The slowdown in Indonesia’s retail sector remains a hot topic as recent data seems to be confirming the trend.

Firstly, AC Nielsen’s report showed that the sales value of 55 categories of fast-moving consumer goods (FMCG) products grew by 2.7 percent year-on-year (yoy) between January and September this year, lower than 9 percent yoy in the same period of 2016.

The sluggish FMCG retail sales are occurring in all kinds of trading channels, including in modern retail, which saw growth of only 3.3 percent yoy during the first nine months of the year, as compared to 9.5 percent yoy seen in the same period of 2016.

Meanwhile, sales value in the traditional trading format, which includes grocery stalls, grew by 2.2 percent yoy as of September, lower than 8.6 percent yoy in the corresponding period of last year.

Based on product type, however, food sales grew 3 percent yoy compared to the 1.9 percent yoy growth in non-food products.

Secondly, Bank Indonesia’s (BI) retail sales survey showed a downward trend in the retail sales index growth. On a yearly basis, the monthly growth rate from January to September remained relatively low, ranging from 3.3 percent to 6.3 percent, compared to the same period last year, when the range reached between 6.3 percent and 16.3 percent.

Thirdly, the revenue of retail companies, especially those targeting low-and lower-middle income segments, tended to slow down or even experienced negative growth.

For instance, the financial statement of retailer Ramayana showed that its revenues between January and September contracted by 3.1 percent yoy compared to 6.9 percent in the same period last year. Ramayana also posted a minus 0.7 percent yoy cumulative same-store sales growth (SSSG) between January and September.

There are several factors affecting the retail sales slowdown this year. The first one is the limited purchasing power of low-and lower-middle income class consumers due to rising living costs, including electricity expenses. At the same time, salaries remain unchanged or only increase by single digits.

The impact of such limited cash conditions has caused consumers to consume less, withhold purchases of impulsive products and downsize to control or decrease volume usage.

The second factor is a shifting behavior of the way consumers prioritize and spend their money, as shown in AC Nielsen’s report in which consumers focus more on things related to basic and future needs as well as entertainment, such as food, education and leisure.

The share of several consumption categories related to leisure has increased in household expenditures, national income data shows.

For example, the share of transportation and communication stood at 22.76 percent between January and September 2016, and increased to 23.07 percent during the same period this year.

The share of hotel and restaurant also rose slightly to 9.88 percent in the first nine months of this year from 9.86 percent in the corresponding period of 2016.

Relatively higher growth also occurred in household expenditures among hotels and restaurants, as well as transportation and communication services, compared to other categories.

Last but not least, we think commodity prices also played a major role, in which the “new rich” — or people who gained profit during the commodity boom — changed their consumption pattern when the cycle ended.

During a climate of weak demand, retailers face additional pressures from tight business competition and rising operational costs. The most common example of tighter competition occurs between traditional and modern retailers, and between local retailers and those who own nationwide networks.

For that reason, producers and retailers must have an excellent business strategy, including by being innovative and creative in product development to capture the tastes and changes in consumption patterns among their consumers.

At the same time, another key factor to better performance in the consumer sector is a consistent effort to maintain business effectiveness for efficient operational costs.

In this digital era, the fast-growing e-commerce sector contributes to the tighter competition as well.

According to data from the Indonesia E-Commerce Association (IdEA), the country saw US$5.6 billion worth of e-commerce transactions last year, with digital buyers comprising around 9 percent of all buyers.

Furthermore, market statistics portal Statista estimates that retail e-commerce sales in Indonesia will reach $7 billion and $8.6 billion in 2017 and 2018, respectively. Indonesia is also expected to be Southeast Asia’s biggest digital economy by 2020.

The fashion segment was the biggest contributor to Indonesia’s online retail sales in 2015 with 34 percent, followed by electronics and media, including mobile phones, gadgets and their accessories, with 20 percent, Statista data shows.

The remainder, meanwhile, were toys, hobby and do-it-yourself (DIY) products, furniture and appliances, as well as food and personal care with 19 percent, 17 percent and 9 percent, respectively.

Those figures are in line with the Communications and Information Ministry’s 2015 data, in which it categorized online retail sales based on transaction value.

In 2015, online transaction values under Rp 500,000 ($36.91) dominated the e-commerce market with 68 percent, followed by those between Rp 500,000 and Rp 1 million, as well as above Rp 1 million, at 22 percent and 10 percent, respectively.

The massive growth of online shopping is often considered the cause of recent weakening sales in the conventional retail sector, also known as offline shopping. But this is not entirely correct, in our opinion.

Despite the high growth, online shopping transactions contribute very little to Indonesia’s total value of retail sales, at less than 2 percent. It will take longer for online shopping businesses to dominate domestic retail sales.

Some efforts are needed to encourage greater online shopping contributions in Indonesia, including pushing infrastructure development to boost internet penetration and developing better logistics to ensure on-time delivery. Better government support, especially in terms of e-commerce regulations, should also be invoked.

In short, we expect that improvements in the economy will provide a boost to the retail sector, despite the current slower growth, as its potential remains quite promising in the medium and long term due to its huge market.

The Indonesian Retailers Association (Aprindo) predicts a retail sector growth of around 7.5 percent this year.

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The writer is an industry analyst at Bank Mandiri.

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