Challenges For Foreign F&D Players In Indonesia

BMI view: We believe the Indonesian food and drink market is a challenging one to gain an advantage in because of its complicated geography and underdeveloped infrastructure. Also, consumers tend to be much less brand savvy than in other Asian markets, such as China. As a result, we believe foreign producers that have managed to establish a strong presence will have to continue investing resources to maintain their market share, especially against the proliferation of local competitors.

Even if we see tremendous growth potential for food and drink consumption in Indonesia, we believe companies involved in the market will continue to face challenges as they push to maintain their market share. We forecast strong growth in consumer spending over our forecast period to 2018, and expect strong GDP per capita growth over the coming years. Also, the Westernization of consumers' eating habits will boost growth in categories that were underrepresented in the market previously such as dairy, confectionary and skin care.

Still, we believe the Indonesian market is challenging for foreign producers to maintain an advantage in due to its complicated geography and underdeveloped infrastructure. In fact, Indonesians live on about 6,000 of more than 17,000 islands that span 5,000km from east to west. Even if 60% of the population lives on the island of Java, it is difficult to reach shoppers spread across the archipelago, especially as only 11 cities have more than one million residents. Moreover, the country's road density is only two thirds that of China's, and less than half of Malaysia's, while 40% of roads are unpaved. Congestion is very common and, for example in Jakarta, the average work commute takes more than two hours. Added to this, the country's retail landscape is dominated by small traditional shops where competition for shelf space and limited air conditioning determine choices, according to a study conducted by Kantar Worldpanel and Bain.

Consumer Spending Growth Ahead
Indonesia - GDP Per Capita & Real Private Consumption Growth

BMI view: We believe the Indonesian food and drink market is a challenging one to gain an advantage in because of its complicated geography and underdeveloped infrastructure. Also, consumers tend to be much less brand savvy than in other Asian markets, such as China. As a result, we believe foreign producers that have managed to establish a strong presence will have to continue investing resources to maintain their market share, especially against the proliferation of local competitors.

Even if we see tremendous growth potential for food and drink consumption in Indonesia, we believe companies involved in the market will continue to face challenges as they push to maintain their market share. We forecast strong growth in consumer spending over our forecast period to 2018, and expect strong GDP per capita growth over the coming years. Also, the Westernization of consumers' eating habits will boost growth in categories that were underrepresented in the market previously such as dairy, confectionary and skin care.

Consumer Spending Growth Ahead
Indonesia - GDP Per Capita & Real Private Consumption Growth

Still, we believe the Indonesian market is challenging for foreign producers to maintain an advantage in due to its complicated geography and underdeveloped infrastructure. In fact, Indonesians live on about 6,000 of more than 17,000 islands that span 5,000km from east to west. Even if 60% of the population lives on the island of Java, it is difficult to reach shoppers spread across the archipelago, especially as only 11 cities have more than one million residents. Moreover, the country's road density is only two thirds that of China's, and less than half of Malaysia's, while 40% of roads are unpaved. Congestion is very common and, for example in Jakarta, the average work commute takes more than two hours. Added to this, the country's retail landscape is dominated by small traditional shops where competition for shelf space and limited air conditioning determine choices, according to a study conducted by Kantar Worldpanel and Bain.

An Already Consolidated Market
Largest Player Second Player Market Concentration
Cheese Kraft (60%) Fonterra (15%) 84%
Yogurt Danone (40%) Yakult (30%) 90%
Condensed Milk Friesland Campina (40%) Indofood (30%) 98%
Chocolate Petra (50%) Mondelez (10%) 77%
Instant Noodles Indofood (75%) Wings (20%) 94%
Biscuits Mondelez (20%) Mayora (40%) 62%
Skin Care Unilever (50%) P&G (10%) 70%
Note: data is as of 2012; Market concentration is calculated as the top four players combined share of the market; Source: Kantar Worldpanel, Bain & Co, Euromonitor

Even if Indonesian consumers are willing to pay a premium for products where they see a distinct quality or functional benefits, they are much less loyal to brands than other consumers in the region, especially compared to the Chinese. In some categories, such as instant noodles, liquid milk, and ready-to-drink tea, Indonesians buy almost twice as many brands as the Chinese do over a year. Some foreign companies though have managed to command large premiums for their products on the Indonesian market thanks to better taste, higher quality or functional benefits associated with the products. Danone commands a 30% premium for its bottled water category in Indonesia (compared to local brands) according to a study from Kantar Worldpanel and Bain. Ice cream offered by Unilever and Campina sells at a premium of 450%, and chocolate confectionery offered by Mondelez and Petra Foods sells at a premium of 75%.

Indonesians Less Brand Loyal Than Chinese
Indonesia & China - Number Of Brands Purchased Per Year In Selected Products

We believe foreign companies will continue to deploy efforts to maintain their market share as local companies threaten to undercut them, especially in categories where brand loyalty is low. In fact, the proliferation of local artisan brands in some categories and the fact that Indonesian shoppers prefer to shop more frequently in smaller traditional shops than consumers in other emerging markets makes it more difficult for foreign brands to maintain their existing market share. Research from Bain shows that there is a direct correlation between frequency of shopping and the number of brands purchased in a given year. Also, proliferation of local brands for some categories (especially confectionary and biscuits) and their better distribution in smaller retail formats, gives them an advantage over foreign brands.

We believe rapid expansion in larger retail formats will give an advantage to foreign players by the end of our forecast period, provided they manage to keep their current share of the country's food and drink markets. Hyper and supermarket sales increased by 43.0% in value over Q114 in urban areas, while minimarkets and traditional trade increased by only 14.0% and 15.0% respectively, according to Kantar Worldpanel. We forecast total mass grocery retail value to grow by 13.7% out to 2018, driven by hyper and supermarkets (and also convenience stores).

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Related sectors of this article: Food & Drink, Drink, Food, Mass Grocery Retail
Geography: Indonesia, China
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