Investors

Extraordinary Risk 

The Covid-19 transmissions in Indonesia show a declining trend in early 2022, but right at the end of July 2022, an increase in active Covid-19 cases again occurred. According to data released, there has been a three-fold increase in cases or the equivalent of 6,000 cases in just one month. This condition was prone to affect retail sales in Indonesia, including Matahari’s performance.

Mitigation

1. During the year, the Company closely monitored the consistency of adherence to Covid-19 health protocols in Support Centers and stores to ensure a safe and healthy shopping experience for customers, while also conducting continuous business contingency plan and assessment over the Company’s operations for time to time The Company also made sure that its employees received complete vaccinations. At the time of the compilation of this Annual Report, 100% of the Company who had been vaccinated. Currently, the Company continues to monitor and encourage all employees to receive further/booster vaccinations, and
2. The Safe Office Management updated company policies from time to time throughout the pandemic, adjusting to regulatory development and restriction level in different areas where Matahari stores operate. Policy updates concerned the re-opening of Matahari stores and work from office for employees with certain restrictions, business travels and other SOPs, campaign/ training on Covid-19 health protocols for all employees, and others.
3. The Company had 28 incidental inspections by Covid-19 Response Taskforce and the local government teams. The visits found 100% compliance with Covid-19 health protocols at all entire visited Matahari stores.

Macroeconomic and Industry Risk 

In general, economic growth drives rising wages. Thus, the number of consumers who have sufficient income to spend on our product offering increases, and demand may vary. The customer preferences also change rapidly, with new trends emerging.

Mitigation

As customer-centric company, Matahari has a flexible business model and initiatives to rapidly adapt its merchandising and operations to the changing customer needs and changing macroeconomic or industrial situation. Matahari maintain good relationships with our diverse supplier base, giving us the flexibility to adjust our merchandising strategy to respond to customer preference changes, emerging new trends, and macroeconomics conditions.

Productivity Risk 

• The Company’s financial results are linked to its stores’ productivity, measured by two indicators, i.e., SSSG and merchandise sales per square metre of retail space.
• SSSG is driven by the store refurbishment program, improvements in the merchandise mix, and the rising income of the target market. The Company’s SSSG from 2017 to 2021 was an average -27.7% and 20.8% in 2022.
• The sales per square metre are subject to the Indonesian economy’s condition, products’ price point mix, the merchandise attractiveness, as well as the stores’ location, appearance, and operation. Marketing effectiveness and adverse publicity can also affect merchandise sales. The retail space in the metric is the aggregate square metres at the period’s end, not adjusted for any area under refurbishment. Gross sales per square metre of retail space in 2022 were Rp13,162.1 thousand compared to Rp11,364.7 thousand in 2021.

Mitigation:

To mitigate the risk, we closely monitor the underperforming stores, analyse the causes of the weakness, and take necessary actions. The actions, among others, are store refurbishment, merchandise optimisation, and staff productivity improvement. The Company refurbished 2 stores in 2020 and 4 stores in 2021. Following those efforts, the underperforming stores could be closed, modified, or replaced by new stores in other potential locations. In 2021, we have closed 11 stores.

Expansion Risk 

Opening a new store may result in the increase in the Company’s expenses, such as rent, salary and wages, depreciation, energy, distribution and insurance expenses. Aside from the mall’s traffic, a new store’s success also depends on synergies from integration with existing operations and optimal merchandise mix and pricing that match consumers’ preferences.  

New stores tend to be less profitable in the early years than more mature stores due to lower sales productivity and most operating expenses fixed. It takes time for a new store to recoup the capital investment, which is within 3-4 years. It even takes 4-5 years for the new store’s productivity, net revenue and adjusted EBITDA margin to reach the average level of a comparably sized store.

Mitigation

The Company identifies and evaluates potential new sites on an ongoing basis to ensure a robust pipeline of new stores. There are financial hurdles that need to be achieved to open a new store. With around two-third sales coming from the consignment vendors, Matahari has the negative working capital to mitigate the risk. The Company takes measures to integrate new stores and develop synergies with the existing operations. In addition, the Company also aims to ensure that each new store has an optimal merchandise mix that matches local consumer preferences and needs.

Merchandise Mix Risk 

Net revenues on consignment sales made up a significant proportion of the total net revenues, 38.8% in 2021 and 42.4% in 2022 which were derived from the guaranteed minimum gross profit amount and a consignment margin based on consignment sales, which stood at 31.5% in 2021 and 31.4% in 2022.

In the meantime, revenue from the Company’s Direct Purchase (DP) goods is a result of its sales performance and prices. The prices are determined by several factors, including the cost of sales, supplier terms with overall supply and demand for retail consumer products in Indonesia, market, seasonality, inventory volume, inventory age, fashion and consumer trends, promotions,
and manufacturer recommendations.

