Furniture Retailing in Indonesia Indonesia’s wooden furniture retail industry

155 • Review and cross-checks of all sources and independent analysis to build all final estimates including the size, share, drivers and future trends of the wooden furniture market in preparation for the final industry overview report. Forecasting bases and assumptions Euromonitor based the report on the following assumptions: • The Indonesian and US social, economic, and political environment is expected to remain stable in the forecast period • There will be no external shock, such as financial crisis or raw material shortage that affects the demand and supply of wooden furniture in Indonesian and the US during the forecast period • Key market drivers such as increase in per capita disposable income, rapid urbanization, low per capita consumption compared to developed countries, rising health awareness, increasing demand for high-end production, increasing demand for Indonesia wooden furniture, and improved distribution network are expected to boost the development of the Indonesian and US wooden furniture market

A. Furniture Retailing in Indonesia Indonesia’s wooden furniture retail industry

Indonesia’s wooden furniture retail industry is influenced by the country’s strong historical traditions in woodworking and the appreciation of handicraft products. The country is home to a wide range of retailers from storefront domestic workshops to chain stores in large cities and provinces. Industrial districts like Jepara and Semarang are known for hosting a vibrant array of such wooden furniture stores in Indonesia. Larger cities and provinces like Jakarta, Surabaya, Jepara and Bali are home to larger wooden furniture stores. Stand-alone stores like Thema Home in Surabaya and Beautiful Homes in Jepara are examples of larger wooden furniture retail outlets in Indonesia. These retail outlets carry different types of wooden furniture products across different usage categories. e.g. office, kitchen, hallway, children, dining, living room furniture, etc.. There are also chain store retailers with two or more stores across Indonesia. Informa, Vinoti Living and Malinda Gallery are among chain-stores retailers that are spread out across Indonesia. These stores usually carry wooden and non-wooden furniture items. Growing domestic retail market for wooden furniture as economic growth spurs private consumption Indonesia is one of the world’s top producers and exporters of wooden furniture. While most of the wooden furniture produced in Indonesia were previously earmarked for export, rapid economic growth and rising affluence among Indonesian consumers have resulted in a growing domestic retail scene. The preference for wooden furniture is mainly due to the visual appreciation of wood products in homes. Wooden furniture will continue to gain popularity locally given their perception as high-end furnishing and popularity with interior designers in Indonesia. 156 Furniture retail industry in Indonesia is diverse and varied The furniture retailing industry in Indonesia is widespread and diverse, ranging from low cost, mass produced furniture to custom imported luxury brands. Retailers in Indonesia favor mass-produced, low to medium priced wooden furniture that caters to the masses domestically. Separately, a smaller pocket of luxury consumers also allows for retailers to import handcrafted brands from the US and Europe giving the retail market a wider range of furniture to choose from. The increase in retail furniture imports not only presents new opportunities to foreign brands but also provides local brands with the necessary experience to compete domestically. Strong seasonal trends observed in furniture retail for Indonesia Furniture retailing in Indonesia benefits from seasonality, with profitable cyclical trends being observed prior to the fasting month of Ramadan and the Idul Fitri holidays. The festive season encourages consumers to spend and upgrade their home furnishings and decorations. Significant promotions are also offered during the festive season to encourage home makeovers furniture purchases. Strong government support to develop and expand the local furniture retail industry The Indonesian government is increasingly active in extending support to the domestic furniture industry in an effort to further develop this retail sector. The IFEX Indonesia Furniture Exhibition is one example of successful furniture craft shows supported by the Ministry of Trade. Such furniture craft shows highlight Indonesian wooden furniture to local and international consumers and help promote furniture retail businesses. On the regulatory front, the Indonesian Government has also been proactive in addressing specific issues and constraints pertaining to the domestic wooden furniture industry. For example, a Voluntary Partnership Agreement between Indonesia and the EU became operational in November 2016. In addition to promoting legal trade, a host of other measures to ensure compliance with EU timber regulations are also enforced. Retail consumers benefit from the higher standards adopted by the