Report from the Board of Directors
The Board of Directors (“BOD”) is pleased that the Company was able to navigate throughout year 2019 with several achievements in transforming into a customer-centric retailer, despite having to operate within challenging Fast-Moving Consumer Goods (“FMCG”) environment during the period.
Within 2019, the Company still faced several market challenges. In addition to customers trading down their purchases, the rising competition in regional areas from local supermarkets offering aggressive pricings as well as the dominating penetration of minimarkets have resulted to more challenges to our business. The rapidly increasing modern digital lifestyle, which fosters the exponential growth of online businesses with “burning money” strategies, also continued affected directly and indirectly the offline stores. The overall consumer spending remained as a challenge during the year. The strength of disposable income was still not justified by electricity subsidies and fuel tariffs, increase of minimum wages and general unemployment rate. The shifting of Eid al-Fitr holiday getting closer to new school year and customers’ modern lifestyle seeking for new life experiences also affected the retail growth as consumers having to prioritize their expenditures.
However, on the macro economy the successful presidential election set an important milestone for Indonesia. The overall economic policies and structural reform have been showing favorable signs to provide foundation for the stability of economic fundamentals. These were seen through the country’s GDP growth of 5.02% and inflation rate of 2.72% in 2019, of which were within expectation by the market.
To anticipate and overcome those market challenges, the Company continued its unwavering focus in realigning MPPA’s business strategy throughout 2019.
Strategy #1: Bringing Best Of Fresh Products To Consumers
It is critical for the Company to continue the execution of strategy realignment to consumer retailing. The Company put its main focus to Bringing Best of Fresh Products To Consumers as its business strategy fundamental. Key focus is addressed to meet most customers’ daily needs on a sustainable basis through wide arrays of fresh food, groceries and fast-moving consumer products. Being the most important business aspect, the Company’s Fresh products recorded a strong sustained growth of 4.0% sales growth with Comparable Store Sales Growth (“SSSG”) in retail sales of 6.2% leading to Total Sales over Rp 2 Trillion in 2019. It also contributed 24.0% of Company’s 2019 Total Sales which represented important contribution to the Company’s retail business.
Throughout 2019, the Company continued in carrying out the execution of several important initiatives and actions to bring the best of fresh products to meet the growing consumer needs.
In November 2019, the Company announced its collaboration with The Walt Disney Indonesia to bring world-class unique shopping experiences in Fresh products to consumers across all stores. Quality fresh produce like fruits and vegetables, as well as bakery products will come in packaging inspired by Disney characters, while products- across toys, apparel and reusable shoping bags to be added over the course of 12 months. This collaboration is aimed to bring the best Fresh products available in the market to meet modern customers looking for new lifestyle experiences in their shopping activities.
The Company also launched its latest store format in early 2019 - Hyfresh, which is the latest interpretation of community supermarket with greater focus on fresh and groceries products at great prices to attract households for shopping daily needs. The format starts to demonstrate encouraging performance with average sales productivity in the range of Rp1.4 million/m2/month and gross margin between 21-22% of sales, which are almost similar to the Company’s core, larger format – Hypermart.
Strategy #2: Refocus To Consumer Retailing
The focus of competitive pricing has become an important factor and expanded into majority of Fresh Products, groceries and fast-moving, basic household necessities sought by most consumers on daily basis.
Throughout 2019, the Company focused on reviewing the product assortments and inventory management in order to address the most appropriate product offerings to consumers as well as to reduce slower unproductive items for better cash flow. Greater focus was put on fast moving, productive SKUs; while the Management also put greater efforts in eliminating aging inventory. These would also allow fresher merchandise in portfolio to capture the retail potential from valued customers. As the results of these efforts, the Company was able to reduce its Out of Stock (“OOS”) to less than 3% on Critical Items (“CI”) and 5% on Key Value Items (“KVI”) from last year, while Inventory Turnover Days also improved to 55 days from 58 days last year.
The Company sees omni-channel as a positive opportunity to drive sales beyond what can be realized by conventional offline stores in the future. This is in-line with the vast growing of consumer’s modern digital lifestyle seeking for convenience. In 2019, the Company continued its plan toward its online business strategy by further strengthening its Hypermart Online, an O2O application for online purchases supported by all participating Hypermart stores in Greater Jakarta. This online business collaborates with OVO and Grab Delivery, which are prominent e-wallet operator and online community-based delivery service operator in Indonesia respectively, to enable convenient, secured online purchases and product delivery within 10 kilometers radius from participating stores.
