JAKARTA, July 02 (Fitch) The closure of 7-Eleven convenience stores in Indonesia is not evidence of industry-wide problems, but reflects circumstances peculiar to the franchise, Fitch Ratings says.
The agency believes the closure of the stores by its master franchiser PT Modern Internasional Tbk (Modern Internasional) underscores the risk of evolving regulation and the importance of a solid business model for a retailer’s credit profile.
Modern Internasional said it will close all the 7-Eleven stores under its management by 30 June 2017 due to a lack of resources to fund its store operations. The announcement was made a few weeks after the deal to sell the subsidiary that operates the 7-Eleven chain to PT Charoen Pokphand Indonesia Tbk fell apart.
Modern Internasional’s business model for the 7-Eleven chain in Indonesia was undermined by unfavourable regulatory developments. The company closed around 25 stores in 2016 (2015: around 20 stores), leaving the company with 161 stores (2015: more than 185 stores).
This followed regulation issued by the Ministry of Industry in April 2015 that banned the sales of alcoholic drinks in small, modern retail formats, which used to make up about 15% of Modern Internasional’s sales.
The store closures eventually resulted in a 28% decline in sales and EBITDA losses in 2016, making the company’s leverage profile unsustainable. Fitch believes the problem was exacerbated by the lack of clear differentiation between the 7-Eleven convenience stores and fast-food and medium-sized restaurants in Indonesia.
The business model and risks of the 7-Eleven stores were similar to that of restaurants, as the chain offered ready-to-eat food and beverages with seating and free Wi-Fi.
As a result, the chain faced strong competition from fast-food restaurants and traditional food vendors, which are still highly popular among Indonesian consumers. This business risk profile is significantly different from that of other mini markets and convenience stores, such as Alfamart and Indomaret, which put greater emphasis on groceries and have a bigger network across the country.
The 7-Eleven stores also had higher rental expenses than other convenience stores because the chain offered seating space, which required larger store areas. In addition, most of the 7-Eleven stores in Jakarta were located in prime areas that commanded high rental rates and exposed the company to steep rental revisions when leases expired.
Modern Internasional’s rental expenses increased by around 28% in 2016 despite the large number of store closures in 2016 and 2015.