Mitigation

The Company has the opportunity to adjust the merchandise margins when we enter into an agreement with a vendor or renew the contract, which typically occurs on a biannual basis. Management believes that the mutually symbiotic relations with consignment vendors and the strength of the Company’s brand will ensure the consignment margins to remain stable for the foreseeable future.

Meanwhile, given the considerable diversity in our DP goods range, the pricing strategy for a specific product does not significantly impact the Company’s net revenue. However, sales and profitability in a given period may be materially influenced by discounts, rebates, or other national level promotional activities designed to increase market share and/or clear aged inventory. The Company has the flexibility to adjust the price and gross profit margin on DP goods.

Sales performance of all brands that we have must also meet the expectation on a store-by-store basis and overall Company’s performance. The Company regularly reviews each brand’s performance and may have to take necessary actions, such as discontinuing the brand.

Operating Expenses Risk 

The Company’s main components of operating expenses are rent, depreciation, employee costs, and marketing. As the business grows, operating expenses may increase in line with the increased volumes or due to other factors such as inflation.

Operating expenses as a percentage of merchandise sales decreased from 24.7% in 2021 to 22.6% in 2022.

The Company’s rent expenses were Rp178.1 billion in 2021 and Rp525.4 billion in 2022, contributing 7.0% and 18.7%, respectively, of the Company’s operating expenses for the
corresponding periods.

The Company’s depreciation and amortisation expenses are derived from fixed assets, right- of-use assets and software. Depreciation and amortization expenses were Rp913.0 billion in 2021 and Rp776.5 billion in 2022, contributing 35.9% and 27.6% respectively, of the Company’s operating expenses for the corresponding periods. Salaries and allowances as a percentage of merchandise sales were 7.9% in 2021 and 6.8% in 2022. The decrease was primarily due to natural attrition, contract expiration, and the multiskilling project. 

Marketing expenses (predominantly promotional and advertising costs in digital advertising media, SMS, etc) decreased by 21.5% in 2021 and increased by 59.5% in 2022.

Mitigation 

During the pandemic, the Company was keeping strict control over non-essential expenses. Matahari maintains the growth in operating expenses at manageable levels through rigorous cost control programs, including leveraging the bargaining power to negotiate better prices with suppliers.

With regards to occupancy cost, the Company typically entered into long-term contracts to reduce the risks associated with rent increases. The Company also negotiated with the landlords, aiming for a more flexible rental scheme and lower charges to reduce the pandemic impact.

In terms of labor components, the Company aimed to ensure the competitive wages compared to other retailers. Matahari managed to optimise the headcount requirement with the focus on the power brands, stores with healthy profitability, and single warehouse.

Various initiatives like multi-tasking, labor scheduling, multi-shifts and others enable Matahari to operate with a lower headcount than in the past. Having said that, the Company would be looking at selectively increasing its headcounts at a lesser velocity than sales recovery to maintain operating leverage or in an agile way to leverage seasonal opportunities. That said, the Company will always maintain the necessary minimum to provide the best service to customers. In addition, Matahari has also replaced the security staff in Matahari stores with Prevention Associates (PA), who were fewer in number but still delivered adequate internal control.

The Company has maintained a low level of inventory shrinkage (the loss of merchandise for any reason between the point of delivery from suppliers and point of sale) through tight inventory control. The Company also deployed an in-house distribution team, equipped with an electronic article surveillance system for high-priced merchandise. The inventory shrinkage for consignment goods was beyond the Company’s undertaking.

Risk of Seasonality 

Matahari stores experience sales seasonality several times in a year, mainly linked to Eid al-Fitr, Chinese New Year, Christmas, school holidays and the Back-to-School moments in June-July. Because the dates of several holidays change from year to year, the sales peak and results in a given interim financial period may or may not be directly comparable to results from the preceding interim period or to the corresponding period in prior years. The number of pay periods spanned by a particular peak season may also drive sales higher.

Mitigation 

To tap the seasonal sales momentum, such as Eid al-Fitr, Chinese New Year, Christmas, school holidays and the Back-to-School event, the Company secures the seasonal merchandise well in advance. Moreover, to maximise sales traction, the Company activate specific promotions and advertising linked to those main events and holidays.

The Company also takes thoughtful moves to anticipate the high store traffic during the events by having more seasonal staff in stores and sufficient points of sales.

Risk of Geographical Diversity 

Matahari stores in Java contributed a significant share of our merchandise sales (56.7% in 2021 and 57.9% in 2022), while the remaining stores are located outside Java, spread across the country.

Mitigation 

Matahari’s logistic capabilities manage to reach out to the farthest area in Indonesia, such as Aceh and Papua. Meanwhile, to reach out to our customers in areas that we do not have any physical store presence yet, the Company provides e-commerce platform, Matahari.com, and official store in marketplace.

