Are Spoiled for Choice

From perks for the pampered to deliveries to the wilderness, Indonesia’s retailers are pulling out all the stops to attract a growing number of fashion consumers.
A spread from Dewi magazine's October 2013 issue | Source: Femina Group
By
  • Robb Young

JAKARTA, Indonesia — Crouching on the floor in a flirtatious shade of tangerine, a Lamborghini Gallardo peers out at the crowds in the Pacific Place Mall. A rather discreet sign next to the sleek beast announces that one lucky patron of the mall will win the supercar in a raffle. Situated where it is, immaculately coiffed women must teeter around it to get from Cartier to Hermès, while the men are too busy on their Blackberries to notice it as they dash between Zegna and Louis Vuitton.

A good hour of pedestrian traffic passes by — including many less affluent shoppers on their way to the likes of Esprit, Guess and food courts on the mall’s upper levels — and yet no one bats an eyelash at the lusty sportscar that can reach speeds of over 300 kilometres per hour.

"I've come to the realisation that a luxury car giveaway by shopping malls is pretty common here in Jakarta. Senayan City Mall, our partner for Jakarta Fashion Week, is currently giving away a Mercedes-Benz and just last summer Plaza Indonesia Mall gave away an Audi A5," says Diaz Parzada, creative director of Jakarta Fashion Week, the national designer showcase which was spearheaded five years ago by one of Indonesia's oldest and most deeply-rooted fashion lifestyle publishing empires, the Femina Group.

At first glance, such lavish marketing ploys seem only to corroborate the prevailing Western profile of the Indonesian fashion consumer as an indulgent high-roller, epitomised by the ladies of leisure who locals freely admit do sometimes reserve two seats each when dining out with friends: one for herself and one for her deluxe designer handbag. Wealth X, a firm monitoring ultra-high-net-worth individuals (those having a net worth of over $30 million) estimates that there were 865 UHNWIs in Indonesia in 2013, though still only a tiny portion of the country’s total population, a figure that nonetheless represents a 10 percent increase over the previous year.

No wonder the Lamborghini barely registers. Renee Tang, vice president of marketing and promotions at Pacific Place Mall explains that in a previous raffle, the mall offered private jet trips to four winners and their extended families. "This is just the standard that our customers expect and are used to," she shrugs.

Nevertheless, there is a very rational explanation for why Indonesia's major fashion players — and not only those in the luxury trade — employ such high-octane promotional campaigns. Simply put, in a market where import duties, sales and luxury taxes can amount to prices that end up anywhere between 15 to 30 percent higher than those in neighbouring countries, the incentive to reward loyal customers for shopping locally is extremely high. And if that means spending a whole lot of cash publicising the rewards that themselves cost a pretty penny, it's still money well spent. What's more, competition across the entire market is getting ever more fierce so that customer service and shop proximity are increasingly important factors determining success.

"We're working hard to create an atmosphere to make it compelling for customers to shop locally as we scale up and diversify our presence, reach out to them in the second and third tier cities and most importantly treat them with sensitivity, respect and grace and not just see them as money bags," says Raj Kaul, CEO of Trans Fashion Indonesia and Thailand (a unit of CT Corp Group) whose brand management portfolio includes Giorgio Armani, Ferragamo, Valentino, Versace, Jimmy Choo, Brioni, Canali, Tommy Hilfiger and Mango.

"Just in the last two years, we've expanded vigorously and taken mostly our diffusion brands into the cities of Bandung, Surabaya, Bali, Medan, Makassar and also within Jakarta to the outer suburbs where international quality malls are being built with incredible attention to detail, finish and integrated facilities."

In recent years, Indonesia's fashion-hungry globetrotters have stepped into the spotlight as they embark on ever more conspicuous shopping trips to Europe, Dubai, Hong Kong and, of course, nearby Singapore. But much less is known about them than their travelling Asian counterparts. And few outside Indonesia could imagine the diversity and scale of fashion retail that exists already or the opportunities for further growth in this country of 240 million people — which, incidentally, puts the vast archipelago fourth in the world behind China, India and the US in terms of sheer numbers of consumers.

