Smita Aggarwal, a global investments advisor at Flourish Ventures. (Photo Courtesy of Flourish Ventures)

Study Confirms Role of Warungs in Indonesia's Digital Economy

SEPTEMBER 28, 2022

Jakarta. Flourish Ventures, a global venture capital firm with portfolio investments in Indonesia and across Asia, recently released a new study that confirmed the importance of corner shops in Indonesia – known as warungs – as a driver of future economic growth. 

The Digitizing the Corner Shop report surveyed shopkeepers and corner shop customers across India, Egypt, Brazil, and Indonesia, and developed a framework to understand the digitized corner shop opportunity. The report discovered that in all four markets, technology start-ups are providing corner shops with low-cost and online tools, which can unlock a 60-100%+ increase in corner shop earnings when implemented at scale. 

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In Indonesia, Flourish surveyed more than 200 warungs and their customers to assess the potential for digital technology to unlock greater efficiency and financial opportunity for these neighborhood “mom-and-pop” stores. 

The survey found that 98 percent of consumers plan to shop as much or more at their local corner shop in the future. At the same time, 84 percent of the warung shopkeepers said they already use digital apps to help run their businesses today.

Indonesia’s 3.5 million warungs represent 70 percent of sales in the country’s $257 billion grocery market, despite competition from big-box retailers. The report concludes that warungs are an integral part of everyday life in Indonesia and will remain vital to the local and national economy. 

“The pandemic has given a huge boost to digital adoption by customers. Despite that, small neighborhood shops in Indonesia – warungs - continue to be a significant contributor to the economy and enjoy the trust of the customers,” Smita Aggarwal, a global investments advisor at Flourish Ventures, said in a recent press statement.

“Our research affirms that these brick-and-mortar stores offer unparalleled convenience and service to their customers. Imagine the opportunity for the entire economy if they can embrace digital tools and become more efficient. Helping shopkeepers solve the pain points in their businesses will create a virtuous cycle by growing sales, improving margins, contributing to GDP and the wider ecosystem," she said. 

The report revealed that 67 percent of warung customers said they shop at their local store every day, contributing to the $180 billion in corner store grocery sales in Indonesia and signalling that they continue to thrive alongside other modern retail formats, contrary to popular notions.

When asked to rate their grocery destinations, 40 percent of surveyed customers cited a local market as the most frequented destination, versus only 10 percent who made grocery purchases via online channels.

According to the study, some 79 percent of warung shoppers said they purchased more of their groceries from local corner shops during lockdowns. Almost all customers surveyed (90 percent) rated convenience as the most valuable attribute of their warungs, followed by 80 percent of shoppers who cited customer service as a key differentiator.

A majority of warung shopkeepers (84 percent) said they use messaging apps to communicate with suppliers and customers; 25 percent endeavor to increase digital tool usage in the next two years to boost online sales, communications, and delivery.

Most shopkeepers (78 percent) said they were comfortable with using digital tools, but barriers remain as 41 percent confessed that they had difficulty learning or adopting them.

Warung shopkeepers have ambitions to grow and cited expanding product offerings as a top priority (33 percent), followed by increasing store earnings (25 percent). 

Opportunities for Embedded Finance 

Flourish’s research also found that Indonesian corner shops struggle to finance their businesses and face challenges purchasing and managing inventory.

“Corner shops routinely struggle with supply chain inefficiencies, limited access to working capital, or the kind of sales forecasting that can help them grow. As they look to thrive in the 21st century, warung shopkeepers should focus on digitizing their stores. Digitization would help them access embedded financial products,” Aggarwal said.

“We believe, from an economic standpoint, it’s crucial that warungs remain at the heart of Indonesia’s local neighborhoods, supported by digital tools to boost their growth and profitability.”

Additional Findings

Shopkeepers cite managing inventory and product placement as the biggest pain point (41 percent) in running their business, while sourcing products from wholesalers and placing orders and receiving products also remain difficult to track. Digital inventory tracking and purchasing can boost productivity as well as create a data trail for financial applications either with digital payments and financing on the buy side or leveraging sales figures for business loan purposes.

While offering credit to customers is a unique feature of warungs, only 35 percent of shop owners claimed access to formal bank loans; 28 percent said they borrow through informal means such as family and friends. Only 4% reported borrowing from a digital lender. There are multiple touch points where embedded finance can leverage store data for securing or offering credit.

About 52 percent of warungs admitted that they face a cash crunch while running their business – bridging cash flow challenges is an opening to introduce embedded finance, which can eliminate operational risks and unlock opportunities to involve more traditional financial institutions.

Almost all surveyed shopkeepers (90 percent) said they have never considered or applied for an online loan due to short loan tenure (36 percent), insufficient loan size (27 percent), or high-interest rates (27 percent). The efficiencies that digitalization typically introduces and the cost barriers it overcomes means that these same obstacles represent multiple in-roads for embedded finance to bring improvement to warung business models.

Survey Methodology

Flourish Ventures launched this research to better understand corner shops across the globe and share learnings on how digital firms can serve their needs. In partnership with research firm 60 Decibels and e-commerce platform TaniHub, it surveyed 200 Indonesian corner shop owners and 200 of their customers to learn first-hand about their business pain points, competitive threats, aspirations, and digital behaviors. To view the full report and access the underlying data, visit: https://digitalcornershop.flourishventures.com/indonesia/

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