Ramayana Lestari Inconsistent Sales Strategy

The supermarket division contributed c.31% of Ramayana Lestari’s (Ramayana) total sales in 1Q16. Its gross and operating margins improved 340bps and 180bps QoQ respectively in 1Q16 as Ramayana terminated the trader wholesale programmes in Dec 2015. However, Ramayana plans to restart the programmes to prop up sales despite the fact that the programmes are usually loss-making activities.

Based on our observation, most of its SPAR supermarkets (a middle-income design concept) are in close proximity to wet markets (low-income communities), giving rise to a design concept mismatch between its supermarkets and target customers.

The department store division contributed c.69% of Ramayana’s total sales in 1Q16. We are concerned that Ramayana was the only one that recorded an operating loss for its department store division in 1Q16, when compared to Matahari Department Stores (LPPF IJ, BUY, TP: IDR19,900) and Mitra Adiperkasa (MAPI IJ, SELL, TP: IDR3,000).

Remain NEUTRAL
Considering the inconsistency of its supermarket division’s strategy and a decline in its department store’s performance in 1Q16, we remain NEUTRAL on Ramayana. Key upside risk to our call is a faster-than-expected economic rebound leading to higher disposable income for the low-income segment, which is its target group. Key downside risk would be lower-than-expected same-stores sales growth (SSSG).

Supermarket division
The supermarket division contributed c.31% of Ramayana’s total sales in 1Q16. Its gross and operating margins improved 340bps and 180bps QoQ respectively in 1Q16 as Ramayana terminated the trader wholesale programmes in Dec 2015. However, Ramayana plans to restart the programmes to prop up sales despite the fact that the programmes are usually loss-making activities. Furthermore, we believe its supermarket division is losing its competitive edge to more agile minimarkets such as Sumber Alfaria Trijaya (AMRT IJ, NEUTRAL, TP: IDR570).