Indonesia’s dairy industry and dairy products industry is undergoing a boom with market demand rising by over 10% on an annual basis for the past ten years due to changing consumer habits and population growth (Nielson). While not a traditional part of the Asian diet, dairy products such as milk in fresh and powdered form as well as cheese and yoghurt are gaining popularity to become a regular feature on the shopping list for middle income families. Indonesia’s estimated per capita milk consumption is only 11.7 litres per annum which is significantly lower than 22 litres in the Philippines and 31 litres per capita in Thailand. Indonesia also has the highest rate of growth in milk consumption in the ASEAN at 4.8% per year over the period 2006-2010 (International Finance Corporation & More Link Asia Pacific). This is presenting exciting opportunities for the private sector in both the upstream and downstream segments to make up the shortfall in milk supply as well to introduce new products that appeal to the growing health consciousness of the market.
One of the key challenges currently facing the industry is the lack of supply from local dairy producers and the quality of the milk being produced. Indonesia has approximately 500,000 dairy cattle which are mainly found in small numbers and tended to by individual farmers who are members of their local dairy cooperative (Koperasi Unit Desa, KUD) (See Agriculture Overview Indonesia). Close to 97% of such farms are concentrated in West, Central and East Java with a small proportion of around 3% in Sumatra (International Finance Corporation). East Java is Indonesia’s largest dairy production base accounting for 57% of all milk production. The average productivity of cattle in Indonesia is nearly half of the international standard at 12-14 litres per day compared to around 30 litres per day (National Milk Board, DSN). This figure has increased on an annual basis over the past 5 years for dairy corporations at 42% however the average is brought down by individual producers whereby productivity has grown by only 19% (IFC). The country’s demand for milk in 2011 stood at 3.5 million MET with local producers supplying approximately 950,000 MET (DSN). This figure is set to increase to 6 million MET by 2020 in line with the current growth in demand.
Reliance on imports, mainly from Australia and New Zealand, are a concern given the country’s vast availability of land and labour for cattle farming. Only 25% of the raw materials for milk supply are produced locally with 75% coming from foreign imports to a total value of $1.3 billion USD in 2011 up from $750 million USD in 2010 (Indonesia Finance Today). The pricing and quality of the milk being produced by dairy farmers is holding back the further development of the domestic upstream dairy industry. Government subsidies for staple agricultural goods including milk in various OECD countries makes such products cheaper to import compared to locally produced fresh milk in Indonesia despite the 5% import duties and VAT applied to milk. Local, small scale producers implement suboptimal production methods such as for the feeding and nutrition of the cows as well as using domestic cattle breeds which produce inferior yields. Such producers are also failing to meet international industry standards in hygiene as they lack their own processing facilities and coordinated supply chain therefore only 12% of locally produced milk meets minimum industry standards and holds a significantly lower market value. Milk produced in Indonesia is therefore being used as a supplementary supply source in the production process as opposed to the main component of the supply chain.
Indonesia’s dairy industry is made up of around 30 corporations which are both locally incorporated multinationals as well as large scale local producers which tend to be units of consumer goods focused groups as part of an integrated supply chain. The key international players in the industry as a whole are Nestle in the liquid and powdered dairy product sector who produce 116,000 MET of milk per year, Frisian Flag in liquid and condensed milk who produce 280,000 MET of milk per year as well as Sari Husada which is part of Danone Dairy for infant nutrition and Unilever for frozen dairy products such as ice cream (IFC and World Bank, 2011). In terms of local players Indolakto, which is part of the conglomerate Indofood Sukses Makmur, is one of the largest dairy brands in Indonesia with market dominance in UHT and sterilised milk. Ultrajaya is another key player in the sector with over 3,000 dairy cattle producing 102,000 litres of milk in 2011. Other major local players and recognised dairy brands include Greenfields Indonesia which produce the Greenfields milk brand that has become the preferred choice for the middle and upper income segment and Cimory.
