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Revolutionising retail

Revolutionising retail
Published: May 04, 2014
In Jakarta, 7-Eleven found a loophole that allowed it to break into small-format retailing, transforming itself and contributing to a revolution in Indonesian retail in the process

George Martin Sirait and Michele Ford

The 7-Eleven revolution   Michele Ford

Jalan Kyai Haji Wahid Hasyim, in central Jakarta, is a busy street in the tourist district just off Jalan Thamrin, the city’s main drag. Lodged between the hotels and restaurants is a 7-Eleven convenience store. On a balmy evening, a five-man band is performing Indonesian pop for an audience relaxing in café chairs on an expanse of bitumen in front of the store. Passers-by – local and foreign – stop for a moment to listen, smiles on their faces. Every now and then, someone walks inside to buy a drink or a snack and take a seat.

World-wide, 7-Eleven is associated with late-night runs for milk, bread or junk-food. However, Jakarta’s 7-Elevens are 7-Elevens with a difference. Inside, the aisles are wider and the offerings a little more up-market than in the Japanese or Australian versions. But it is outside where the difference is most striking. The atmosphere in the improvised café setting is relaxed and friendly, much like that of a warung in a small Indonesian town. It is worlds away from the utilitarian feel normally associated with the franchise’s stores. 7-Eleven is also different from typical Indonesian minimarkets, which sell almost everything, in that it specialises in food and drink, including alcohol. To reach out a broader consumer base, 7-Eleven works with Go-Jek, a Jakarta-based motorcycle taxi company that offers a delivery service.

In a city where public space is limited, and open-air dining opportunities mostly either very up-market or confined to cramped roadside food-stalls, the 7-Eleven phenomenon heralds something of a revolution, offering one of the few modern café experiences available to the city’s lower middle class youth outside a food hall in a mall. But who would have thought that 7-Eleven would lead the charge? It turns out that the reasons behind the 7-Eleven revolution are not only complicated, but their consequences far-reaching, not only for this particular chain but also for other foreign investors in Indonesian retail.

Restrictions on foreign investment

Before 1998, there were no 7-Elevens – or Carrefours or Lotte Marts and the like – because government policy allowed for little foreign investment in Indonesian retail. But all that changed with the Asian financial crisis. In order to secure loans from the International Monetary Fund (IMF), the Indonesian government had to commit to a structural adjustment program. The IMF’s demands included provisions requiring the liberalization of wholesale and retail trade. In October 1997 Indonesia signed a Letter of Intent and Memorandum of Economic and Financial Policies with the IMF. In a more detailed memorandum signed three months later, it committed to lifting restrictions on foreign investment in the modern retail sector.

It wasn’t, however, to be a case of open slather. When the government implemented the IMF memorandum, it did so in a way that allowed foreign capital to directly invest in large format retailing but reserved smaller scale retail for domestic capital. A Presidential Decree issued in 1998 stipulated that medium and large firms, including those owned by foreign investors, were not to engage in informal trading formats, a category that included small shops. Their involvement was restricted to medium and larger scale modern retailing formats like malls, shopping centres, supermarkets and department stores.

This decree was complemented by other attempts to regulate the relationship between modern and traditional retailers. Initially, under a 1997 Joint Decree of the Minister of Trade and Industry and the Minister of Home Affairs, modern markets were only permitted within provincial capital cities. Ten years later, a Presidential Regulation allowed for the establishment of hypermarkets, shopping malls, supermarkets and department stores in other towns subject to local planning requirements. Under the regulation, hypermarkets and shopping centres could not be built in the inner city. They could only be built along arterial or collector road networks and supermarkets. Department stores, too, were prohibited on local road networks in an attempt to protect minimarkets and traditional markets, which were permitted in any part of the city and on any type of road.

Subverting the system

If foreign investment in small-scale retailing remains illegal, what is 7-Eleven doing in Indonesia in the first place? The Indonesian bureaucracy is famous for its capacity to bend the rules, but surely the entry of a high-profile foreign convenience store chain into a restricted market is a step too far?

