FOCUS | XXX

Company Update | XX XXXXX 2013

FOCUS | Cigarette
Sector Update | 10 December 2018

Exploring the Grassroots: Cigarette Retailer Program

Mandiri Sekuritas Analyst

Riyanto Hartanto
We recently observed three cigarette retailer programs - namely Djarum Retail
riyanto@mandirisek.co.id Partnership (DRP), Sampoerna Retail Community (SRC), and Gudang Garam
+6221 5296 9488 Strategic Partnership (GGSP) - to observe their branding innovations in the
Lakshmi Rowter
grassroots. Our findings suggest that enhancing community-based programs is
+6221 5296 9549 instrumental in keeping customer loyalty for company-sponsored GT outlets,
lakshmi.rowter@mandirisek.co.id which in turn will increase familiarity to the sponsoring cigarette brands.
Adrian Joezer
+6221 5296 9415
It’s all about creating a stronger brand equity… Diversifying branding strategies have
adrian.joezer@mandirisek.co.id been priorities for cigarette companies, especially following the 2012 Government
regulation that limits cigarette ads, promotion, and sponsorship. Though restricting, it still
offers opportunities for cigarette companies to innovate creatively. Going down to GT and
Sector: Cigarette communities was one way to do it, in the form of assisting small retailers to keep their
businesses in shape in return for branding emblems.

…by turning GT owners as branding agents. Based on our survey, cigarette companies
OVERWEIGHT expect 2 things done by GT outlets: prominent product display at the racks and notable
banners at the store fronts. HMSP and Djarum have a stricter rule in terms of exclusive
point-of-sale displays (Fig 3 and 8), while GGRM prefers the installation of banners with
Stocks Recommendation
cigarette brands inside and outside the shop (Fig 5 and 6). In our survey, 3 out of 4 stores
are located <150 meters from main streets and school areas. As most of the retailers are
Ticker Recom Price (Rp) TP (Rp) located in mid-low urban areas, all stores in the partnership program are allowed to sell
HMSP IJ Buy 3,750 4,000 cigarettes on a stick basis, just like a typical GT outlet. We believe the expansion of
GGRM IJ Buy 82,800 94,050 cigarettes sold per stick basis sales point will be beneficial for the industry given the price
Source: Mandiri Sekuritas sensitivity of target customers and the occasional down-trading practices.

In return, cigarette companies also give incentives to their retail partners... Cash
payment and free cigarette packs are the most common incentives in order to start the
partnership.
…continue to next page

FIGURE 1. SUMMARY OF MANSEK VISIT TO TOBACCO RETAIL COMMUNITIES

Angle GGSP SRC DRP
‐ Prominent HMSP display
Notable banners & display
Promotion racks Easily-seen Djarum display
inside and outside the
strategy ‐ Notable banners outside racks
shop
the shop
‐ Better display of other
products in stores
‐ Better purchase price of ‐ Re-painting jobs
‐ Free tables and chairs
GGRM cigarettes ‐ Yearly bonus & incentives
Retailer benefits ‐ Yearly bonus & incentives
‐ Yearly bonus & incentives ‐ Free cigarette cartons
‐ Annual gatherings,
‐ Promotional merchandise ‐ Promotional merchandise
luncheons
‐ Promotional merchandise
Sales target No clarity on sales target
Strategic location; All surveyed stores are located < 150 meters from busy streets and
Location
schools
Source: Mandiri Sekuritas survey

Please see important disclosure at the back of this report Page 1 of 5

FOCUS | Cigarette
Sector Update | 10 December 2018

We understand SRC officially allocates Rp1.5mn/year for each GT outlet, though in practice
things have varied based on qualitative assessment: one gets Rp1.5mn/6-months, while
another gets Rp1mn/year. In GGSP’s scheme, members get the benefit of lower purchase
price of GGRM cigarettes in addition to promotional merchandises. Meanwhile, DRP
members are equipped with outlet decoration budget by Djarum, e.g. wall re-painting.

…without any real sales target. In return for those benefits, we do not see any binding
sales target set by the sponsoring companies. In its Facebook page, the SRC program
actually has 3 stages of awards, namely Silver, Gold, and Premium; meanwhile, GGSP and
DRP do not have any clear performance index. However, these members shared that
incentive benchmarks are not explained very well, making them unaware why some
succeed and some do not. We believe a retailer partnership program is based more on
interpersonal relationship rather than professional business relationship between GT
owners and salespeople. Hence, without any binding sales target, this will eventually build
GT owners’ trust and obtain their loyalty, which will benefit HMSP, GGRM, and Djarum in
the long run.