domestic wooden furniture industry in compliance with the prevailing regulations. Table 1: Wooden Furniture Retailing in Indonesia, 2014-2021 Description Units 2014 2015 2016 2017 2018 2019 2020 2021 Indoor Furniture IDR bn 25,604 26,919 28,040 29,134 30,188 31,208 32,181 33,147 Wooden Indoor Furniture IDR bn 4,717 5,008 5,258 5,575 5,924 6,337 6,785 7,271 Outdoor Furniture IDR bn 384 403 420 437 452 468 482 497 Wooden Outdoor Furniture IDR bn 153 161 168 177 186 198 211 225 Total Retail Furniture IDR bn 25,988 27,322 28,460 29,571 30,641 31,676 32,664 33,644 Total Retail Furniture Growth NA 5.1 4.2 3.9 3.6 3.4 3.1 3.0 Total Retail Wooden Furniture IDR bn 4,871 5,169 5,426 5,752 6,111 6,535 6,996 7,496 Total Retail Wooden Furniture Growth NA 6.1 5.0 6.0 6.2 6.9 7.0 7.1 Note: Forecast are based on constant 2016 prices Source: Euromonitor Passport Home and Garden 2016, Retailing Indonesia 2016 Wooden furniture retail growth outperforms the overall furniture industry The wooden furniture retail market in Indonesia was worth IDR 4,871 billion in 2014. By 2016 the market grew to IDR 5,426 billion and is expected to reach IDR 7,496 billion in 2021. The growth of the retail wooden furniture market out performed the overall furniture retailing industry within the same period. Over the forecast period, the wooden furniture retail market is likely to benefit from the lower cost of serving customers arising from e-commerce, improving logistics and warehousing best practices. Smaller provinces and cities are expected to embrace online shopping as a preferred method thus giving 157 rise to the need for innovation in packaging, and marketing of wooden furniture products. Online retail sales to overseas customers are also expected to contribute to the growth in the overall retail sales in Indonesia. The expected growth in wooden furniture retail sales is also attributed to consumer preferences towards wooden products. Based on Euromonitor’s trade interviews, demand for wooden furniture items are increasing as a result of better design and functionality. The Government is also engaged in the construction of low-cost housing which are partially furnished with wooden furniture items. The Jokowi administration had publicly disclosed its intention to build 1,000,000 of such homes. The buyers of these low-cost, partially-furnished houses are likely to purchase additional furniture, thereby contributing to the growth of wooden furniture retail sales in Indonesia. Indonesia’s top wooden furniture retailers influence growth domestically The top five wooden furniture retailers which focus on low-to-mid priced items account for approximately 19.0 of wooden furniture sales or approximately IDR 1,019 trillion in 2016 domestically. The wooden furniture retail scene is fragmented with many small establishments catering to the low-to-mid priced offerings. Such small, independent family owned stores can be seen along the streets of Jepara and Semarang and are typically not found in larger cities like Jakarta and Surabaya. Chain store retailers on the other hand would fashion their products in prominent city centers. Operating anchor stores in larger malls and shopping centers is also a common practice for such chain-store retailers in Indonesia. The top five ranked retailers may be seen operating through stand-alone or independent large retail outlets along crowded areas such as Jl. Proklamasi in Jakarta as well as retail spaces in shopping malls like Tunjungan Plaza in Surabaya. The Company’s new upcoming independent store, Thema Home, features medium to high end furniture offerings, capturing the demand for export-grade furniture products attributable to the rising affluence of the middle-class. The Group is hoping to expand across the country with other establishments in the coming months. Based on the Company’s sales of branded furniture products in Indonesia, which amounted to IDR 36 billion in 2016, it was not ranked among the top five wooden furniture retailers in Indonesia. Euromonitor noted that while the Company generated IDR306 billion of sales from the manufacturing segment in Indonesia in 2016, a large portion of its sales from the manufacturing segment in Indonesia was to commercial or non-retail customers such as supply of furniture to hotels or housing projects. Based on Euromonitor’s estimate, the wholesale wooden furniture market amounted to approximately IDR.4.5 trillion in 2016. B. Furniture Retailing in the US Robust growth observed in consumer expenditure on furniture in the US Consumer expenditure on furniture and furnishings, carpets and other floor coverings generally observed a robust growth of 3.6 over the historic period from 2014 to 2016. This was in part bolstered by the penchant for home improvements and an improving housing sector since the subprime mortgage crisis in 2009. As highlighted above, Euromonitor’s trade interviews suggest the rising popularity of wooden furniture for home furnishing and remodeling projects. Interior designers and consumers alike may opt for wooden furnishing items for a classier natural home outlook. On the retailing front, Omni-Channel retailing is prevalent when compared to the Indonesian retailing scene. Consumers continue to look online for information, ideas and purchases. Online retailing is growing and will continue to cannibalize into brick-and-mortar sales. 