Global Business Guide Indonesia

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Manufacturing | Indonesia’s FMCG Sector; Marred by Low Confidence but Boosted by Modern Retail

Between 2007 and 2012, Indonesia enjoyed GDP growth of at least 6% a year (excluding 2009) and 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% in 2014. In the second quarter of 2015, Indonesia's GDP could only haul itself to year-on-year growth of 4.6%, a six-year low. A slowdown in commodity exports has been central to Indonesia's economic deceleration but at the end of 2015 for the first time, there was some anxiety over private consumption; another important factor in the country's growth (56% of the country’s GDP over the past five years) in which fast moving consumer goods (FMCG) play a central role.

Indonesia’s FMCG Sector; Marred by Low Consumer Confidence but Boosted by Modern Retail
Indonesian consumers have culturally specific shopping behaviours; they are risk averse and brand loyal

A weakening currency and high inflation has led to a period of tight monetary policy and put pressure on Indonesia’s private consumption. The impact on Indonesia's retail sector can be seen in the country's burgeoning modern retail trade (See Indonesia’s Retail Boom is Far From Over). Kantar Worldpanel says sales from Indonesia's minimarkets were flat in the 12 weeks to July 2015; sales at supermarkets fell 3% and tumbled 14% at the country's hypermarkets.

However judging from the performance of Indonesia’s capital market, the consumer sector is also still considered attractive by investors. In 2014, the consumer goods price index grew by 22.2%, the third highest in the Indonesia Stock Exchange. Factors that will have a positive impact on the consumer sector are better economic growth projections for this year (2016) and the number of infrastructure development projects that are expected to improve the distribution of consumer products (See Concrete Developments in Indonesia’s Infrastructure).

The potential of Indonesia’s consumer sector in the medium to long-term also remains strong. Looking at Indonesia’s demography, it is currently in a phase of changing age structure in which more than 50% of the total population is younger than 30. As these are people in a productive age, there will be more labour supply, more work participation and increasing disposable income, which should also drive consumption.

Further, we have also witnessed changes in lifestyle and consumption patterns in line with the rising urbanisation trend. By 2030, it is estimated that 71% of the total Indonesian population will live in urban areas compared with about 55-57% at present. Consequently, this group who are categorised as middle-income people, are growing in size to become the new backbone of the consumer market in Indonesia.

Indonesian consumers naturally like to spend and opportunities for retailers in particular are therefore substantial.

According to AC Nielsen, 48% of Indonesia’s total spending on fast moving consumer goods comes from the middle class. The proportion of the middle class itself is expected to rise, from 68.4% of Indonesia’s total population in 2015 to 76.1% in 2020. As stated in a report by McKinsey, Indonesian consumers have culturally specific shopping behaviours; they are risk averse and brand loyal. Based on McKinsey’s survey, 63% of Indonesian consumers only buy products with brands they already know. This condition positions Indonesian consumers as late adopters as they are not willing to try new products up until it is suggested by their family members or other peers.

The Economist Intelligence Unit forecasts that retail sales in Indonesia will rise from an estimated $330 billion USD in 2014 to $639 billion USD in 2018. In local-currency terms, growth in retail sales will average 12.1% a year in 2014-2018, but rapid inflation means that average annual volume growth will be much lower, at only 4.9%.

Together with restaurants and hotels, the retail and wholesale sector employs about one-fifth of the labour force, or around 25 million people. Supply remains highly fragmented and is dominated by informal retailing. For example, in the grocery sector the five largest firms have a combined market share of just 3.8%. In rural areas the retail sector remains dominated by independent grocers and wet markets.

However, shopping centres and malls are proliferating in Jakarta as well as emerging secondary cities. In the other major cities there has also been strong growth in the construction of ‘trade centres’, which offer lower prices than conventional malls. As a result, urban areas, which accommodate around 60% of the population, will remain the focus of retail activity. Although Indonesia’s large domestic market and favourable demographic profile offer long-term potential, sales growth will continue to be constrained by increasing income inequality and a tightening monetary policy stance.

For many multinationals in the FMCG sector, Indonesia remains an important part of their international growth strategy. 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 (See Indonesia’s Growing Appetite for Wheat). Dairy giant Fonterra, meanwhile, has stated that the country remains central to the company's global strategy and one of its eight global priority markets (See Indonesia’s Dairy Industry Needs to Scale Up to Meet Local Demand).

McKinsey’s report further explained that Indonesia is a country ‘dominated’ by ‘fragmented trade’, in reference to the 4.1 million, small and independent retailers. However, the modern retail channel is growing twice as fast. 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 convenience store chains, such as Indomaret, Alfamart and Circle K, expanded into Indonesia's second and third-tier cities last year, presenting more opportunities for manufacturers.

According to data analytics firm Nielsen, Southeast Asia’s traditional retail market, which comprises small roadside vendors and stalls, will see its 54% market share dwindle, with big retail chains and supermarkets expected to account for 53% of the regional market by 2020. Meanwhile, modern chain stores account for just 14% of sales, versus 53% in Malaysia and 63% in China, leaving room for growth.

All these factors make Indonesia’s retail market an ideal investment segment. Indeed, the country rose four spots to reach 15th place among 30 developing countries in A.T. Kearney’s 2014 Global Retail Development Index, which ranks nations based on their investment attractiveness. Indonesia stands as one of the top retail investment destinations in South Asia, ranking below Malaysia (9th) but above Sri Lanka (18th), India (20th), the Philippines (23rd) and Vietnam (28th).

Foreign investment in the sector has grown steadily in recent years, and 2013 saw several new players enter the market, including South Korea’s Lotte Shopping, France’s Galeries Lafayette and Japan’s Uniqlo. Foreign retail expansion gained momentum in late 2014, when major retailers such as Swedish home furnishing store IKEA, Singapore’s Courts Asia and Thailand’s Central Department Store opened their doors in Jakarta.

Expansion into second and third-tier cities seems to be an increasingly important factor for investors in listed Indonesian retailers, as those cities are projected to grow more quickly than Jakarta in the next 35 years, with the UN reporting that the country’s urban population will expand by 70% by 2050, compared to 35% for Jakarta. A 2013 Boston Consulting Group report found that growth in the middle class and affluent consumer segment will be faster outside of Java, with the number of locations with over 500,000 such consumers expected to rise from 25 at present to 54 by 2020.

This paves the way for future expansion, and growth is on the horizon for a number of retailers. Modern Internasional plans to expand its portfolio of 7-Eleven stores from 176 to about 2,500 by 2025, while Courts Asia has announced plans to build 10 new stores. For its part, IKEA announced in 2014 that there were some 9.5 million people in the Greater Jakarta area who could afford to shop at its stores – the same population as the entire country of Sweden, where there are 19 IKEA locations. This underscores opportunities for further expansion.

For the remainder of 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 purchases.

Global Business Guide Indonesia - 2016

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Indonesia Manufacturing Snapshot

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.