Case study: Dig deeper into SRC

 HMSP started SRC back in Medan around 2008 when GT owners (and friendly
parties to HMSP’s salespeople on the ground) successfully increased their sales
after improving their outlet into a more presentable community format store (GT
into small coffee shop). People around the area started to notice the difference
and the format store became the top of mind destination to shop and relax.
 Since then, HMSP has tried to replicate the same concept nation-wide. According
to our survey, HMSP initially funded the renovation for stores that join SRC, then
evolved to the disbursement format up to Rp1.5mn/year since 2016. The
membership benefits are networking events between cigarette traders, guidance
for store arrangement, and incentives.
 Currently, SRC has become the biggest retailer community in Indonesia with more
than 60,000 stores nationwide as of Sep’18. During our talks with SRC owner, we
learnt that the stellar growth within 10 years was due to the aggressive targets of
HMSP’s on-the-ground salespeople, wherein 1 salesperson was assigned to
acquire 5 stores in 3 months when the program was just launched.

But, why do cigarette players need to build this community model? With more than
3.1mn GT outlets in Indonesia and more than 80% of cigarette sales distribution through
GT, we believe cigarette players have to develop their biggest distribution channel as well.
Furthermore, according to the Indonesia Public Health Association (IAKMI), the prevalence
of adult smokers has increased during 2001-2015 from 31.5% to 36.3%. The 5% hike was
mostly dominated by the lowest income group (Q1) and second lowest income group (Q2),
which are the main customers for these retailer communities. Hence, by using these
traditional retailers as their branding strategy, cigarette companies will effectively bring
their products much closer to their customers and hence create stickiness to their brand.
Looking forward, if the Indonesian Government follows other countries that fully ban
cigarette ads and promotion, we believe this retailer program will help big players maintain
their brand equity.

Please see important disclosure at the back of this report Page 2 of 5

FOCUS | Cigarette
Sector Update | 10 December 2018

FIGURE 2. HISTORICAL A&P TO SALES RATIO OF GGRM AND HMSP

5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

3Q17

1Q18

3Q18
GGRM Transportation, ads & freight expenses HMSP A&P expenses

Source: Company

FIGURE 3. HMSP HAS A STRICTER RULE INI TERMS OF CIGARETTE FIGURE 4. …AND ADVERTISING TYPE
DISPLAY RACK…

Source: Mandiri Sekuritas survey Source: Mandiri Sekuritas survey

Please see important disclosure at the back of this report Page 3 of 5

FOCUS | Cigarette
Sector Update | 10 December 2018

FIGURE 5. GGRM PREFERS INSTALLATION OF BANNERS WITH FIGURE 6. …AND INSIDE THE SHOP
CIGARETTE BRANDS OUTSIDE…

Source: Mandiri Sekuritas survey Source: id.nearplace.com

FIGURE 7. DJARUM RETAIL PARTNERSHIP FIGURE 8. DRP’S POINT OF SALES

Source: id.nearplace.com Source: id.nearplace.com

Please see important disclosure at the back of this report Page 4 of 5

 Mandiri Sekuritas A subsidiary of PT Bank Mandiri (Persero) Tbk
Menara Mandiri Tower I, 25th floor, Jl. Jend. Sudirman Kav. 54 – 55, Jakarta 12190, Indonesia
General: +62 21 526 3445, Fax : +62 21 527 5374 (Equity Sales)

