Japanese convenience store operators are shrinking the size of their outlets in Indonesia amid growing competition from local rivals. But the strategy of pursuing profitability over scale runs the risk of downsizing the companies out of the market.
In Jakarta, the two leading local operators — Indomaret and Alfamart — have over 10,000 outlets each. Japanese rivals are finding it difficult to stay competitive with their traditional focus on larger shops, which often include cafes. To fight back, Lawson and Seven-Eleven Japan plan to increase the number of smaller stores in office and commercial buildings.
During lunchtime in an office building in Jakarta, people form long lines to buy bento box lunches, bread products and other items at a Lawson outlet. A karaage, or deep-fried chicken, bento sells for 45,000 rupiah ($3.20). “It’s my turn to pick up lunch today,” said a female office worker as she carried a shopping bag full of food from the store.
The outlet, which opened in August, is Lawson’s first small store in an office building. It is less than half the size of a typical Lawson shop in Indonesia and has only one row of shelves. Midi Utama Indonesia, the local retailer that runs the stores, has been considering such new locations as shopping malls and train stations, one official said.
Lawson entered Indonesia in 2011 after granting Midi a license to operate its stores. The Japanese company was ambitious, with plans to open 10,000 outlets in the first 10 years. But in mid-2013, after having opened just 80 shops in the country, sluggish profits forced it to withdraw from Bali. Lawson cut the number from 60 to 50 in 2014. Today, there are only some 40 Lawsons in Indonesia.
In the meantime, Indomaret and Alfamart have been steadily increasing their store networks. They have adopted some of the techniques brought in by Japanese rivals, such as in-store cooking and in-store cafes. Duskin, a Japanese housekeeping equipment company, chose Indomaret over Japanese players as its local partner to run Mister Donut when it entered the market this year.
Following the money
With their limited number of stores, Japanese operators are finding it hard to continue offering the level of product and service quality associated with Japan while still turning a profit. As a result, they are betting on small outlets in commercial buildings to drive earnings. In explaining the shift, a FamilyMart official cited “the high income level of customers and the easy-to-predict demand structure.”
FamilyMart plans to start opening stores in office buildings and upscale condominiums in 2016. Its existing 25 outlets are in stand-alone buildings or buildings shared with Japan’s Yoshinoya chain of gyudon beef bowl restaurants.
Seven-Eleven Japan, the largest Japanese convenience store operator in Indonesia, is considering opening more small stores in train stations, commercial buildings and other busy locations, according to Modern Internasional, the operator of 7-Eleven stores there.
Ministop, which has six Indonesian outlets, the fewest among Japanese companies, plans to cut costs by operating smaller stores and revamping its product lineup. For example, the matcha green tea-flavored soft ice cream it is promoting is selling three times as well as the chocolate flavor, the company said.
According to Alfamart, Indonesia’s convenience store market grew about 13% by sales in the first nine months of this year. Though that is down from 19% in the same period last year, the growth is still significant compared with midsize retailers such as supermarkets, which saw 3.6% growth.
Japanese players are not alone in their “go small” approach. Local operators are also increasing the number of smaller outlets in train stations and other facilities amid a shortage of space to build stand-alone stores, and also because of the difficulty in obtaining approval from authorities in the metropolitan area.
With local rivals not only adding more stores to their already-large networks but also adopting strategies similar to those used by their foreign counterparts, the pressure on Japanese operators to find new ways to remain competitive will likely increase.