Few industries in Indonesia have benefitted from rising purchasing power as much as the fast moving consumer goods (FMCG) sector. While the overall economy grew between 6.2% and 6.5% per year since 2010, consumer spending increased by double digits over the majority of the same period. Rising personal incomes are lifting millions of Indonesians into the middle class every year, and FMCGs, which include groceries, pharmaceuticals, toiletries and household care products, are among the first items they spend more money on.
Growing sales in Southeast Asia’s largest economy have helped global companies expand their businesses. Unilever Indonesia, the giant on the local market, has enjoyed years of steady growth and achieved a 16% increase in both revenue and profit in 2012. The Anglo-Dutch controlled company is upping local production capacity to meet rising domestic and export demand. France-based cosmetics maker L'Oréal foresees such potential in Indonesia that it picked West Java as the location for its largest factory worldwide. The opening of the plant in November 2012 followed sales growth of more than 30% in Indonesia.
Meanwhile, Indonesia’s largest food producer Indofood Sukses Makmur has boosted domestic sales and exports of its consumer products and is expanding into other emerging markets with strategic acquisitions in China and Brazil.
Building strong brands is vital for foreign companies seeking to strengthen their foothold on the market. A study by consultancy McKinsey & Company found that “Indonesians attach more importance to brands than do the consumers of any nation we’ve seen at this stage of development” thus illustrating some of the unique facets of the consumer market.
A local presence or cooperation with domestic firms can help global corporations customize products and adopt marketing campaigns that resonate with Indonesian shoppers and create brand attachment. Market research suggests that imported products are by no means at a disadvantage over local ones, though they tend to be more geared towards the premium segment.
Aside from overall GDP growth, a number of trends highlight future potential in the FMCG market. For one, minimum wages are rising quickly, with Jakarta lifting the minimum wage by 44% in 2013 (Jakarta City Government). While many Indonesians work in the informal sector where legal rules have little bearing, the increase in formal and government sector wages will feed through to some extent to the wider labour market. A large portion of the extra disposable income should translate into higher FMCG sales, particularly among new middle class entrants. Other consumer groups will find that higher earnings allow them to upgrade to premium brands.
The spread of retail outlets throughout the country increases options for FMCG sales into regions so far served mainly by traditional markets (See The Rise of Modern Retail Outlets). Modern supermarkets, convenience stores and pharmacies generally usher in a wider product range, making global brands available to new customers. While the Island of Java remains the heartland of commerce and retail, ample potential is waiting to be unlocked across the Indonesian archipelago. Second-tier cities such as Medan in North Sumatra or Makassar in South Sulawesi have seen a rapid increase in business activity over the past years.
Increased connectivity between Islands is helping regional centres narrow the development gap with the capital. While logistics in Indonesia remains one of the main challenges for consumer goods makers, urbanisation is making the distribution of goods more cost-effective (See Indonesia’s Logistics Sector). Rapid demand growth in new economic centres is also affording newer entrants to the Indonesian market the opportunity to introduce new brands despite competition with established players.
Urbanization also tends to promote new lifestyles, creating demand for products consumers may previously have considered unnecessary. This is a trend that is buoying sales of personal care products from women’s nail polish to men’s skincare across Indonesia’s diverse consumer market. The beauty and cosmetics market in Indonesia is growing fast with a 14% growth in cosmetics sales in 2012 totaling $1.01 billion USD (Euromonitor). While women’s beauty products make up the lion’s share of growing sales, demand for men’s products is undergoing significant growth mirroring a phenomenon being witnessed throughout Asia.
The fact that urban families tend to have fewer children leaves more disposable income to be spent on non-essentials such as beauty products or higher quality foodstuffs. At the same time, parents with fewer children normally spend more per child, which promises bright prospects for premium-brand baby and childcare products in a country with Asia’s second highest birth rate. One FMCG category set to benefit from changing Indonesian lifestyles is infant formula milk which has seen sales increase by 9% per annum (Reuters). As more women in city environments are formally employed, they are finding it harder to maintain a breast-feeding regime and are therefore more ready to opt for commercial alternatives. Multinational as well as local FMCG producers are investing heavily in new dairy plants to meet swelling demand such as Nestle and Fonterra in addition to Indofood Sukses Makmur (See Overview of Indonesia’s Dairy Industry).
A further category of FMCGs set to benefit from Indonesia’s youthful demographics is disposable nappies or diapers. Since 2006 Indonesia’s disposable diaper market has grown by an average of 35% per annum (Reuters). More affluent urban families are shifting towards disposable diapers as opposed to traditional cloth diapers as their rising incomes enable them to afford previously out of reach luxuries.
Several factors marred economic sentiment in the first semester of 2013. China, the regional growth engine and an important importer of Indonesian commodities, showed signs of slowing down, while belt-tightening continued in Europe and global markets prepared for an eventual end to quantitative easing in the US. However, Indonesian consumers have proven quite resilient to global economic woes. The 2008-2009 credit crisis did not do much to dent household spending and Indonesia weathered the global downturn better than many of its more export-reliant neighbours. This consumer attitude adds to Indonesia’s attraction as a market for FMCGs.
The steep increase in government-controlled petrol prices in June 2013 stoked higher inflation but is unlikely to have a long-term negative effect on household spending. A global survey published in July 2013 showed that Indonesia came out on top in terms of consumer confidence and spending intentions (Global Consumer Confidence Survey, Nielson). Optimism about future employment and income, relatively low indebtedness and political stability are keeping Indonesians happy to spend.
The upcoming ASEAN Economic Community (AEC) will see increasingly tight integration of local markets in the 10-nation block. The AEC, which is scheduled to be fully implemented by 2016, creates a unified market for goods and services, skilled labour, trade and investment. For Indonesia’s FMCG sector, it will bring both challenges and opportunities. A market of 600 million people has obvious allure for consumer goods makers. Imports to Indonesia are set to become easier as tariff barriers fall, standards are harmonized and the AEC aims for closer integration with global trade.
Some, however, have questioned Indonesia’s readiness to compete for investment with ASEAN countries that offer lower labour costs or better logistics. Investors need to factor AEC into their decisions on building local factories. That said, the Indonesian government has embarked on an ambitious infrastructure development programme to improve the reliability and speed of freight shipments across and out of Indonesia. Assuming logistics costs come down and inflation remains in check, Indonesia should remain a highly appealing market for fast moving consumer goods.
Global Business Guide Indonesia - 2013
Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.
Overview of Fibre, Textiles & Garments
Challenges in Indonesia’s FTG Industry
Overview of the Pharmaceutical Sector
Opportunities in the Pharmaceutical Sector
Automotive Industry: Driving Manufacturing
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