Indonesia is south-east Asia's largest consumer market and is central to the growth strategy of many an international packaged food manufacturer eyeing or operating in the region. However, Indonesia's economy has slowed in recent years, hitting consumer spending, while there are concerns over issues from infrastructure to regulation. just-food gives a run-down of the issues in Indonesia strategy executives need to consider.
Economic growth is slowing
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By GlobalDataBetween 2007 and 2012, Indonesia enjoyed GDP growth of at least 6% a year, excluding 2009, when growth was hit by the global economic turmoil and slowed to 4.6%.
Beyond India and China, Indonesia, buoyed by a global commodities boom, appeared to offer the prospect to multinationals of a healthy economy with household consumption on the rise.
However, growth slowed in 2013 to 5.6% and further still to 5% last year. In the second quarter of this year, Indonesia's GDP could only haul itself to year-on-year growth of 4.6%, a six-year low.
Concern over private consumption
A slowdown in commodity exports has been central to Indonesia's recent economic deceleration but there is some anxiety over private consumption, another important factor in the country's growth in the last decade.
Consumer confidence in Indonesia remains "optimistic", according to a Mastercard's survey for economies in south-east Asia covering the first six months of 2015 but the index showed that optimism was receding, with the financial services group claiming there had been an "extreme deterioration" in confidence compared to a year earlier.
A weakening currency and high inflation has led to a period of tight monetary policy and put pressure on consumption. According to The Economist Intelligence Unit, inflation has remained high in 2015, with the rate even ticking up. The average annualised growth in consumer prices has been 6.9% in the first eight months of 2015, higher than the annual average of 6.4% recorded in 2014, the EIU says.
The impact on Indonesia's retail sector can be seen in the country's burgeoning modern retail trade. Kantar Worldpanel says sales from Indonesia's minimarkets were flat in the 12 weeks to 12 July; sales at supermarkets fell 3% and tumbled 14% at the country's hypermarkets.
Trade policy
In July, in a bid to boost domestic manufacturing, Jakarta increased import duties on groups of consumer goods products. The levies did not apply to countries with which Indonesia has free-trade agreements, including neighbours in south-east Asia. However, the increases in tariffs were significant. On meat, the levy was taken from 5% to 30%. The duty on imported tea and coffee, which was also 5%, was increased to 20%. Tariffs on imported sugar confectionery rose from 10% to 15-20%.
As well as the obvious restrictions on companies looking to do business in the country, the move has also put upward pressure on prices, according to The Economist Intelligence Unit. "In the absence of investment into developing technologies that will help produce the import substitutes, such policies have only resulted in keeping consumer prices high," it says.
Infrastructure that needs investment
Like many emerging markets, Indonesia is a country that needs continued investment in infrastructure. President Widodo is said to be eyeing spending of $20bn on infrastructure this year, including on roads and ports, but there have been concerns about progress. Traditional trade accounts for the majority of retail sales (a PricewaterhouseCoopers report from February says the five largest firms in Indonesia's grocery sector have a combined market share of 3.8%), making it a challenge to reach shoppers. Local giants such as Indofood, with their distribution networks built over many years, have an edge. According to a McKinsey report on Indonesia's consumer goods market, at companies "winning" in the country, under half of modern-trade accounts are served by distributors, with direct sales allowing "winners to exert fuller control over their relationships with key accounts". However, the option is not available to all and companies looking at Indonesia will likely need to look for local distribution, meaning strategies to monitor the performance of their local partner are critical.
However…..
President Joko Widodo trying to boost economy
This week, Indonesia announced its latest attempt to stimulate the country's economy. Among the measures, Jakarta is looking to simplify regulations and set up economic incentives. "Regulations at the regional level should be simpler, more efficient and easier," cabinet secretary Pramono Anung said yesterday (29 September), according to The Financial Times. "This is to give positive signals to neighbouring countries that Indonesia is a country that is investor-friendly."
Underlying positive demographics
With a population of arond 250m, Indonesia has the largest consumer market in south-east Asia. Over 28% of Indonesia's population are under 15 years old. The country has seen increased urbanisation and a rising middle class. These characteristics have made Indonesia attractive to companies with international ambitions and, despite the recent relative weakness in the country's economy, still stand.
For some multinationals in the sector, Indonesia remains an important part of their international growth strategies. In June, Japan's Ajinomoto announced plans to enter Indonesia's bread market, saying it expects its core market to be Jakarta's middle-class consumers. Dairy giant Fonterra, meanwhile, tells just-food the country remains a key market. "Indonesia is central to Fonterra's global strategy and one of our eight global priority markets," Achyut Kasireddy, MD of Fonterra Indonesia.
Modern retail on the rise – but remember traditional trade
According to management consultants McKinsey, Indonesia is a country "dominated" by the "fragmented trade", 4.1m, small, independent retailers.
However, the modern channel is growing twice as fast. A McKinsey report says consumer goods companies believe the "greatest growth opportunities" are in the convenience trade. And retailers are looking to expand their presence outside of Indonesia's urban centres. According to Euromonitor, major cnvenience store chains, such as Indomaret, Alfamart and Circle K, expanded into Indonesia's second and third-tier cities last year, presenting more opportunities for packaged food manufacturers.
Nevertheless, McKinsey says consumer goods companies operating in Indonesia need to develop specific sales strategies for both types of store. "Winners in sales strategy serve both modern and traditional retailers well. Even though modern trade is where most of the growth opportunities lie, winners view fragmented trade as a continued source of growth and set clear growth targets for their business in that channel."
The longer-term outlook for the consumer
For the remainder of 2015 (and likely into 2016), consumer sentiment in Indonesia is likely to remain depressed compared to the levels seen in recent years. However, the longer-term dynamics suggest reasons for optimism. The trends suggest the movement of more Indonesian consumers into the middle class will continue, moving more shoppers up the value chain and into more discretionary food purchases.
The next sections of just-food's management briefing on the challenges and opportunities in Indonesia's food sector will take in four sectors – confectionery, dairy, ice cream and infant formula – to present a more granular look at parts of the industry.
