Indonesia’s Supermarket Boom Offers New Opportunity for Traditional Markets & Farmers

Bank Dunia Jakarta, August 13, 2007. 

Modern retailing and supermarkets are booming in Indonesia, growing at 20 percent a year since the lifting of restrictions in 1998. In fact, they now account for 30 percent of the food retail business. The national output of fresh fruits and vegetables has doubled to US$10 billion from 1994-2004 and is increasingly reflected in changing patterns of food consumption. Indonesians consumption of fresh produce was 50 per of their of expenditure on rice in 1994, it rose to increased to 75 percent in 2004 and, in urban areas, it now stands at 100 percent. i.e. urban Indonesians, are spending the same amount of money on rice as they are on fresh fruit and vegetables. Nearly all of this produce is home grown and while imports have nearly tripled over the last decade, they still account for only 3 percent domestic consumption. These findings are part of a report Horticultural Producers and Supermarket Development in Indonesia released by the World Bank in Jakarta today.

Report Highlights
Among the main findings of the report is the comparative disadvantage of traditional wholesale markets in competing with suppliers of better quality produce either from abroad or from smart new domestic wholesalers. Large inter-island traders and a new-generation of Indonesian wholesalers who are specialized, capitalized, and dedicated to the modern food industry are making it harder for traditional markets to compete.While fresh fruit and vegetables account for 8 percent of supermarket sales and up to 15 percent of urban retail, a high share – 80 percent of the fruit sold and 20 percent of vegetables – are imported. Fruit and vegetables from China and Thailand in particular are usually cheaper and at the same time of a higher quality, making it difficult for local farmer to compete. “Indonesian farmers trying to sell to supermarkets are really handicapped by extremely poor supply chains,” says the lead author of the report Shobha Shetty. “Moving over poor roads, lacking cold chains and logistics services while dealing with entrenched bad business practices, Indonesian farmers face formidable odds. Yet, retailers see a large opportunity for local produce in supermarkets if these supply chain problems could be resolved.”

At present, the percentage of farmers participating in the new supermarket sector is small, around 15 percent. These are mainly small farmers – but they are the elite in terms of landholdings, capital, facilities such as irrigation tanks and education. Their profits are also 10-30 percent higher than farmers in the traditional sector.

However, traditional markets which service the bulk of farmers and are controlled by district governments, also act as a buffer and a reality check on modern chains. They sell residual produce, including that which fails to meet demanding quality control checks of supermarkets. They sometimes sell to the modern sector in times of scarcity or sudden loss of supplies. Importantly, traditional markets serve to place a cap on the growth of modern sector market power and in reality, the market segments are as much complementary as competitive.
Addressing the Challenges
The modernization of agricultural marketing in Indonesia has occurred largely as a result of market-driven, private initiatives, rather than government intervention. Results from this study indicate there are distinct roles for the public and private sector in this transformation. In the wake of decentralization, regional governments also have a major role to play in creating an efficient marketing infrastructure, together with the removal of complex licensing requirements and informal taxes.

Traditional retail markets need improved hygiene and sanitary standards, infrastructure (pavement, road, building, and stalls), cold chain systems, etc. so they can compete with supermarkets. Overall, this will create an efficient system linking processors and packers to the modern procurement system and create an incentive to upgrade the supply chain. It will also reward good quality differentiation at the production level, a key point of weakness at present.

Key Recommendations for Policy Makers Include:
Agricultural Support Services: The main challenge for policymakers is to increase the supply of fresh produce from small farmers to modern supermarkets. The first option is for direct support through investments in public goods and services notably agricultural research and extension services so they are more in line with the needs of the market. The results of this study indicate that farmers can be supported with technical and management assistance, post-harvest handling technology assistance, factor input assistance, etc.

The study also indicated that there is little evidence of strong farmers/producer organizations to facilitate joint marketing, purchase of inputs etc. D evelopment of farmer groups, grower associations, and new-generation cooperatives is another challenge. Providing market intelligence to those working in the supply chain and facilitating business linkages among farmers, wholesalers and supermarkets through business meetings, exhibitions, and business visit programs is a key role for the local governments.

Rural Infrastructure: One of the factors reducing competitiveness of fresh local produce is the high cost of transportation to the production zones. Good quality telecommunications and a paved-road network are essential if local farmers are to compete with imports. This is especially an issue as horticulture crops in Indonesia are often produced in remote, high-altitude areas where these infrastructure facilities are often missing.

Access to Financial Services: The study also shows the core constraint to a dynamic agricultural sector in Indonesia remains the lack of financial services to small farmers and suppliers. This also results in lower productive investments all along the supply chain. Since the payment of supermarkets is generally delayed for up to 40 days, cash flow problems may affect suppliers, farmers and wholesalers. The government can facilitate agreements with the modern retail association (APRINDO) and the banking system so that they provide a guarantee for the amount of sales the supermarket owes, so that small/medium farmers or even wholesaler can get access to commercial bank loans.

Land Rental Markets: Active land rental markets contribute significantly to the horticulture boom. However, the study shows that only a small percentage of the land is titled. Thus, public land registration needs to be widely socialized and farmers encouraged to register their land. Land titles will give full rights to the landowner and provide the land rental market with the necessary legal support.

This is a two-pronged policy that focuses on “structural competitiveness” and “customized competitiveness”. Improving “structural competitiveness”, which reduces the overall costs of supermarkets procurement and levels the “playing field” for traditional retailers and wholesalers includes: enforcing healthy business practices, improving rural infrastructure, improving the quality and relevance of the agricultural extension service etc.

In addition, governments should promote policies that support “customized competitiveness” so suppliers and farmers can enter the supply chains for supermarkets through access to market intelligence, improving enforcement of standards all along the supply chain, land titling, and developing innovative financial services that cater to the needs of the major actors in the supply chain. “The modernization of food retail in Indonesia offers a great opportunity for those in the horticultural sector to improve the quality of their produce and supply the growing demands of the urban market, which now makes up half the population,” says Shobha Shetty.

2 responses to “Indonesia’s Supermarket Boom Offers New Opportunity for Traditional Markets & Farmers

  1. Pingback: Marketing Research » Indonesia’s Supermarket Boom Offers New Opportunity for Traditional Markets & Farmers

  2. Where I can find good quality films?
    Can anyone help me?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s