Report of the Board of Directors
Bunjamin J. Mailool
The overall economic condition in 2018 remained challenging, especially the Fast-Moving Consumer Goods (FMCG) sector. On macroeconomic factor, the economic policies and structural reform program by the government have been showing signs to underpin the stability of economic fundamentals. Investment growth and recovery of commodity prices supported the overall investment climate as seen at the performance of Indonesia Stock Exchange (IDX) as well as direct investments in certain sectors. These subsequently had indirect impact to the country’s GDP growth of 5.18% and inflation rate of 3.1%, of which were within expectation by the market.
Despite the above, the overall consumer spending was still at a challenging situation during the year. The strength of disposable income was still not justified with reduction of electricity subsidies and increase of minimum wage (UMR) only adjusted for inflation and national economic growth, without considering the inflationary increase in the price of goods. Additionally, the shifting of Idul Fitri holiday in 2018 getting closer to new school year also hampered the retail growth as consumers having to prioritize their expenditures.
Within the year, the Company also faced several market challenges. Within the modern retail market, the continuing trend of shopping behaviors where consumers are trading down on their purchases has affected the Company’s business operation. This was also coupled with the rising competition in regional areas from local supermarkets offering aggressive pricings as well as the dominating penetration of minimarkets adding more challenges to our business this year. The rapidly increasing modern digital lifestyle allowed online retail businesses, which provide convenience and favorable pricings continued their growth significantly which both directly and indirectly affected the modern offline stores.
Strategy: Realigning the Retail Business
In anticipation of changing market environment and overcoming the challenges, the Management believes that it is critical for the Company to realign its retail business direction and go back to its core value propositions as a customer-centric modern retailer. Throughout 2018, the Company continued in carrying out the execution of several important initiatives and actions to realign its strategic direction and to regain its stage within the FMCG market.
Starting from competitive pricing strategy of 5,000 SKUs in 2017, this has become the primary focus that the Management has been putting its main efforts to bring back the customers into our stores. The competitive pricing has expanded into the majority of key fast-moving, basic household necessities sought by most consumers on daily basis. To provide the best offering to consumers, the Company has performed market pricing comparison analysis on regular basis and coordinated with vendors on mutual benefits to bring the most competitive prices available.
The Company also focused on reviewing the product assortments and inventory management in order 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 resulted to a relatively large reduction of total SKUs to-date, allowing fresher merchandise in portfolio to capture the retail potential from valued customers.
On the operational aspects, the Company reviewed extensively its store formats. The core Hypermart format was under heavy review for more efficient operation. It is driven to transform Hypermart into a n ew e fficient y et m odern f ormat w ith p roper merchandise assortments following the Company’s new strategy. Toward end of 2018, the Company was also in the final development stage for a new supermarket format with brand name Hyfresh, which is expected to launch in early 2019.
The Foodmart supermarket format is also under refinement program with Foodmart Primo for premium segment and Foodmart Fresh for mainstream supermarket operation. This is expected to bring support for MPPA’s total retail coverage for areas in closer proximity of housing complex and/or areas in which the larger hypermarket cannot penetrate.
In-line with the new business strategy alignment, the Company reaffirmed its decision to reduce its exposure from unprofitable B2B business. Majority of B2B business had been put on halt since second semester 2018, and it would continue to reduce and consolidate into the consumer-centric retail business.
The Company also continued in re-examining its cost structure by looking at a number of operational efficiencies. These include headcount productivity optimization including further change in organization structure. In 2018, total employees were reduced to 9,495 people, while efficiency measure at headquarter resulted to approximately 11.1% headcount reduction and more streamlined, efficient management structure.
Other action was also taken for unsupportable costs including a shift of marketing spend from expensive nationwide media advertising to a more cost-effective online, social media approach and community-based marketing. These efficiency measures resulted into approximately Rp461 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 2019, coupled with the new strategy will position the Company to regain its market leadership going forward.
Performance Highlights in 2018
Net sales reached Rp10.7 trillion in fiscal year 2018, which was still 14.9% below the Rp12.6 trillion level reached in 2017. This was predominantly due to the Company’s reduced exposure from B2B business and generally difficult market. Driven by results of business realignment to retail, 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 Rp1.5 trillion, or 14% of sales compared to 8% last year and improved profitability for the year.
The Company received information toward the end 2018 that PT Global Ecommerce Indonesia (GEI), the parent company of MatahariMall.com, in which MPPA owns 10.08% shareholding, changed its business strategy from general online marketplace to become fashion-focused online retailing. MPPA Management has performed analysis and study for the fair value and future prospect of the Company’s investment in GEI and has decided to adopt a prudent stance and fully impair its investment in GEI at the end of 2018. The impairment along with other factors led the Company having to register a net loss of Rp898.3 billion in 2018, improved by 27.8% compared toa net loss of Rp1.2 trillion in 2017.