However, despite the country's incredible wealth of natural resources like energy, minerals and commodities, about 40 percent of Indonesians live on less than $2 per day, according to the World Bank, leaving Indonesia’s macro numbers a whole lot less attractive and effectively excluding tens of millions from the spending power needed to buy essentials — let alone fashion brands. Poverty has been broadly decreasing, but not at a rate to lift most of the destitute out fast enough.

"It would be odd if the gap between the haves and have-nots weren't seriously being considered by the lawmakers in order to regulate and moderate luxury consumption. It's totally understandable," says Kaul. "[That's why] it's not easy or straightforward to import luxury goods. The duties and luxury tax are heavy and so are the penalties. For the short to mid-term, it would seem frustrating to have to face so many constraints, but when you look at the big picture there is only one way to go — up. With incomes rising, there's a need to upgrade and crave for better things. We see this change coming. Now is the time to put the building blocks in place and be ready for a long and happy ride."

Indeed, the number that keeps some economists and most marketers excited is the 133 million or so Indonesians who make up the upwardly mobile middle classes. If this strata of society can be transformed into active fashion consumers — and many already are — it would mean more new people to tap into here than there are living in all of Japan. While such a comparison certainly does come with many caveats, many experts foresee substantial and immediate upticks in prosperity levels. Consultancy firm McKinsey estimates that the number of Indonesian households earning $7,000 per month will rise from around 17 million in 2013 to 25 million by 2020.

Chandra Widjaja, director of Club 21 Indonesia which operates stores for the likes of Dolce & Gabbana and Marc by Marc Jacobs in Indonesia and whose parent company is partner for dozens more around the region says that "for us, it has never really been a challenge to attract the elite customer in Indonesia. What has been a challenge is the ongoing changes in custom duties, regulations and import taxes. These are factors that you have to take into account when you want to do business in Indonesia — every time there's a new cabinet in government, in fact. Nevertheless, we deal with it and it is improving."

Someone whose firm has been watching fashion retail evolve for over 40 years is Svida Alisjahbana, CEO of Femina Group, a highly influential media player with a stable of about a dozen home grown women's, fashion and lifestyle titles that include flagship magazine Femina, Dewi and Gadis alongside the Indonesian editions of Grazia and Cleo.

"Some of the long term obstacles for fashion retail are bad infrastructure, regulations — like customs, IP and high logistics costs — and corruption. However, if one is ready to face up to these challenges, their rewards will be high," says Alisjahbana, who is the second generation to oversee the group's portfolio of magazines and has strengthened its ties with the local fashion industry through Jakarta Fashion Week and many awards and business initiatives. "This is the reason that it's highly recommended to enter Indonesia through joint-venture partnerships with locals."

Although Femina Group remains a dominant player, it must no doubt feel the heat of competition after a recent influx of foreign entrants. InStyle has been licensed to Kompas Gramedia and Cosmopolitan, Harper's Bazaar and Esquire to MRA Group while Trinaya Tirta's portfolio including Kartini and Kartika magazines was beefed up by Elle in 2008 and Marie Claire two years later.

Two other key players in the market — on the retail side — have also witnessed rivals swell in recent years. At the lower end, Matahari Department Store, which has been an institution for over 50 years, is beginning to be hit by global fast fashion brands. What keeps it buoyant is that it has locations far and wide dotting the country's many islands and in most urban retail districts while fast-fashion operators have yet to cast such a wide net.

Another is MAP Indonesia (PT Mitra Adiperkasa) which went from one store in 1990 to an IPO on the Indonesian Stock Exchange in 2004. Today, it is the local partner and operator for 150 brands across 56 cities in the country. From last year's opening of Galeries Lafayette Jakarta (despite MAP's earlier failure to keep Harvey Nichols Jakarta afloat) to other longer standing department stores including Sogo, Seibu and Debenhams to the Inditex brands, Marks & Spencer, Topshop, Lacoste, Next, Reebok and Converse, it continues to dwarf most of its competitors.

