Sustained growth makes Indonesia's food and beverages industry a priority for spending

The combination of Indonesia’s 250m-strong population and its robust agriculture and fisheries sector create an almost ideal operating environment for the food and beverage industry. These opportunities have not been lost on international or local companies, and the segment continues to attract some of the most significant investment of any industrial segment. The segment’s relevance for Indonesia is apparent, not only in its role of providing sustenance for the country’s growing population, but also for its significant contribution to the economy – food and beverage manufacturing accounted for 5.6% of GDP in 2015, according to the Bank Indonesia (BI). The industry is also far and away the largest subsector of Indonesia’s manufacturing industry, representing around one-quarter of total manufacturing value and more than double that of the next-largest sector.

High Priority 

Recognising the importance of this industry from both a qualitative and quantitative standpoint, the government continues to prioritise food and beverage operations, going so far as to include the food industry as one of the 10 priority industry groups designated for accelerated development in the Master Plan of National Industry Development 2015-35. The subsectors in this mainstay industry include fish processing, milk processing, freshener material, vegetable oil processing, fruit and vegetable processing, flour and sugar cane.

The impact of the food and beverage industry is reflected in its consistently high showing in terms of investment flow, with the sector generally ranking among the top-three manufacturing segments each year. Foreign direct investment (FDI) in the food industry totalled $1.5bn in 2015, according to the Indonesia Investment Coordinating Board (BKPM), placing it third among manufacturers, behind metal, machinery and electronics investments ($3.1bn), and chemicals and pharmaceuticals ($1.96bn) and averaging $1.66bn growth each year between 2010 and 2015. This was supplemented by domestic investment; the food industry was the single largest recipient of any sector in 2015, manufacturing or otherwise, with 879 projects worth a combined Rp24.5trn ($1.8bn).

“Many investors come to Indonesia because of the large captive market, which accounts for 40% of the total combined population of ASEAN member states,” Adhi Lukman, general chairman of the Indonesian Food and Beverage Association, told OBG. “Once companies have established themselves in this market, then further expansion into other countries becomes an added bonus.”

Downturn 

In spite of this strong and sustained showing, 2015 represented a relatively off-year for food industry investments, which cannot be entirely explained by the overall downturn in the economy. Incoming FDI to the industry was more than halved from $3.1bn in 2014 to $1.5bn only a year later. This significant shift occurred partly as a result of the implementation of a 2014 regulation regarding water rights, which made it more difficult for private companies to gain access to water for commercial use. This in turn had a significant impact on the food and beverage segment in particular, which is heavily reliant on water usage for its operations. However, the negative impact will likely be short lived, as the government reversed course in November 2015, and the BKPM reallocated the previously reworked permits.

The cumulative effect of this flurry of activity has resulted in a dramatic surge in output, as food and beverage contributions to the national economy increased by 80% over a five-year span from Rp360.4trn ($26.3bn) in 2010 to Rp647trn ($47.2bn) in 2015, according to BI data. Growth slowed significantly in 2015, largely due to the overall cooling of the economy as a whole and lower purchasing power resulting from a more unfavourable exchange rate. The weakening of the rupiah had a measurable impact on the food and beverage industry due to its reliance on imported goods for more than half of its inputs. As the relative prices of dairy products, meat and other inputs increased and incomes decreased, producers felt the squeeze on both ends. In 2015 manufacturers were forced to raise prices of processed food and beverage products by an average of 7.5%, in part due to the pressures originating from rupiah depreciation, which gave rise to exchange rate losses when importing raw materials such as sugar, wheat, milk, fruit juice and soybeans. Another more significant contributing factor was the higher transportation costs that followed the central government’s decision to largely scrap fuel subsidies.

Growth Surge 

Nevertheless, the segment began to rebound in early 2016 on the back of renewed economic growth and government spending in the first quarter of the year, as well as increased demand driven by the Ramadan and Eid holidays in the second quarter. Lukman told OBG that he expected the sector to grow by 8% year-on-year in the second quarter of 2016, improving on the 7.5% growth recorded in the same quarter a year earlier. Total 2016 turnover is projected to increase by 8%.

This rise in domestic demand could also be bolstered by a short-term increase in sales thanks to a tax amnesty period that was enacted by the government in 2016. “The tax amnesty could have a significant impact on the economy, with as much as Rp300m-400m ($21,900-29,200) coming back into the country,” Lukman told OBG. “We believe the food and beverage industries will benefit the most from this.” Although much of the windfall will most likely be directed towards the upper and middle classes, which are placed to benefit most from the deal, the boost in spending is expected to trickle down through the different income groups across the economy.

Future Potential 

Despite the significant amount of investment and increased production capacity achieved over the past decade, there is room for continued expansion, particularly in serving the domestic market. The amount of imports entering the country has increased substantially over the years, driven by population growth and a rising appetite for new and higher-end foods and beverages. The value of primary and mainly household food imports, for instance, has increased roughly five-fold, from $265.4m in 2005 to a total of $1.32bn in 2015. Imports of processed, mainly household, food and beverages have more than doubled, from $1.05bn to $2.33bn over the same decade, according to BI data. Although the growth rate of these imports has mostly stabilised since 2010, the opportunity remains to capitalise on the $4trn import market by providing locally manufactured import replacement products.

The value of food and live animal exports out of Indonesia in 2015 was $11.6bn, along with another $1.1bn worth of beverages and tobacco, and $18bn in animal and vegetable oils and fats, mostly from palm oil sales. Indonesia’s food and beverage exports are focused on wealthy markets, including Japan, the US and Europe. In addition to these markets, there is substantial potential in expanding into the Middle East, given Indonesia’s knowledge and certification in halal foods. While China remains an enticing market for its sheer size, accessing the food and beverage sector in the 1.7bn-person country presents major challenges in terms of non-tariff trade barriers, which often make exporting a near impossibility.

State Of Affairs 

Although the vast majority of companies operating in the sector are small or micro-sized enterprises, a few large companies dominate the market, including Indofood, Wings, Mayora and GarudaFood, a subsidiary of Tudung Group. These companies’ strong local presence has recently been solidified, largely due to the difficult economic conditions, which prompted consumers to shift towards more affordable packaged food brands. In addition to maintaining market share by undercutting the prices of large international players, these companies are developing their own tailored, value-added products that appeal to the Indonesian consumer’s preference for traditional food in an instant form. As greater opportunities arise for high-end and luxury goods, in line with the increasing affluence of the urban population, the grocery sector is becoming more stratified through the expansion of premium niche categories, such as fresh or organic foods, which can also be served by smaller-scale, local producers.

Among the leading foreign packaged food players in Indonesia, multinational companies such as Nestlé Indonesia, Heinz ABC Indonesia, Kraft Foods Indonesia and Unilever Indonesia have the strongest footholds due to their early entry, high consumer awareness of their brands and products, and the substantial budgets allocated to promotional activities and research and development. The influence of these brands is expected to continue growing, as the ongoing internationalisation of Indonesia’s cuisine suggests that traditionally Western foods, such as those based on milk or wheat, will increasingly suit the local palate.