158 Cost sensitive furniture retail in the US As an important cost control practice, furniture retailers take global sourcing seriously when deciding on their purchasing practices. Factors such as the cost of labour and the availabilites of raw materials. Factors such as cheaper labor and raw materials in other countries will encourage sourcing for raw materials and finished goods in those countries. Furniture retailers are increasingly sourcing furniture directly from manufacturers abroad. Countries such as the People’s Republic of China, Indonesia, Canada, Mexico and Vietnam are typical import partners. The use of dedicated offshore manufacturers for US branded furniture is also a dominant trend. Wooden furniture is mostly imported into the US from third party manufacturers The wooden furniture imported into the US for sale, either by domestic retailers or by foreign brands, is increasingly being sourced from a wide variety of suppliers. The People’s Republic of China, Vietnam and Indonesia are prominent partners in the trade. Typically, furniture designs come from US companies, while manufacturing and packaging are handled by the exporting countries. The ability to produce knock-down, flat-packed and easy-to-assemble furniture pieces is therefore crucial for offshore manufacturers. Online retail of furniture is becoming a growth driver In recent years, the online retail of furniture has taken off and has become more prevalent, especially among urban consumers who are more familiar and comfortable with online retail. In 2014, around 4.4 of wooden furniture retail sales took place through online channels. By 2016, this figure had risen to 5.6, with nearly USD 2,959 million worth of wooden furniture retail sales taking place online. Millennials are a key driving force influencing furniture purchasing patterns Millennials in the US are a growing and increasingly influential demographic force in driving the growth of furniture retail sales in recent years, including that of wooden furniture. As one of the largest age groups in the US today, millennials have demonstrated different views and approaches towards home furnishing and furniture choices compared to the older generation, such as the baby boomers. This has shaped, and will increasingly shape how wooden furniture is designed, marketed and sold to mass-market consumers, as retailers become more acutely aware of the importance of tapping into this consumer group. However, millennials have delayed purchasing their own homes, partially due to factors such as the impact of the recession in 2009 which inadvertently affected the income security and employment of many millennials in the years following the recession. As a result, fewer millennials currently own residential properties. Millennials who own residential properties also tend to favor smaller and more affordable properties. Accordingly, the type of furniture that is favored by millennials are also smaller, multifunctional and affordable furniture in line with a dynamic and urban lifestyle. Low barriers of entry into the furniture retailing market New retailers looking to enter the furniture retailing market in the US face low barriers to entry, as capital costs required are no longer significant with manufacturing typically outsourced to the People’s Republic of China, Indonesia, and other countries. There are also no trade restrictions or market entry barriers, with the overall retail scene in the US generally being receptive to imported wooden furniture products. 159 However, new retailers will have to compete with major industry players who enjoy lower costs through economies of scale, existing brand-names with strong consumer acceptance and appeal, as well as strategic barriers within specific products such as exclusive dealing arrangements. Table 2: Wooden Furniture Retailing in US, 2014-2020 2014 2015 2016 2017 2018 2019 2020 2021 Wooden Indoor Furniture 47.705 50.375 52.235 53.521 54.444 55.368 56.738 57.547 Wooden Outdoor Furniture 786 825 851 868 885 900 913 923 Total Retail Wooden Furniture 48.491 51.200 53.086 54.389 55.329 56.268 57.650 58.470 Total Retail Wooden Furniture Online 2.141 2.474 2.960 3.501 4.033 4.517 5.150 5.614 Note: Forecasts are based on constant 2016 prices Source: Euromonitor Passport Home and Garden 2016, Retailing Indonesia 2016 Online retail is becoming a preferred channel for furniture sales in the US The US retail market for wooden furniture was worth USD 53,086 million in 2016; which grew by of 3.7 from previous year. Total online retail sales for wooden furniture were USD 2,960 million in 2016, representing a growth of 19.6 from the previous year due to a growing preference for online purchases by consumers The growth of online retail sales has outperformed traditional wooden furniture retail sales despite the latter’s dominance as a retail channel and this trend is expected