Within 2018, the Company opened several new stores consisting of 4 Hypermart, 1 Foodmart and 3 Boston HBC, while it also closed most of unprofitable stores. As of December 31, 2018, the Company operates a total of 219 stores consisting of 107 Hypermart, 24 Foodmart, 74 Boston HBC, 12 FMX and 2 SmartClub in 71 cities across Indonesia. A Hypermart store in Palu was severely damaged by tsunami hit in September 2018, but the Company managed to reopen a temporary Hypermart store within 3 weeks in order to support the availability of much-needed household products within the area.
The Company sees omni-channel as a positive opportunity to drive sales beyond what can be realized in the existing conventional store formats in the future. In 2018, the Company reinvented its online business with the launch of Hypermart Mobile, a smartphone app for online purchases, at 4 stores in Greater Jakarta area until year-end.
The online business collaborates with OVO and Grab Delivery, the leading fin-tech and the community-based delivery service provider in Indonesia respectively, to enable convenient, secured online payment and delivery as fast as 30 minutes within 5 kilometers radius of participating stores. The Company will continue to strengthen its omni-channel platform in preparation of building up its organic online business to cater to the fast-changing modern customer’s digital shopping behaviors as well as to support the Company’s offline stores.
In mid-2018, the Company successfully raised Rp 807 billion in capital from a rights issue process in order to strengthen its overall working capital and to reduce partial of its bank debts. This Rights Issue was important for the Company to be able to secure newer merchandises to align with its new business direction. By yearend, the Company has fully utilized the proceeds as intended.
Updated Vision and Mission
In 2018, the Company updated its Vision and Mission statements to be in-line with the Company’s current strategy. We believe the updated Vision and Mission will reinforce the Company’s strategic direction and provide the solid foundation for the Company to demonstrate its renewed identity and retail capability to the consumers in the current market and future.
The Company continued its steps to uphold Good Corporate Governance (GCG) throughout the organization in 2018. Company information is communicated transparently and professionally to shareholders and stakeholders in a timely manner. Internal control measures are continually being refined and strengthened to provide a strong foundation for 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.
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.
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 2018, 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.
The Company 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 in its Hypermart 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, 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 attracted 2,257 children from 71 kindergarten and elementary schools in 40 Hypermart and Foodmart stores.
The Company also responded well when tsunami hit Palu and surroundings in Central Sulawesi in late September 2018. Our Hypermart store in Palu was severely damaged from the disaster. For its CSR relieve efforts, the Company immediately sent various food supplies and other needed products from its other Hypermart stores in Makassar (South Sulawesi) and Poso (Central Sulawesi) to the location to accommodate the basic necessities during emergency situation.
Within 3 weeks after the disaster, the Company was also able to operate a temporary Hypermart store in Palu to supply foods and basic necessities for consumers. It also supports the government effort to speed up the regional economy recovery in the affected areas. Coordinating with Lippo Mall Investment Real Estate Trust (LMIRT) and Yayasan Papua (YPHP), the Company donated 8,600 packages of school stationery supplies for unfortunate children from 43 elementary schools in Palu and surroundings to give hope and motivation for the children to continue their education.
Other Social Activities
During 2018 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. In 2018, the program has successfully repaired several infrastructures of elementary schools and educational institutions. 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 2019
We believe that Indonesia’s economy is on track to continue its recovery during the course of 2019, with the government projecting GDP growth beyond 5.15%. Alongside continued infrastructure investment and stable inflation, we believe this would drive an upturn in consumption.
We have strong belief and optimism for MPPA as it continues to strengthen its position as the Indonesia’s leading homegrown hypermarket group. MPPA currently operates 219 multi format stores nationally from Aceh to Papua, with an unparalleled world-class logistics infrastructure and employing directly more than 9,400 staff and store associates. It has a reputation of entrepreneurship, professionalism, discipline and is obsessed with customer satisfaction, innovation and excellence in operations.
Looking to the 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. 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 from traditional and modern channels are the key drivers to fuel a sustained rise in consumption that will support our business in the future.
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 and EGMS in 2018, the BOD’s structure has changed to enable the Board to manage the execution of Company’s strategy more effectively. We would like to welcome Fendi Santoso as our Independent Director and responsible for the Company’s financials. Joined the Company in early 2017, Fendi is also the Company’s Chief Financial Officer. Additionally, we also would like to welcome back Andre Rumantir as our Board member. Andre has an extensive experience in human resources and industrial relations, and he was also a member of the Company’s board in the period of 2004-2007. Currently, Andre is also a Director of PT Matahari Department Store Tbk.
In the same opportunity, we would like to thank Carmelito Regalado and Lina Latif, the former Directors, for their long-time services in the Company.
On the Management team, we also would like to welcome Elliot J. Dickson as our new CEO to lead the Company business with the new strategy. Elliot is well known for his retail expertise globally and in Indonesia. His former expertise in WalMart China as well as Lion SuperIndo would certainly bring new experience and discipline for the Company in achieving its new direction. 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 millions of customers throughout Indonesia who trust their retail needs with us throughout the year.
On behalf of the Board of Directors,
Bunjamin J. Mailool