Competition Risk 

Indonesia’s retail industry is becoming increasingly sophisticated in several areas: merchandise mix and quality; store location, design, and ambience; inventory; price; customer service; credit availability; and advertising. The Company is presently Indonesia’s largest department store retailer targeting the middleincome segment. However, the Company faces growing competition from new entrants to the market, including international operators, existing department stores, and specialty retailers. Despite high barriers to entry in our target market, the actions taken by our competitors as well as our proactive actions and responses may impact the Company's performance. In particular, the more intense competition in Java also yields lower Merchandise Sales per square meter of retail space than the total average across all regions.

Mitigation 

To keep pace with evolving trends and customer preferences, the Company has collaborated with several global fashion brands as their distributor in Indonesia. To minimise the risks associated with such initiatives in the future, the Company focuses more on data-driven pilots, with small test rollouts leading to more nationwide
successes and fewer costly exits.

The Company’s business model is moving toward omnichannel capabilities, which combines up-to-date online sales channels with our extensive store network, which is also designed to deliver added value to sustain our sales growth and enhance our customers’ shopping experience.

In 2022, our non-store channels became more active during tight restrictions. We actively traded in our social commerce platforms and official stores in marketplaces.
The Company also continuously improved its offering to offline and online customers, especially loyalty members, through the revamped loyalty program, Matahari Rewards.
To mitigate the impact of competition intensity in certain areas on lower productivity, the Company regularly reviews the stores’ condition and the merchandising mix
and pricing in each store. In the meantime, the Company continuously explore the untapped potential area to grow.

Bank Borrowing and Interest Rates Risk 

The Company enters into loan agreements and credit facilities for working capital purposes. Matahari may occasionally withdraw the loan.

Mitigation 

After fulfilling the working capital needs, Matahari will repay any withdrawn loan as quickly as possible to minimise the cost incurred. The Company ended the year 2022 with zero bank loan. In the general course, the Company relies on trade payable for the purchase of merchandise from suppliers.

Security Risk 

At the store level, the Company has a risk exposure related to the security of its merchandise. 

We have mitigated these risks by installing an advanced Electronic Article Surveillance system, including Closed Circuit Television (CCTV), pedestals, and other store security systems. These measures allow for more effective control over operations by enabling enhanced monitoring in selected stores with a high-risk profile.  

Mitigation

The Company has mitigated these risks by installing an advanced Electronic Article Surveillance system, including Closed Circuit Television (CCTV), pedestals, and other store security systems. These measures enabled enhanced monitoring in selected stores with a high-risk profile, allowing for more effective control over operations.

Cyber Security Risk (IT) 

The Covid-19 pandemic has accelerated the Company’s digital transformation process, both in terms of sales and operations. Given the rapid development, the Company carried out assessment on data/information security and cyberattack risk. Moreover, the Company also conducts a Disaster Recovery Test (DR Test) once a year at minimum to ensure the
effectiveness of the system function

Mitigation 

In 2022, the National Cyber and Crypto Agency evaluated the Company’s information security preparedness level (Information Security Index/KAMI), based on completeness
and maturity, identifying the result as “Adequate”. According to Environmental Risk and Mitigation Matahari, the climate change has a significant impact that indirectly
affects the Company’s economic performance. The increasing intensity and frequency of extreme weather events, such as excessive rain or extreme dry season, has caused floods, landslides and fires, as well as rising temperatures and rising sea levels, which may negatively affect the Company’s operation.

Moreover, Matahari has stores throughout Indonesia that is geologically in the path of an active earthquake as it is surrounded by the Pacific Ring of Fire. In addition, Indonesia is at the confluence of three continental plates, namely Indo-Australia, Eurasia, and the Pacific which are prone to various natural disasters, such as volcanic eruptions, earthquakes, and tsunamis. This condition may disrupt Matahari’s business operations.

Environmental Risk  & Mitigation  

The increasing intensity and frequency of extreme weather events, such as excessive rain or severe dry season causing floods, landslides, fires, rising temperatures, and rising sea levels, may negatively affect the Company’s operation. Moreover, Matahari has stores across Indonesia, which is geologically prone to various natural disasters, such as volcanic eruptions, earthquakes, and tsunamis. Therefore, this condition may disrupt Matahari’s business operations. 

Matahari has regularly updated the risk mapping of Matahari’s business areas related to environmental risks so that it does not significantly affect Matahari’s operations. This risk assessment helps the Company to value the insurance needed to support the operation sustainability. Matahari has also established a Disaster Recovery Centre (DRC), managed by a third party. All hardware and software have standalone duplicates and will instantly and seamlessly replace the main system in a catastrophic event. The Company conducts Disaster Recovery Test (DR Test) twice a year.