to continue in the forecast period. As consumers become increasingly savvy with technology, sales of furniture products via online channels is expected to become more prevalent. The availability of virtual showrooms and detailed product information on the Internet are expected to support online sales of furniture products including wooden furniture in the US. Table 3: Ranking of Wooden Furniture Retailers in US, 2016 Retailers Ranking Ashley HomeStore 1 Rooms to Go 2 William-Sonoma including West Elm 3 Restoration Hardware 4 Wayfair 5 Note: Retail value only takes into account percentage of wooden furniture products sold at the outlets and does not take into consideration online sales and revenue. Source: Euromonitor estimates from desk research and trade interviews with leading wooden furniture and building component manufacturers distributors as well as the relevant trade associations in the US Top US wooden furniture retailers influence growth domestically The top five furniture retailers in the US accounted for about 9.0 of total wooden furniture retail sales in 2016. Ashley HomeStore are present across many states and offer online and traditional retail shopping with wooden furniture being among their offerings from the many segments of home decorations. A manufacturing arm in Minnesota under Ashley Furniture supplies their stores with local and international goods. Rooms to Go, on the other hand is a retailer that trades in mainly imported products from brands made in Asia and Canada. They have been consistently ranked second for the last three years and revenue from their home furnishing segment has shown a year-on-year growth in sales. 160 William Sonoma Home, which is based in California operates 35 stores across the US. Services from the company include made-to-order wooden kitchen furniture, design, services and retail gift cards. Restoration Hardware, is a luxury brand in the home furnishing marketplace in US. The company has multiple channels of distribution including galleries, source books and online shopping websites. Its wooden furniture collections are inspired by Asian designers mainly based in Hong Kong. It is also known to partner with world-renowned artists from time to time in the development of their products. Wayfair, is one of the largest online furniture shopping platforms that offer a wide array of styles and price points to consumers. Headquartered in Boston, the company employs close to 5,400 people, offering more than 7 million products from 7,000 suppliers across the world. C. Furniture Manufacturing in Indonesia Based on the latest available release by Badan Pusat Statistik, Indonesia is home to approximately 965 wooden furniture manufacturers in 2014. Out of this number, 263 or 27.3 of these manufacturers are classified as larger facilities manufacturers. Characteristics of such manufacturers include an area more than 25,000 sqm and capabilities of producing up to 10 containers on a monthly basis. Government statistics also indicate that 55 of these manufacturing facilities are foreign-owned. The furniture manufacturing sector in Indonesia is large and fragmented with many smaller size facilities catering to local communities in rural Indonesia. Strong global demand for Indonesian wooden furniture, attributed to its strong traditions in woodwork and artistic crafts Indonesia is one of the world’s largest manufacturers and exporters of wooden furniture. Indonesia has a strong tradition in woodwork and artistic crafts which has resulted in large quantities of beautiful, handcrafted wood furniture being produced from Indonesia and exported worldwide. This has helped to build the reputation and brand value of Indonesian wood furniture in global markets, creating high demand for these exotic products in major export markets such as US and Europe. Indonesia’s abundance of skilled craftsman also means that production of such high-quality handcrafted wood furniture can be ramped up to meet global demand where required. More Indonesian manufacturers and exporters of wooden furniture working towards FSC certification FSC certification has become a critical issue for Indonesian manufacturers and exporters of wooden furniture. This is because many major export markets for Indonesian wooden furniture bans the import of illegal timber and wood products into their markets. FSC certification is an internationally-recognized certification that certifies products that are eco-friendly, of high quality and also harvested and produced in a legal manner. As such, FSC certification allows Indonesian wood furniture manufacturers to enter into markets which offer higher margins such as US and Europe. Accordingly, industry players are starting to focus on FSC certification and are also investing significant resources into ensuring that their wooden furniture products obtain FSC certification. While FSC certification is critical for manufacturers and exporters of Indonesian wooden furniture, obtaining such certification can be a costly and time consuming process, which could pose significant hurdles for smaller manufacturers that lack the resources