RESEARCH
Adrian Joezer Head of Equity Research, Strategy, Consumer adrian.joezer@mandirisek.co.id +6221 5296 9415
Tjandra Lienandjaja Deputy Head of Equity Research, Banking tjandra.lienandjaja@mandirisek.co.id +6221 5296 9617
Ariyanto Kurniawan Automotive, Coal, Chemical ariyanto.kurniawan@mandirisek.co.id +6221 5296 9682
Kresna Hutabarat Telecom, Media kresna.hutabarat@mandirisek.co.id +6221 5296 9542
Laura Taslim Retail, Plantation laura.taslim@mandirisek.co.id +6221 5296 9450
Priscilla Thany Banking, Building Material priscilla.thany@mandirisek.co.id +6221 5296 9569
Lakshmi Rowter Healthcare, Consumer lakshmi.rowter@mandirisek.co.id +6221 5296 9549
Robin Sutanto Property robin.sutanto@mandirisek.co.id +6221 5296 9572
Edbert Surya Transportation, Research Assistant edbert.surya@mandirisek.co.id +6221 5296 9623
Silvony Gathrie Research Assistant silvony.gathrie@mandirisek.co.id +6221 5296 9544
Riyanto Hartanto Research Assistant riyanto@mandirisek.co.id +6221 5296 9488
Henry Tedja Research Assistant henry.tedja@mandirisek.co.id +6221 5296 9434
Leo Putera Rinaldy Chief Economist leo.rinaldy@mandirisek.co.id +6221 5296 9406
Aziza Nabila Amani Research Assistant aziza.amani@mandirisek.co.id +6221 5296 9651

INSTITUTIONAL SALES
Silva Halim Head Institutional Equities silva.halim@mandirisek.co.id +6221 527 5375
Andrew Handaya Institutional Sales andrew.handaya@mandirisek.co.id +6221 527 5375
Feliciana Ramonda Institutional Sales feliciana.ramonda@mandirisek.co.id +6221 527 5375
Henry Pranoto Institutional Sales henry.pranoto@mandirisek.co.id +6221 527 5375
Kevin Giarto Institutional Sales kevin.giarto@mandirisek.co.id +6221 527 5375
Mirna Santikara Salim Institutional Sales santikara.salim@mandirisek.co.id +6221 527 5375
Sharon Anastasia Tjahjadi Institutional Sales sharon.tjahjadi@mandirisek.co.id +6221 527 5375
Stevanie Rusli Institutional Sales stevanie.rusli@mandirisek.co.id +6221 527 5375
Talitha Medha Anindya Institutional Sales talitha.anindya@mandirisek.co.id +6221 527 5375
Kusnadi Widjaja Equity Dealing kusnadi.widjaja@mandirisek.co.id +6221 527 5375
Edwin Pradana Setiadi Equity Dealing edwin.setiadi@mandirisek.co.id +6221 527 5375
Jane Theodoven Sukardi Equity Dealing jane.sukardi@mandirisek.co.id +6221 527 5375
Michael Taarea Equity Dealing michael.taarea@mandirisek.co.id +6221 527 5375

RETAIL SALES
Andreas M. Gunawidjaja Head Retail Equities andreas@mandirisek.co.id +6221 526 9693
Boy Triyono Plaza Mandiri boy.triyono@mandirisek.co.id +6221 526 5678
Hendra Riady Menara Sudirman hendra.riady@mandirisek.co.id +6221 5297 1581
Hendra Riady (Pjs) Pondok Indah hendra.riady@mandirisek.co.id +6221 2912 4005
Linawati Surabaya Linawati@mandirisek.co.id +6231 535 7218
Ruwie Medan ruwie@mandirisek.co.id +6261 8050 1825
Indra Mas'ari Bandung indra.mas’ari@mandirisek.co.id +6222 426 5088
Bambang Suwanto Malang bambang.suwanto@mandirisek.co.id +62341 336 440
Widodo Solo widodo@mandirisek.co.id +62271 788 9290
Yogiswara Perdana Yogyakarta yogiswara.perdana@mandirisek.co.id +62274 560 596
Aidil Idham Palembang aidil.idham@mandirisek.co.id +62711 319 900
Yuri Ariadi Pontianak yuri.ariadi@mandirisek.co.id +62561 582 293
Achmad Rasyid Bandar Lampung achmad.rasyid@mandirisek.co.id +62721 476 135
Ravianda Firmanda Bali ravianda.firmanda@mandirisek.co.id +62361 475 3066

INVESTMENT RATINGS: Indicators of expected total return (price appreciation plus dividend yield) within the 12-month period from the date of the last
published report, are: Buy (15% or higher), Neutral (-15% to15%) and Sell (-15% or lower).

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ANALYSTS CERTIFICATION: Each contributor to this report hereby certifies that all the views expressed accurately reflect his or her views about the
companies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are not and will not be
influenced by any part or all of his or her compensation.