Indonesia’s Retail Credit Crunch Requires Action to Keep Shelves Full

Ibu Mirna runs one of the thousands of corner stores in Makassar, a city of 1.6 million in Indonesia. For the past 10 years, she’s been selling everyday household items like rice and flour, packaged snacks and other household products to customers in her neighborhood. Three times a week, she replenishes her stock from a wholesaler. She’s known her wholesaler from the day she opened her business and is able to obtain merchandise on credit and repay him once she’s sold it.

An Indonesian woman prepares to sell goods in a traditional market. Photo: Jerry Kurniawan, World Bank
An Indonesian woman prepares to sell goods in a traditional market. Photo: Jerry Kurniawan, World Bank

This arrangement has worked well in the past, but the coronavirus (COVID-19) pandemic has seen her sales drop by 70 percent. According to Ibu Mirna, “People are not buying as (they) used to as they don’t have much money. Their buying power is gone.” As a result, she doesn’t have enough money to repay her debt. “I am hoping that this is over soon, I heard by end of May but some say it will be until end of this year,” she said.

For now, her wholesaler has been willing to let her replenish basic staples, but she’s facing mounting pressure to repay him in full before restocking. She’s not his only client who is partially repaying her trade credit account, and the wholesaler is facing severe cashflow pressure of his own as he tries to pay off his debts to larger, upstream distributors.

This situation can’t go on for much longer for either of them. And, unfortunately, it is a dynamic that is playing out on a much larger scale in Indonesia.

Fast-moving consumer goods (FMCG) of the kind that Ibu Mirna sells in her shop are the pulse of Indonesia’s economy. Every day, these essential goods pass down from wholesalers through a network of 2 million traditional retailers on to households across the entire archipelago with payments flowing in the other direction.

In fact, payments from traditional retailers to their immediate suppliers have the equivalent value of 25-30 percent of GDP. By comparison, remittances coming into the country are valued at only 5 percent of GDP.

Fast-Moving Consumer Goods Value Chains in Indonesia

FMCG diagram

As Ibu Mirna’s story illustrates, restrictions on people’s mobility, coupled with limitations placed on retail shops due to the pandemic, are disrupting the ability of FMCG value chains to supply the traditional retailers, who account for 80 percent of the country’s retail sales of food and household products.

As business-to-business trade credit runs through the FMCG value chain, it functions as system liquidity that allows goods to be delivered to households across the country. The sharp decline in retail sales is making it impossible for store owners to repay their trade credit accounts with wholesalers. This, in turn, makes it harder for wholesalers to repay their own trade credit accounts, and so on up the value chain. Effectively, this creates miniature credit crunches throughout the distribution hierarchy.

These credit crunches effectively stop the supply of goods coming the other way down the value chain. Consumer staples, which represent the bulk of the trade, are most affected, and upfront cash payments may soon be required for supplier purchases.

The problem could be magnified if product scarcity drives up costs and further reduces retailer and wholesaler cashflow. If this occurs, the impact could be far-reaching. Customers could face increasingly empty shelves, a shrinking assortment of products, and a lack of staples on which they depend.

A few things can be done to prevent this situation from snowballing.

First, government agencies must identify where these value chain credit disruptions are happening. Business-to-business trade credit is not subject to the same level of regulatory oversight and reporting requirements as the formal financial services sector, so it will be important to start a regular dialogue with major producers and distributors in the FMCG value chain to understand the impact of lockdowns and the change in market dynamics — in particular, the performance of trade credit.

Second, there’s a need to inject working capital support at the larger distributor level. The ability of wholesalers to maintain or extend trade credit to traditional retailers is a critical link in the FMCG value chain. This can best be achieved by providing distributors with additional working capital support in the form of revolving lines of credit from banks, which will allow trade credit terms to be maintained for wholesalers. In this way, the bottom-up shock caused by COVID-19 can be counteracted by a top-down injection of credit.

Third, the government should support the deployment of working capital facilities quickly and cheaply. Under normal circumstances, banks would take their time to assess and price for risk. The already slim margins within FMCG value chains mean that high-interest-rate loans may only be viable if the cost is passed on to consumers. Given the unprecedented nature of COVID-19, governments should consider extending short- to medium-term loan guarantees to banks to support the quick deployment of working capital facilities. There’s the potential to establish a risk-sharing scheme for the guarantees between governments and FMCG stakeholders who commercially benefit from the support given to the value chain.

Now is the time to address the problem. What starts as a seemingly isolated issue around trade credit could quickly snowball into severe shortages for customers, particularly in rural areas. If not addressed, this finely tuned mechanism in the FMCG value chain may become so dysfunctional that it hampers economic recovery.

This blog post is also available in English and Indonesian on the World Bank's East Asia & Pacific on the Rise blog.


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