Expectations have emerged for a better Indonesian economy as we enter the new year of 2020. The role of the domestic market becomes increasingly important at a time when external pressures, such as United States-Chinese trade frictions, remain. The frictions force the economy to not rely too much on better commodity prices and export performance to boost its growth.

As a consequence, household consumption, which dominates the structure of the Indonesian economy by accounting for 56 percent of it, became a strength to drive economic growth this year. In general, we project that Indonesia’s economy will grow 5.14 percent in 2020, slightly better compared to our estimation of 5.06 percent growth last year.

We estimate that household consumption will grow 5.05 percent this year, which would be relatively stable compared to last year. In our opinion, the performance of household consumption in the first half of this year should be better than in last year’s second half because of several factors. First, the Ramadan and Idul Fitri festivities, during which Indonesia usually sees a spike in consumption, will fall in the April and May period and are expected to boost demand by 10 to 30 percent. Second, this year’s harvest is expected to be better than last year.

The third factor is a relatively well maintained inflation amid benign administered prices as the government ensures there are to be no increases in electricity rates for nonsubsidized customers during this year’s January to March period. Furthermore, we see that Bank Indonesia (BI) may cut its policy rate by 25 basis points (bps) to 4.75 percent in the first quarter or in the early second quarter.

Fourth is the scheme of village funds and social assistance disbursement that will be carried out early this year as the government tries to strengthen low-income people’s consumption rates. Forty percent of the village funds are to be disbursed in the first phase, 40 percent in the second phase and the remaining 20 percent in the third phase. Previously, the government disbursed 20 percent in the first phase, 40 percent in the second phase and 40 percent in the third phase.

A huge domestic market potential will bring some benefits for some sectors, such as consumer-based industries and retail trade. The sectors’ demand is going nowhere but upward and will have a good future going forward. The Indonesian Retailers Association (Aprindo) projects that the retail sector will keep growing even though it will not be much different than last year’s performance.

Aprindo aims for the value of modern retail trade gross sales to be worth Rp 286 trillion (US$20.9 billion) in 2020, a 10 percent expansion, unchanged from the target set in early 2019. However, last full year’s growth target was revised down to between 7 and 9 percent in the third quarter in line with Indonesia’s sluggish economic growth.

Aprindo sees that retail growth this year will still be supported by the fast-moving consumer goods (FMCG) products, especially food products, which account for about 60 percent of total FMCG sales.

In line with Aprindo’s guidance, we see some challenges that will affect the retail sector’s performance this year from both the demand and supply sides.

First, the people’s purchasing power, especially that of the lower middle income segment, is still quite vulnerable. Corresponding to the sluggish economic conditions, this segment is the most exposed to any economic fluctuations. In addition, we are of the view that a significant increase in the Health Care and Social Security Agency (BPJS Kesehatan) premiums and cigarettes prices starting earlier this year could hit household consumption.

Second, the government's ability to maintain security, political stability and a supportive business climate is important to keep the consumers’ confidence and their willingness to spend, especially for the upper-middle income class.

Third, from the supply side, the ability of retailers to adapt to the changes in consumer behavior is critical. Several retailers have made changes to their business concepts to be more in line with their targeted markets. In some cases, they even conduct a market survey to ensure that their selected items are the best-selling products in certain areas so the retailers can make different product mixes between their branches.

Fourth, the retailers’ ability to operate efficiently also determines their performance. Several retailers try to pocket an optimal operational profit by closing unprofitable outlets or relocating outlets to more strategic areas to get better yield per square meter.

In the current era of the digital economy, retailers must make strategic breakthroughs, such as using an omnichannel that combines online and offline platforms in its trading channel. Although the portion of online shops is still relatively small (less than 5 percent), we think that the potential of e-commerce is getting more significant going forward following a shift in consumption patterns.

In addition, the rise of millennial buyers should be taken into consideration by retailers when expanding their businesses. According to the IDN Research Institute, millennials prioritize location, products stocks, variants and their complete availability, lower prices, promotional offers, effective product displays, cleanliness and customer service when shopping.

On that basis, we think that the huge domestic market potential should be optimized in this current economic situation. We see that consumer goods retail trade is one of the prospective sectors going forward. However, retailers must stay alert to see the potential and challenges ahead in a bid to win in the fierce competition in the business.

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The writer is an industry analyst at PT Bank Mandiri (Persero) Tbk

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