New investment in Indonesia’s food and beverages market comes amid regulatory uncertainty

The food and beverage (F&B) industry is set to benefit from Unilever Indonesia’s decision to invest $500m in product expansion locally over the next five years.

In what has been interpreted as a major show of confidence in the local market, the firm, which is one of Indonesia’s largest producers of consumer goods, announced plans on June 5 to expand production capacity across both its food and refreshment and home and personal care segments.

The move has been driven largely by increased take-up of Unilever’s products by the country’s expanding middle class and came on the back of 8.9% year-on-year sales growth for Unilever Indonesia in the first quarter of the year to Rp10.8trn ($810.4m).

Turnover for the F&B industry as a whole is also expected to rise by 8.5% to Rp1.4trn ($105m) this year, according to estimates made by the Indonesian Food and Beverage Association, up from 8.4% in 2016.

However, things look less positive for the soft drinks segment, with data from the Indonesian Soft Drink Industry Association (ASRIM) showing negative growth of 3.7% in the first quarter of the year.

F&B growth potential

More positive signs for the food and beverage segment include 8% value growth recorded among grocery retailers last year – as per figures from research firm Euromonitor International – as well as strong economic growth forecasts, which could have a knock-on effect on disposable incomes.

Indonesia’s GDP is projected to expand by 5.1% in 2017, rising to 5.3% in 2018, before reaching and levelling off at 5.5% in 2020.  

Consumer confidence in Indonesia remains the third highest in Asia at 120 –  behind India (132) and the Philippines (130) – according to market research firm Nielsen, with scores over a baseline of 100 indicating degrees of optimism.

Tightening market puts pressure on sales

While the F&B food and beverage market segment is on course to expand, a tighter market has contributed to a decision by 7-Eleven to close its doors in Indonesia.

Competition with traditional service providers, such as street vendors, eroded the franchise’s earnings from the ready-to-eat foods and drinks segments, while the congested nature of the market had put increasing pressure on sales and earnings.

Franchise holder Modern Internasional announced plans in late June to shutter its remaining 120 outlets after failing to find a buyer for the chain. The operator had already closed 46 stores earlier in 2017.

A ban imposed in April 2016 on the sale of alcoholic beverages at convenience stores such as 7-Eleven and local rival Indomaret has also weighed heavily on the food and drink industry. Alcohol sales previously accounted for up to 10% of 7-Eleven’s total sales prior to the regulatory shift.  

Tax increases on the cards?

With falling oil and gas revenues forcing the government to look for other ways to boost earnings, concern is also on the rise among industry players that tax increases could be in the offing.

The import tax on alcoholic beverages, for example, was set as high as 150% of market value for products between 25% and 80% proof in 2015, having previously been based on volume at around Rp125,000 ($9.38) per litre. Officials have also floated proposals in recent years to extend excise duties to other components of the industry, including packaging, sweetened beverage and carbonated soft drinks.

In February, however, the government said it had no plans to impose an excise tax on plastic packaging for food and beverages in the short term, despite moving forward with a levy on plastic bags that was trialled across 23 cities early last year.

Meanwhile, other stakeholders have called for state efforts to focus on areas other than tax. “While we applaud government efforts to follow up on deregulation packages and update tax legislation, there is more to be done,” Triyono Prijosoesilo, chairman of ASRIM, told OBG.

“Indonesia is a member of ASEAN, meaning many goods and services flow freely into the country; however, domestic industry players still face challenges, particularly when trying to obtain a consistent supply of competitively priced, high-quality, raw materials,” he said.

“Furthermore, to strengthen the F&B industry and raise the competitive level of Indonesian products as compared with imports, a more comprehensive and harmonised set of policies are needed.” Triyono added.