The Company also continued to reduce its exposure from B2B business in 2019. While majority of B2B business had been put on halt since 2018, the Company continued the B2B business reduction further from its stores as well as closing down a SmartClub outlet within the period.
In term of cost efficiencies, the Company continued re-examining its cost structure by looking at a number of operational efficiencies. These include headcount productivity optimization with further change in organization structure. In 2019, total employees were 9,084 people with a more streamlined, efficient management structure. Other actions were also taken for unsupportable costs including a shift of marketing spend from nationwide media advertising to a more cost-effective online, social media approach and community-based marketing. These efficiency measures resulted into approximately Rp299 billion savings on selling, general, and administrative expenses within the period.
We believe all those actions above are important foundation as the Company continues to build a sustainable retail management platform that is necessary to support future growth. We are optimistic that improved macroeconomic condition in 2020, coupled with the new strategy will position the Company to regain its market leadership going forward.
Performance Highlights in 2019
Net sales reached Rp8.7 trillion in fiscal year 2019, which was still 19.1% below the Rp10.7 trillion reached in 2018. This was predominantly due to continued reduction of exposure from B2B business and generally difficult market, despite performance turnaround from consumer retailing started to be seen during the year. Excluding B2B sales, the Company’s retail sales in 2019 was Rp 8.0 trillion, which was 91.9% of total sales compared to 78.6% of total sales last year. In-line with focus to consumer retailing, controlled inventory purchases and pricing as well as cost efficiency measures described above, the Company was able to show some margin improvements with gross profit reaching Rp1.58 trillion, or 18.3% of sales compared to 13.9% last year and EBITDA profitability continued to deliver positive improvement for the year.
The Company also focused on re-launching a total of 37 existing Hypermart, Foodmart and Boston stores to meet the demand of growing urbanized customers as well as adapting to market environment changes as described above.
Additionally, there were new 1 Hypermart, 8 Hyfresh, 3 Primo, 3 Boston HBC and 5 FMX stores opened, while the Company also closed most of its unprofitable stores. As of December 31, 2019, the Company operates a total of 222 stores consisting of 102 Hypermart, 9 Primo, 17 Foodmart, 8 Hyfresh, 69 Boston HBC, 16 FMX and 1 SmartClub in 73 cities across Indonesia.
The Company will continue to strengthen its omnichannel platform in preparation of building up its organic online business as well as to support the Company’s offline stores. In addition to development of Hypermart Online to expand the operation into more Hypermart stores outside Greater Jakarta, the Company would also strengthen its collaboration with OVO and others to capitalize the increase usage of digital e-wallet in Indonesia as well as to develop more partnerships with other third party online partners in order to cater to the fast-changing modern customer’s digital shopping behaviors.
The Company continued to uphold Good Corporate Governance (GCG) throughout the organization. In April 2019, the BOD & Management Team signed a renewed Integrity Pledge. This Integrity Pledge was followed by the renewed Code of Conducts signed by each employee within the organization as part of mutual commitment to uphold transparency, professionalism and integrity in managing and operating the Company.
The BOD worked closely with the Management under the guidance of the BOC and Audit Committee to deliver company-wide standard operating procedures, which in turn ensuring proper implementation of GCG aspects into daily business operations. Internal control measures are continually being strengthened to support MPPA’s businesses. The function and importance of Internal Audit has also been elevated while the Whistleblowing system has been further enforced to ensure good governance practices are executed following proper procedures.
In compliance with OJK Regulation No. 33/POJK.04/2014, the BOD continued to enforce its guidelines and work conducts for each Board member. During the year, the BOD conducted 12 meetings among its members and 4 separate formal meetings with the BOC. Results and further BOC’s guidance from those meetings were well communicated to the Management team to ensure proper and timely execution and reviews.
The BOD remuneration is determined by the BOC and is approved by the shareholders through the AGMS. The remuneration is calculated after taking several factors into consideration, including collective and individual performance, market conditions and the capacity of MPPA.
