April 28, 2014 7:50 pm JST

Indonesia's Hero Supermarket struggles for profit as competition grows

WATARU SUZUKI, Nikkei staff writer

JAKARTA -- Hero Supermarket, Indonesia's largest supermarket chain operator, reported that its net profit for the first three months of 2014 was flat on the year as rising competition with big foreign retail groups put pressure on its margins.

     The operator of nearly 700 stores, including Hero Supermarkets, Giant Hypermarkets and Guardian drugstores, on Friday reported a net profit of 55 billion rupiah ($5 million) for the first quarter of 2014, unchanged from the same period a year earlier. Its year-on-year revenue growth of 16% to 3.13 trillion rupiah was offset by a surge in sales and administrative expenses, causing its operating income to shrink 45% to 51 billion rupiah.

     "We remain optimistic about our growth momentum continuing in the rest of 2014, while we need to pursue our control over cost pressures," said Philippe Broianigo, who will be stepping down as president director of Hero Supermarket at the end of June, in a press release.

     The rise in expenses was partly due to the addition of 14 new stores, a move aimed at helping the company maintain its market share amid fierce competition with big players, who are becoming more aggressive in trying to tap the country's fast-rising middle class.

     South Korean conglomerate Lotte Group opened five Lotte Mart stores in Indonesia last year, bringing its total to 36. CT Group, a fast-growing Indonesian conglomerate, has also been expanding its retail network, taking over Carrefour Indonesia from its French parent in late 2012. Last year, Singaporean state-owned investment company Temasek Holdings acquired a 26% stake in hypermarket operator Matahari Putra Prima.

     "We think Hero's top line will continue to remain weak, as we expect the company's middle-end target market to be unable to absorb price increases and thus go to competitors with cheaper price points," wrote Maxi Liesyaputra, an analyst at Bahana Securities, to clients in a report following the earnings announcement.

     In an effort to expand into the warehouse market, where competition is less stiff, Hero Supermarket teamed up with Sweden's IKEA with the aim of opening the first IKEA store in Indonesia by 2014. But the project has been delayed by several months, resulting in additional costs.

     Hero Supermarket's parent company is Mulgrave, a subsidiary of U.K. conglomerate Jardine Matheson Group.