or know-how to navigate the entire certification process. Hence, smaller manufacturers who might not be successful in obtaining FSC certification and may face a barrier to entry into export markets that require FSC certification 161 Rising awareness of environmental sustainability issues are changing how companies source for raw materials Both local and global consumers of Indonesian wooden furniture are increasingly paying more attention to environmental sustainability issues, and placing emphasis on the environmental friendliness of the wooden furniture products they purchase. This is especially so for more affluent consumers from the middle-to high income bracket, and countries where profit margins for wooden furniture manufacturers are typically higher. In response to these evolving trends, Indonesian manufacturers of wooden furniture are increasingly utilizing recycled wood as part of their key raw materials, and also introducing or expanding local reforestation programs to boost their green credentials. Other strategies employed by such manufacturers including adopting more environmentally efficient production methods; as well as obtaining internationally recognized certifications in environmental management. These are often done in the hope of enhancing access to critical export markets such as Europe, the US and Japan which impose increasingly stringent environmental standards on imported products. Indonesia an attractive manufacturing base for international wood furniture companies Indonesia is generally attractive as a manufacturing base for foreign furniture companies, due to the country’s relatively low labor costs, and the abundance of both unskilled and skilled labor. Foreign furniture companies are also attracted to Indonesia as a manufacturing base as there is easy access to raw wood supplies at a significantly lower cost due to proximity to the source of such supplies which is also another major draw for these foreign furniture companies. Knock-down wooden furniture product a trend Exporting furniture is not an easy task as preferred trends, packaging style and even social practices need to be reviewed before a deal is concluded. Foreign buyers from the US and even European countries increasingly prefer knock-down packaging as it is easier to transport and does not inflate logistics cost especially when ordering large volume. Companies like the Group are among the few companies capable of producing knock-down furniture for export. Quality control is important as color variations and connected parts need to fit when assembled by consumers. Experience in delivering knocked down furniture goods is therefore advantageous when dealing with foreign clients. Table 4: Manufacturing of Wooden Furniture in Indonesia, 2014-2021 in million Rupiah 2014 2015 2016 2017 2018 2019 2020 2021 Value of Goods Produced 17,780,228 22,564,162 17,454,492 20,005,256 22,117,137 23,493,479 24,315,750 24,860,608 Note: Forecasts are based on constant 2016 prices Source: Pusat Badan Statistics Indonesia, Euromonitor analysis Demand for wooden furniture products to increase in the forecast period The value of wooden furniture products produced in Indonesia stood at IDR 17,780 billion in 2014. The production dipped in 2016 to IDR 17,454 billion due to a decline in exports. Based on latest available trade statistics, this trend was found to be similar in regional countries like the People’s Republic of China, Vietnam and Malaysia which also registered declining exports of wooden furniture products in 2015 year on year. 162 In Indonesia, inventories manufactured in 2014 and 2015 had been cleared out in 2016 by Indonesian retailers and exporters. Euromonitor therefore projected a turnaround in manufacturing activities from 2017 onwards driven by growing domestic and export demand for wooden furniture products which are expected to lead to an increase in the wooden furniture manufacture value to IDR 24,860 billion in 2021. This represents a CAGR of 5.6 between 2017 and 2021. Table 5: Competitive Intelligence of Wooden Furniture Manufacturers in Indonesia, 2016 Manufacturers Ranking Wooden Furniture Market Share The Group 1 5.2 Company B 2 2.6 Company C 3 1.6 Company D 4 1.5 Company E 5 0.7 Source: Euromonitor analysis from trade interviews Top five local wooden furniture manufacturers making a mark The Group is the largest manufacturer of wooden furniture in Indonesia with a market share of 5.2 in 2016. The Group had maintained its top position in terms of wooden furniture market share during the historical review period. The Group is among the few vertically integrated manufacturers of wooden furniture with three factories in Indonesia. The company owns two forest concessions, fully equipped manufacturing facilities and a retail store located in Surabaya. The company is fully certified to the various domestic and foreign export requirements including FSC certification and Indonesian Timber Legality Assurance System and implements sustainable overall recycling practices at every step of the process.

D. Furniture Export and Import Large manufacturers targeting export markets