In 2019, the BOD and Management team received the remuneration in the forms of salaries, allowances and bonuses based on individual, teamwork and Company’s KPIs. The remuneration was based on BOC’s evaluation, which was supported by the Nomination and Remuneration Committee (NRC), for each member of the Directors and key members of the Management team.
Corporate Social Responsibility
The Company always prioritizes its role as a good corporate citizen for all stakeholders and continues to address Corporate Social Responsibility (CSR) in its daily activities. It is involved in various social activities, which focus on community development, education and environmental preservation through long-term cooperative partnerships. Working with several Indonesian NGOs, it reaches out to communities managing certain CSR programs.
MPPA continued its CSR focus toward children education in its CSR programs. During the year, the Company was actively involved in its “In-Store CSR Educational Fieldtrip for Children” activities at Hypermart, Primo and Foodmart stores. The program attracted children from the surrounding schools, where children were invited to have educational store tours conducted by our store staffs. Valuable information about basic information of hygiene, food handling, and fresh products for health as well as the role and function of modern retailing were interactively presented to children. The CSR program usually ended with fun activities for the children in the stores. During the year, this program successfully reached 19,581 children from 401 schools in 119 Hypermart and Foodmart stores.
At December 2019, MPPA rolled out a new CSR program with Book1001 Foundation, a non-profit, volunteerbased foundation, to allow customers donating used children books in 8 participating Hypermart and Primo stores in Greater Jakarta. The collected books will be distributed by Book1001 Foundation to children libraries and reading parks in poor areas at several region in Indonesia. MPPA plans to strengthen this CSR in 2020 to allow more participating stores into the program.
Other Social Activities
During 2019 the Company also had other social activities. The Company continued its coordination with Dompet Dhuafa through “Program Infaq via Kasir”. This program enables consumers and the public at large to provide donations while shopping to help the community development programs. Additionally, the Company continued its cooperation with Yayasan Pendidikan Harapan Papua (YPHP), a non-profit organization in Indonesia, to support the development of school infrastructure and children education in remote areas of Papua island.
Perspective for 2020
We believe that Indonesia’s economy is on the track for positive outlook during the course of 2020, with the government projecting GDP growth beyond 5.3%. Several important actions already executed by the newly elected Indonesia’s government cabinet would provide a solid base for beneficial business environment going forward. Alongside continued infrastructure investment and stable inflation, we believe this would drive an upturn in consumption growth. The expansion of Indonesia’s middle class, which has continued to grow in spite of the challenges in the economy over recent years and the increasing rate of urbanization as well as the ongoing shift to modern channels are the key drivers to fuel a sustained rise in consumption that will support our business in the future.
We have strong belief and optimism for MPPA as it continues to strengthen its position as the Indonesia’s prominent homegrown hypermarket group supported by a strong national network of 222 multi format stores, an unparalleled world-class logistics infrastructure and employing directly more than 9,000 staffs and store associates. Looking to longer term, we view the Company will have a positive prospect with its aligned consumer retail strategy and several key tailwinds that will benefit the general retail sector.
Changes in the Composition of Board of Directors
Based on the NRC proposal to the BOC as well as shareholders’ approval at the Company’s AGMS in 2019, the BOD’s structure has changed to enable the Board to manage the execution of Company’s strategy more effectively. Adrian Suherman was appointed as the Company’s new President Director. Adrian brings strong vision and leadership, passion for the consumer, and execution capabilities needed to build MPPA in this fast-changing environment. In the same opportunity, we would like to thank Bunjamin J. Mailool, the former President Director, for his longtime service in the Company. Bunjamin now joins as a Commissioner of the Company to strengthen the BOC’s supervisory duties with his long-time knowledge and leadership within MPPA.
On the Management team, Elliot J. Dickson continues to lead the Company as the CEO. His retail expertise and disciplines bring valuable insights and solid teamwork for the organization in executing MPPA’s renewed consumer-retailing strategy. We also would like to thank several departing executives in the Management team who had brought insights and experience during their previous services in the Company.
On behalf of the BOD, we would like to extend our recognition and gratitude for the dedication and hard work of the Company management and staff. We would also like to thank our many partners in the business community and government for its continuous support toward our business. We also would like to thank the BOC for their guidance and supervision. We are grateful for the trust and confidence exhibited by our shareholders. And we are thankful for the customers throughout Indonesia who trust their retail needs with us throughout the year.
On behalf of the Board of Directors,