A matter of choice: Growing disposable income is creating demand for new products

Another recent beneficiary of Indonesia’s rapid economic growth has been the consumer goods industry, with domestic demand rising significantly for food and beverage (F&B), pharmaceuticals, cosmetics, textiles and footwear, and tobacco products (see analysis). Exports have also been growing, with the bar increasingly high for Indonesian producers as they seek to meet regulatory and food safety standards in Western markets. These are challenging and potentially highly rewarding times for the consumer goods sector.

F&B: One star performer in recent times has been the F&B sector, where rising incomes, an expanding population and widening tastes have led to a surge in demand for all types of products. Indeed, while Indonesia’s income demographics are characterised by a large gap between rich and poor, the recently accelerated growth of an urban middle class – estimated to include around 30m people – has created great opportunities. These consumers have increasingly adopted nontraditional tastes too, which has been a boon for importers. As a majority Muslim country, production of halal products is another factor in company success.

PRICING: At the same time, however, 2011 has seen rising production costs affect many companies’ margins. Indeed, while revenue from four key F&B manufacturers increased 78% in the first half of 2011, the overall profitability from operating margins dropped 223 basis points over the same time, to 11.09, year-on-year. Lower-income Indonesians are highly sensitive to changes in price, which, when combined with an increasingly competitive market, has meant many producers absorb these extra costs, rather than pass them on to customers. Those companies targeting higher-income groups, however, have generally continued to do well, as they are able to be more flexible on prices. Still, price is not always the primary concern. “The prices for our products are well balanced internationally, but through surveys of our customers we see price in the luxury products market is not the main priority; far more important for our customers is that products are available in Indonesia at the same time as the rest of the world,” Irwan D Mussry, president and CEO of Time International, a luxury watch line carrier, told OBG.

COMPANIES: The F&B market is dominated by a number of large players. Indofood Sukses Makmur, part of the Salim Group, is one leading outfit, and includes branches in consumer branded products, wheat flour production, agribusiness and distribution. It currently holds around 75% of the country’s noodle market. Other companies include Tiga Pilar Sejahtera Food, Charoen Pokphand Indonesia, Mayora Indah, Siantar Top and Nippon Indosari Corpindo. GarudaFood is another player, with its offering of a minority stake for sale in May 2011 provoking widespread interest abroad.

Indeed, foreign interest in the consumer goods market jumped considerably in 2011, although historically there have been few foreign players on the ground. The challenges in obtaining product registration have usually led to foreign interests being served via manufacturing agreements with Indonesian partners. Among foreign-Indonesian joint ventures in consumer goods are Unilever Indonesia, Nestle Indonesia, Kraft Ultrajaya and Coca-Cola Amatil. In retail, Carrefour is present, with the largest retail group being Matahari Putra Prime.

THIRSTY WORK: In the first half of 2011 the F&B sector grew around 3% year-on-year, a slower rate compared to growth in previous quarters. Predictions from the Indonesian F&B Association were for second-half 2011 to see F&B sales up 50.1% from R261trn ($31.3bn) in second-half 2010 to Rp392trn ($47bn). Factors affecting the surge include the presence of both Muslim and Christian festivals in the second half of the year, which traditionally see a jump in consumption. The fast of Ramadan, for example, is particularly good for beverage sales, such as energy drinks. Working against this, however, has been the continuing rise in costs, with the Indonesian Beverage Industry Association (ASRIM) stating mid-year that raw material price hikes of 20-25% might be on the way, with corresponding rises for consumers and some dents in profitability and sales.

Beverages are a huge potential growth area, though. Figures from ASRIM show that Indonesia has the lowest current per capita beverage consumption rate, at 86 litres per year, of any country in ASEAN. This breaks down into at 33 litres per year for carbonated drinks, and 53 litres per year for packaged water. (Alcoholic drinks are counted separately). By comparison, Thailand’s total annual per capita beverage consumption is 89 litres and the Philippines’ is 122 litres.

PHARMACEUTICAL INSIGHT: In pharmaceuticals and cosmetics, competition looks set to increase in 2012 when Procter & Gamble (P&G) adopts a stronger Indonesian profile with a new plant opening. The company’s main competitor will likely be Unilever, which has had considerable success in Indonesia since beginning operations in 1933. Local players include Pyridam Farma and the country’s largest manufacturer, Kalbe Farma.

For pharmaceuticals, the first half of 2011 saw a rash of new product launches and a 5% reduction in sales prices on March 1, agreed between the Ministry of Health and industry leaders; traditionally, the ministry has set prices for medicines. Sales in first-half 2011 reached Rp20.9trn ($2.5bn), according to the Indonesian Pharmaceutical Manufacturers Association. The second half of 2011 is widely predicted to be less busy however, as consumers traditionally switch expenditure to food and beverage items around the Muslim and Christian festivals.

INVESTMENT & REGULATIONS: At the same time, however, there are concerns over a declining level of investment. In 2010, investment reached $800m, down from $3bn in 2005. Government regulations limit foreign ownership in the sector to 75%, with companies often encountering difficulties in finding an Indonesian investor willing to put forward the remaining 25%. Foreign companies must also have a packaging facility in Indonesia if they do not plan to manufacture there. While moves are being made to change these regulations, in the meantime some investors are taking a wait-and-see approach. Domestic investors are forging ahead though. First-half 2011 saw Rp1.11trn ($133.2m) of investment from domestic outfits. Despite the challenges, the sector has seen a compound annual growth rate of 11% between 2003 and 2010, with 21% of the market controlled by foreign companies.

COSMETICS: In cosmetics, international companies include Unilever, PZ Cussons and P&G, while local players include Mustika Ratu, Mandom Indonesia and Martina Berto. Competition between local and foreign groups has been increasing in 2011, thanks to a newly active regulation removing a requirement for foreign companies to have special marketing licences for their products. As of mid-2011 market share was divided roughly 55-60% local to 40-45% foreign. Ministry of Industry figures show the cosmetics sector was worth some Rp11trn ($1.32bn) in 2010, with the ministry predicting this would hit Rp11.88trn ($1.43bn) in 2011.

TEXTILES & FOOTWEAR: Ministry of Industry figures show 15% quarter-on-quarter growth in textiles and textile products in the second quarter of 2011, with the ministry expecting this rate to continue in the third quarter. Overall year-on-year growth in 2010 was 1.74%.

The sector is also a major contributor to Indonesia’s exports, with the first quarter of 2011 seeing total national export sales of textiles and textile products reach $5.7bn. Ministry figures show expected first-half 2011 sales to total $7.5bn, a rise of 28% year-on-year.

In footwear, the appreciating rupiah has had an impact on some exporters, which have seen their products become less competitive. One outcome has been a switch by some manufacturers to the domestic market where they see more profitable opportunities. Going forward, the consumer goods industry seems likely to continue to prosper. Distribution remains a challenge in Indonesia, favouring larger companies that can integrate their own supply chain. Indeed, government policy is increasingly favouring larger players, seeing these as more likely to meet increasing investment, quality and safety standards requirements. A period of mergers and acquisitions may therefore be coming up for smaller players, with foreign outfits also likely to be playing for these increasingly attractive businesses.