The huge potential of Indonesia’s luxury market (part 1)

With a population of 237 million (2010) which is expected to reach over 250 million by 2020, Indonesia is not only South East Asia’s largest countries but also one of the fastest growing economies in the world, with an annual growth rate exceeding 5% in seven of the past eight years, thanks largely to its increasingly affluent middle class. Unlike many of its neighbors, Indonesia doesn’t depend on exports to Europe and the U.S. for growth, so slowdowns in those countries have had only a limited impact on its expansion.

Private consumption, the backbone of the economy, remained resilient, up 4.9% from a year earlier, matching the October-December rate. Consumption is set to remain strong, with the statistics agency pointing to a drop in the unemployment rate; it was at 6.3% in February, down from 6.8% a year earlier.

A recent study by CLSA and Julius Baer Bank reveals that the number of high net worth individuals (HNWI) will triple in Indonesia to nearly 100,000 by 2015, the fastest rise in Asia and internationally, trailed by China and India. One of the important factors behind this growth is the appreciation of the Rupiah. However, many analysists reckon the number of HNWI is at least 20% higher, considering many Indonesians’ offshore deposits.

In a 2012 report by Standard Chartered Priority Bank Asia, high net worth individuals in Malaysia, Indonesia, Thailand had the shortest time-frame for tripling their prosperity, anticipating strong wealth creation by 2020.

Indonesia will become the largest luxury market in Southeast Asia over the next few years, Ravi Thakran, LVMH’s head for South Asia, South East Asia & Middle East told CNBC in March 2012. “I really see a new ‘I’ emerging in BRICS. Going forward, we believe the Indonesian market will be one of the big surprises,” said Thakran, who added that the country remains an under-penetrated market for high-end goods”. He also added “When you look at jewelery or watches, Asians are buying the highest priced segment and the most sophisticated of the products.”

In CPP‘s recent review of the Indonesian luxury market, we have identified three major challenges hindering development:

- the lack of confidence in the market by most international luxury brands, especially fashion and accessories

- the poor infrastructure in the capital city of Jakarta

- the absence of luxury retail real estate developments in the major cities outside Jakarta

The rather recent improved economic performance of the country, the high number of wealthy Indonesians still shopping abroad have been among the major factors determining a lack of confidence by major international luxury brands, especially in fashion and accessories. With the exception of Louis Vuitton and Christian Dior (soon Prada), all international luxury brands have been operating in franchising, the market being dominated by several players. The largest local luxury retailer in Indonesia is Trans Fashion Indonesia, which operates in franchising the mono-brand stores of Giorgio Armani (including Emporio Armani), Salvatore Ferragamo, Valentino, Tod’s, Hugo Boss, Aigner, Jimmy Choo and Canali. Smaller luxury retailers include: Busana Perkasa Abadi (Ermenegildo Zegna, Versace, Roberto Cavalli), Club 21 (Dolce & Gabbana, Marc by Marc Jacobs, DKNY Jeans, CK Clavin Klein, Armani Exchange), Hitaiwarga Tirta (Hermes, John Hardy), Graha Cipta Prima (Gucci, Bottega Veneta), Time International (Chanel, Fendi), PT Graha Lifestyle (Etro, Diane Von Furstenberg, Kate Spade), FJ Benjamin Group (Celine, Givenchy).

The image of close down sales, with discounts of up to 90% at the Harvey Nichols at the end of 2010, which went bust after less than 2 years of operation is still vivid in the minds of luxury players and consumers alike. Although mostly due to the brand mix (most of them unknown in Indonesia) and the pricing policy, most associate the closure of Harvey Nichols with a failure of Indonesia’s luxury market. Mention should be made that the Indonesian luxury consumer profile is very much driven by well known international brands, show off being part of a status symbol. Logos, prints and a recognizable design are a must for a luxury brand to succeed in Indonesia.

Jakarta is probably the South East Asian capital with the least developed infrastructure and poor public transport facilities. The lack of an underground system and a poor bus service overcrowd the streets, traffic at peak hours provoking a stand still. A journey, which, off peak hours can be made in 10 minutes, can otherwise take 90 minutes at rush hours.

Presently, Jakarta’s luxury market is spread over four shopping centres, all mass market, with a luxury section on the ground floor – Grand Indonesia and Plaza Indonesia (the only two within walking distance from one another, both in the heart of Jakarta, adjacent to Grand Hyatt, Kempinski and Mandarin Oriental hotels), Plaza Senayan (off centre) and Pacific Place (a larger complex which also includes the Ritz Carlton Pacific Place). Gucci, Louis Vuitton, Cartier, Ermenegildo Zegna, Bally, Montblanc and Canali have the most extensive presence in Indonesia, with more than 3 stores each. Major international luxury fashion brands with limited presence in Indonesia: Burberry (one store), Chanel (one store).