"A lack of class-A malls and retail infrastructure is hampering our expansion plans in other cities," says MAP Indonesia's CEO, V.P. Sharma. "But barring a world financial crisis, conditions here like per capita GDP, purchasing power and the middle class growth will further boost domestic consumption. The banking and financial sector has also undergone major reforms and it is now in much better shape than before with stronger corporate governance and control over loans and credit cards."

In recent years, many smaller firms have now made inroads on the likes of MAP, especially in the higher end, where such giants have largely hesitated. Collectively, Indonesian joint-venture partners like Graha Cipta Prima, the Masari Group, Time International, Gilang Agung Persada, Graha Lifestyle and Busana Perkasa Abadi have now brought in most of the big luxury and contemporary brands into Jakarta. And megabrands like Prada, Dior and Louis Vuitton are beginning to go it alone without a local partner, and reportedly eyeing up secondary, third or fourth locations outside Jakarta's retail heartland of the Semanggi Triangle and even beyond the capital city.

Rounding out the ever growing assortment on offer are cleverly positioned multibrand boutiques that have carved out a niche for themselves like Papillon (Carven, Comme des Garçons, Dries van Noten,) and Jade (Rick Owens, Margiela, Haider Ackermann and Balmain). There are also a growing number of specialty lifestyle retailers like The Goods Dept and Indonesian designers with global appeal like legendary names Biyan, Edward Hutabarat and Obin or newer labels like Tex Saverio, Major Minor and Jenahara — not to mention the iconic department store Alun Alun which champions Indonesian designers who both safeguard and reinterpret the country's rich and ancient textile and craft traditions into modern fashion and jewellery.

"Designers who can capitalise on the advantage of our long, rich legacy of textiles and handwork, manufacturing power an entire fashion supply chain in the country can really expand their businesses here," says Alun Alun founder and vice president of Pincky Sudarman.

The most striking aspect of the current Indonesian boom is the growing number of Asian companies jostling for space. Regional powerhouses like Club 21 and FJ Benjamin Holdings which hold sway over the bulk of luxury retail in Singapore, have long anchored themselves in Indonesia through local subsidiaries. But now giants like Central Retail Corp of Thailand (partner for many of Bangkok's biggest department stores) and others have announced they also plan to enter the Indonesian race.

Meanwhile, Korean brands of just about every persuasion are setting up shop in independent boutiques and inside Lotte Shopping Avenue. At the same time, Japan Fashion Week has started bringing an entire contingency of its designers during Jakarta Fashion Week to bolster sales in what the Japanese see as an incredibly lucrative future market with an appetite for high fashion as well as a culture that appreciates style subcultures and streetwear.

In the online realm, new regionally-based 'fast followers' like Zalora — which raised $112 million in funding late last year — is also looking for a slice of the pie after testing more established markets in South East Asia. By offering 500 brands from top to bottom-end price points, special delivery rates and payment conditions that meet the needs of a great variety of Indonesian income brackets both in far flung islands and bustling metropolises, local analysts are keeping a keen eye on how Zalora evolves and deals with Indonesia's many barriers and idiosyncrasies.

"Think about it," says Femina Group's editorial director Jati Hidayat, "It's an eight hour flight from Merauke in the east back to Jakarta here in Java — never mind to points further west. So to circumvent payment and logistics issues, Zalora do cash on delivery and outsource to [local] courier companies. And if purchases are above a certain amount, delivery is free to outlying islands. My sources tell me that Zalora have been recording fast growth but it is clear that the average ticket purchase is rather low, apparently below 400,000 Rupiah, or about US$38."

Still, with pockets of uber-wealthy and otherwise eager shoppers in cities in resource-rich regions far from Indonesia's retail heartland of Java like in Borneo's Kalimantan, Papua and Sulawesi, fashion firms that pull out all the stops to draw them in may yet prove to have a significant edge over international e-tailers like Net-A-Porter and Asos.

"My message is reach out now. Don’t look for perfect conditions, a better time or convenience. Adjust, accommodate and modify your template. It's all about flexibility, differentiation and about bending to optimise for the future," concludes Trans Fashion's Kaul.

"Believe [in Indonesia] and take a leap of faith."

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