After years of uncertainty as to whether it would or would be able to invest in Indonesia, 7-Eleven finally obtained permission to operate its convenience stores in Jakarta, which are operated under a franchising arrangement with Modern Putra Indonesia, the operator of the declining photography businesses under brand names such as Fuji Image Plaza. But not under the rules governing foreign investment in the retail sector. Having failed to obtain a license from the regional Office of Trade – the government institution authorized to issue permits in the retail sector – Modern Putra Indonesia hit upon a solution. Thinking laterally, it decided to exploit a regulation on restaurants and cafeterias, under which permits are granted by local Office of Tourism rather than the local Office of Trade. The tables and chairs set up at 7-Eleven outlets were a condition of being allowed to operate as a café.

One of the things that made this strategy possible was a 2004 regulation that shifted responsibility for the issuing of permits from the national Ministry of Trade and Industry to district heads or mayors and, in the case of the Special Region of Jakarta, to the governor. As a result of this change, every region now has its own provisions. For example, in 2006, the Governor of Jakarta imposed a moratorium on minimarket permits in an attempt to combat allegedly ‘illegal’ licenses issued by authorities at the municipal level. Four years later, the moratorium had been lifted but the government refused to issue new licences because local regulations were being revised. The other factor was competition between government agencies – in this case between the Office of Tourism and the Office of Trade. When combined, these elements generated the loophole that Modern Putra Indonesia identified and exploited.

The transformation of small-format retail

The success of 7-Eleven in penetrating the protected small retail market inspired other transnational retailers. Indeed, 7-Eleven’s ‘innovation’ was so successful that it has since been imitated by Lawsons, another Japanese convenience store brand operated in Indonesia by Midi Utama Indonesia, a subsidiary of Alfamart, one of largest minimarket operators in the country. The local Indomaret chain, under brand name Indomaret Point, has also copied the format.

The entry by stealth of foreign investors into small-format retailing is part of a much broader explosion fuelled by the relatively liberal regulatory environment for small retail. The market share of minimarkets and convenience stores skyrocketed from only 4 per cent in 2000 to 22 per cent in 2010, exceeding the combined growth of large retail formats. In the ten years to 2009, the number of stores in this category increased from just over 500 to over 10,000. The number of 7-Eleven stores, meanwhile, has nearly tripled in the three years to 2013 from 57 to 143.

The aggressive expansion of minimarkets turned on its head policy-makers’ assumption that supermarkets and hypermarkets, the formats associated with foreign capital, are the biggest threat to traditional retailers. Attempting to play catch-up, in 2012 the Minister for Trade issued the first regulation in Indonesia’s history to focus specifically on franchising in modern retail, which attempts to limit the spread of small-scale modern retailing by stipulating that holders of a master franchise may operate only up to 150 company-owned stores. This regulation is intended to prevent large-scale capital from further concentrating its control of small-scale retail by encouraging partnerships with smaller holdings. Importantly for the 7-Elevens of the world, the regulation doesn’t distinguish between the nationality of franchisors or franchisees, in effect relaxing the constraints on foreign investment in small retail formats, thus completing the retail revolution.

This new policy marks an important shift in the government’s approach to the retail sectors. Whereas it had previously focused heavily on protecting domestic investors by controlling foreign capital, it is now focused on regulating the size of retailers’ operations regardless of the nationality of their owners. Not only has 7-Eleven transformed itself in its efforts to work around regulatory obstacles, it has effected fundamental change in the regulatory environment itself – and in the process, democratising the modern café experience by making it available to Jakarta’s lower middle classes.

George Martin Sirait (martin.sirait@atmajaya.ac.id) teaches at Atma Jaya University in Jakarta and is a PhD candidate at the University of Sydney. Michele Ford (Michele.ford@sydney.edu.au) is director of the Sydney Southeast Asia Centre at the University of Sydney, where she researches Indonesian labour relations. Michele has recently stepped down from her role as a long-time coordinating editor and member of the board of Inside Indonesia.

Inside Indonesia 116: Apr-Jun 2014{jcomments on}

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