PT Sumber Alfaria Trijaya (Alfamart), the operator of the Alfamart minimart chain in Indonesia, is reeling under labour cost pressure. High inflation and fuel costs, which rose by 44% for petrol and 22% for diesel in 2013 had pushed about 2 million workers across the county to go on strike in October 2013 to demand for higher wages. To mitigate the effect of higher cost of living, the authorities implemented drastic wage hike in 2013 with a 44% increase in the minimum wage in Jakarta to IDR2.2 million (USD228). The wage increase varies by regions. In East Kalimantan, the wage hike was 49% but only 11% in Aceh.
The sharp rise in salary has hit retailers hard. Alfamart saw a sharp 50% spike in selling and distribution expenses in 2013 versus 2012. The growth in selling and distribution expenses was offset by a slower but strong growth in gross profit, up 45.6% over 2012. The result was the deterioration of net profit margin, down 0.4 percentage points to 1.7% (before taking into account the incorporation of PT Midi Utama Indonesia) or a 0.14 percentage fall (after restatement of the 2013 results to take into account PT Midi Utama).
In 2013, Alfamart upped its stake in PT Midi Utama Indonesia, the operator of Alfa Midi mini supermarket, Alfaexpress convenience store and Lawson convenience store, to 56.72% from 12.75% in 2012.
As a % proportion of total revenue, 2008-2013 (note 2012-2013 figures do no take into account the investment in Midi Utama)
% of net sales
A closer look at the salary component of the cost structure shows a rise in the share of salary cost out of total revenue in 2013, rising from 6.11% in 2012 to 7.39% in 2013.
Such situation is an industry-wide problem, affecting not just Alfamart but also its key competitor Indomaret. According to PT Indoritel, labour operating expenses as a percentage of sales for Indomaret surged to 8.4% in 2013, a 2.2 percentage point increase. The result was a sharp decline in net profit margin to 1.1% in 2013 from 1.9% in 2012, translating into a 35.5% year-on-year fall in net profit to IDR372 billion.
From PT Indoritel Q4 Newsletter
Cash Flow
Alfamart is running out of cash as net cash used in investing activities has surged to an all time high of IDR 2.8 trillion in 2013 with acquisition of property, plant and equipment accounting for IDR1 trillion and long-term rent at IDR719 billion, up respectively from IDR907 billion and IDR591 billion in 2012. To sustain its capex needs, the company has issued new shares, raising IDR1.17 trillion in 2012 and raising short-term and long-term bank loans totaling IDR1.94 trillion in 2013. As a result of the rising indebtedness, finance costs (before including Midi Utama) escalated to IDR216 billion in 2013 from IDR46 billion a year ago.
1,000 new stores planned in 2014
Alfamart is accelerating franchising to comply with government restriction on company-owned outlet under the New Franchise Law. Companies have five years from the announcement of the regulation in February 2013 to adjust. The regulation limits company-owned stores up to 250 units with the rest to be franchised. Judging by the current rate of conversion from company to franchise stores, Alfamart is not likely to meet the franchise target. Hampering such effort is an aggressive plans to open another 1,000 new outlets in 2014 focusing on areas outside of Java.
Segment
By segment, food has the biggest share of net sales and gross profit as well as the highest gross profit margin.
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