Jakarta welcomes mid in 2013 its fifth mall with a luxury retail component, the Ciputra World Jakarta Mall, a complex which will include the first Raffles Hotel in Indonesia, an all suite hotel with 171 luxury units. Brands such as Louis Vuitton, Ermenegildo Zegna, Coach and Prada have already confirmed their presence at Ciputra World Mall.

Several major international luxury brands still have only one store in Jakarta: Chanel (Grand Indonesia), Hermes (Pacific Place), Brioni (Plaza Indonesia) and Yves Saint Laurent (Senayan City).  Brands with two stores: Bvlgari (Pacific Place, Senayan City) , Bottega Veneta (Grand Indonesia, Senayan City). The first Prada store in Jakarta is due to open at Plaza Indonesia later this Fall and till late 2013 it will be the only Prada store in Jakarta.

For discerning wealthy consumers wishing to pay a visit to most of the major luxury stores, the city’s infrastructure can become a major hurdle – at peak hours, crossing the entire city, to see luxury shops spread at the four malls, might take up to 2 hours (driving time only).

The fact that none of the four malls has created an exclusive enclosing for the luxury brands, ideally with a separate entrance, is yet another deterrant for the savvy wealthy Indonesians accustomed to shopping abroad in mature destinations such as Singapore. The ideal solution for Jakarta would be to concentrate most luxury brands in one shopping mall, however, this seems rather unfeasible, given the rivalry between the owners and developers of each mall and the preferential relationships each retailer has, in time, developed with one mall or another.

In terms of pricing, thanks to the appreciation of the Rupia in the past two years, prices of luxury branded goods in Jakarta are no longer much higher than in destinations such as Singapore – currently, at most 10% higher than in Singapore. With the cost of travel and accommodation, it hardly makes sense for wealthy Indonesians to make purpose shopping trips abroad, unless they are seeking THE luxury lifestyle. Luxury is not only about stores, but also about a luxurious lifestyle, environment and an entire experience, which is hardly available, for now, in Jakarta.

The mix of brands at the four malls in Jakarta can also be a factor that would diminish the attractiveness of the existing luxury sections within the four malls. I was surprised to find in Indonesia mono-brand stores of Jean Paul Gaultier, Givenchy, Balenciaga or Celine, which I consider niche brands, normally present at concept stores or department stores, rather than free standing, mono-brand boutiques.

Notable absentees from the Indonesian luxury market: Ralph Lauren, Coach, Yves Saint Laurent, Tom Ford. Ralph Lauren will face a daunting task when it decides to formally enter Indonesian market, considering there is already a very popular local Polo brand, with a similar logo and designs, selling at a fraction of the price.

It remains to be seen whether the announced Galeries Lafayette department store at Pacific Place Mall (scheduled 2013) would draw on the experience of Harvey Nichols and understand the importance of the brand mix and the luxury lifestyle experience which it needs to convey to consumers. Already, the fact that Galleries Lafayette is spread over three floors (a surface has yet to be announced) indicates a courageous move both from the part of Galleries Lafayette and their local partners (franchisee).

Like in many other emerging markets, the big questions remains – why so many international luxury brands still prefer franchising operations in a market with the size and potential of Indonesia. What would direct operations bring? – it would definitely improve customer service, merchandising and logistics, a larger selection of goods, a more optimized buying and availability of limited editions, extensive market research and improve direct marketing. Apart from traditional print advertising in the glossy magazines, most of the luxury brands in Jakarta would acquiesce to social events such as cocktails and dinners, most of them held at the brand stores in the shopping malls and attended by the same crowd, mostly made up of socialites.

The crucial upper middle class which buying power has been increasing exponentially is basically ignored, with no marketing efforts made to reach out to these consumers, some aspirational but certainly a very important long term potential loyal consumer base. One of the other shortcomings of marketing in Indonesia of luxury brands is the lack of interaction with other luxury sectors. Apart from the Audi and Bentley pop up stands at Pacific Place, I have not observed any other cross marketing activities.

In a review of the Indonesian luxury market, having surveyed 3 local retailers and 8 international luxury brands,  CPP Luxury Industry Management Consultants Ltd estimates the value of Indonesia’s luxury fashion and accessories market (including shoes and bags) at US$ 650 million in 2011, with a growth of 15% expected in 2012.

Oliver Petcu in Jakarta