OREANDA-NEWS. Convenience stores will lead retail modernisation in Indonesia in 2016, says Fitch Ratings in a new report. However, Indonesia's modern grocery retailers will grow at a slower pace than in 2014-2015. This is due to fewer store openings and a slow-down in same-store sales growth.

Fitch's outlook for Indonesian grocery retailers is stable despite weaker consumer confidence, reduced purchasing power and rising competition among retailers. Yet growth in modern retail is inevitable in light of the continued investment in the sector, as the Indonesian consumer continues to evolve. The traditional markets still dominate, but their share of total sales will slide.

Hypermarkets have led the growth in modern trends, which has been a function of their expansion in major urban centres. However, the pace of growth from this segment will be held back by impending government regulation designed to limit the spread of modern retail in favour of independent outlets, and limited growth in their premium food and drink offering - which are more sensitive to the price-conscious consumer. Convenience stores, unlike hypermarkets, are not constrained by space and have also expanded into urban areas - features that would reinforce their growth in 2016.

Major food retailers have solid market positions with which to weather the macroeconomic challenges and cost pressures. The agency believes that the industry's long-term fundamentals remain solid, with under-penetration of modern retail and a growing middle class.

Fitch expects the leverage of retailers such as PT Sumber Alfaria Trijaya Tbk (Alfamart, AA-(idn)/Stable) and PT Matahari Putra Prima Abadi Tbk (not rated) to remain stable in 2016. The former will continue its debt-funded expansion while the latter will continue to distribute excess cash as dividends - as capex will remain low. The EBITDA margin of these two companies will also be stable despite cost pressures, benefiting from their solid market shares.

The report is available at www.fitchratings.com.