Indonesia Lures More Luxury Brands

Indonesia’s growing ranks of wealthy consumers are enticing more luxury brands to Southeast Asia’s largest economy.

Paris-based fashion house Hermes International SCA opened its third store in Jakarta, a luxury-watch boutique, this week with a local partner. LVMH Moet Hennessy Louis Vuitton SA’s Fendi brand opened two stores this year, and Italian fashion label Gucci, part of France’s PPR SA, is building a 5,500-square-foot flagship store in Jakarta, also through local partners. Luxury-department-store operators Central Retail Corp. of Thailand and SA des Galeries Lafayette of France also are setting up shop in Indonesia.

Their moves into Jakarta come as some of the world’s largest markets for high-end goods sag: Sales for many high-end brands have weakened in the West, while a slowing Chinese economy has damped its consumers’ appetite for luxury. The growth of Indonesia’s economy is expected to ease this year, but the country’s ballooning middle class will drive luxury-goods consumption in the long term, according to Frederick Gibson, an associate economist at Moody’s Analytics in Sydney.

“We firmly believe in the potential of the Indonesian market,” because of the steady economic growth, stabilizing political environment and rising middle class, says Alexis Babeau, managing director of PPR’s luxury division. “Indonesians show a liking for luxury, they appreciate quality products and they value craftsmanship.” Chief Executive Francois-Henri Pinault led about a dozen PPR executives to Indonesia early this year to study the luxury market.

Indonesia is a priority for luxury brands because of the growing number of consumers who can afford high-end goods, says Tos Chirathivat, chief executive of Thailand’s Central Retail, which expects to have five stores in Indonesia by 2017.

The number of Indonesians with more than $1 million in investible assets excluding their primary residence is rising 25% a year, marking the fastest growth rate in Asia, according to brokerage firm CLSA Asia-Pacific Markets. That is expected to push luxury-goods sales to $742.3 million in the country this year, nearly double the amount in 2007, according to market-research firm Euromonitor. Still, that would be only a tiny fraction of China’s $17.9 billion in estimated luxury-goods sales and Japan’s $31.7 billion.

For Indonesians, luxury is about “showing off the brand, the bags that they have,” says Oliver Petcu, founder of CPP Luxury Industry Management Consultants in London. “It’s this appetite that’s been growing.”

For the most part, luxury brands are building slowly in Indonesia because of the country’s high luxury tax — between 10% and 200% of the purchase price — and the shortage of high-end real estate outside Jakarta, which makes it difficult to open stores in other major cities. While luxury-goods sales in Indonesia are growing for brands like Hermes, they still are only marginal to the company’s business in Asia, says Chief Executive Patrick Thomas.

Indonesian consumers also are used to traveling abroad to buy their luxury goods.

“I never feel comfortable buying in Indonesia because the prices are usually much more expensive and the models are usually not up-to-date,” says Rachel Amelia, an investment banker in her 40s, who walked away empty-handed after browsing a Chanel store in Jakarta recently.

In some ritzy malls in Jakarta, international luxury brands occupy only the ground and first floors because there isn’t enough consumer demand to fill all the floors, says Kazim Ali Bokhari, head of research at PT Leads Property Services Indonesia, a Jakarta-based brokerage firm. Harvey Nichols, a department store that began operation in 1880s London, closed in Jakarta in 2010 after only two years in business.

Yet, in a sign of the Indonesian luxury market’s potential, many brands are considering ending contracts with franchisees — which run most of the major luxury stores in Jakarta — and operating stores directly so they have greater control over the marketing and expansion, says Mr. Petcu, the consultant.

PPR has yet to run its own stores in Indonesia because of concerns about the transportation infrastructure, legal environment and high luxury-goods tax, says Mr. Babeau, the PPR executive.

by Kathy Chu in Hong Kong and Made Sentana in Jakarta

Wall Street Journal

Dior in Jakarta at Plaza Senayan Mall