The last five to ten years has seen local and international dairy producers make significant investments in their livestock capacity and production facilities in preparation for the sector’s further expansion. In 2011, Indofood Sukses Makmur announced that it will be investing $130 million USD in a new milk processing facility in East Java which would increase its dairy output by 50% when it begins production at the end of 2012. Ultrajaya spent over 50% of its 2011 capex budget totalling $11.7million USD on machinery and robotics for its production facilities as well as for the purchase of 2,000 dairy cows. The company also established a joint venture with Wellard of Australia to boost its milk output. Nestle has also invested $200 million USD in a production plant for powdered milk and its popular Milo drink brand in Karawang, West Java which will begin production in the first quarter of 2013 and become fully operational in 2014. Dairy giant Fonterra of New Zealand is due to establish a dairy packing plant in Indonesia in 2012 to anticipate further demand from the domestic dairy industry.
Production figures are not the only area that producers are investing in however, raising consumer awareness and marketing dairy products to Indonesia’s diverse local market also requires significant investment. Kalbe, a state owned pharmaceutical producer which is also engaged in the milk and health foods sector, invests 12-13% of its revenues on advertising to woo Indonesia’s lower income segment which have traditionally used mashed up bananas and ground soybeans for infant nutrition as opposed to milk. Multinationals such as Nestle are taking the lead in branding stakes by identifying with Indonesian middle class families’ desire for the success of their offspring both physically and in terms of academic performance. The use of English and Western motifs in advertising campaigns is also appealing to the middle and upper income demographic as affinity to the English language is associated with higher social status. Local brands such as Indolakto are therefore facing a marketing and branding challenge to effectively position their products against the likes of Danone and Nestle in the Indonesian market.
The Indonesian dairy industry tends to go against the consumer trends of other markets both in the region and globally. For example, over 90% of the dairy market is dominated by processed milk as opposed to fresh i.e. UHT milk and that in powdered or sterilised form. Annual consumption in powdered milk is forecasted to reach 252.644 MET in 2013 or over 7% growth annually. Sweet condensed milk is another highly popular dairy product with annual average growth expected at 4.8% annually to 2014 or 529.077 MET. Changes in retail habits and the shift towards modern retail such as grocery stores and supermarkets is opening up further opportunities for fresh dairy products as previously such goods could not be stored correctly in traditional retail facilities. Improvements in transport infrastructure and the establishment of cold chain supply management is enabling dairy producers to reach beyond the traditional economic centres of Java to the country’s main and outer lying islands. Fresh cheese, yoghurt and pro biotic yoghurt drinks are the key product segments that can benefit from this trend as they gain popularity among Indonesian consumers. However, both local and multinational downstream producers face the challenge of adjusting such dairy products to the local consumer tastes. For example, the preference for sweet tasting dairy beverages and the addition of more traditional ingredients to cream or cheese based products such as chilli and curry is seeing the production of dairy products which are particular to the Indonesian market. This presents the opportunity for local dairy players to gain an inside track in crafting innovative products and brands, yet the technology, knowhow and downstream production facilities remain a hurdle to realising such potential.
As a production base for the ASEAN and South East Asia, Indonesia has the future scope to be a key dairy exporter (See Overview of the Manufacturing Sector). Indonesian dairy producers have exported to markets such as USA and Singapore for powdered milk products in the past however exports have tailed off in five years from 5,000 MET in 2007 to 1,000 MET in 2011 (United States Department of Agriculture) as the local market is now the priority for most dairy companies. For the medium term, the Indonesian dairy industry must concentrate on building its capacity to ensure that the local upstream and downstream players are able to take advantage of the boom in dairy consumption. Large scale investment is required to import cattle from Australia and New Zealand in order to double the current number to reach over 1 million cows. Improved coordination among Indonesia’s 220 dairy cooperatives and 100,000 independent farmers to introduce modern production methods are also crucial to Indonesia’s dairy capacity. The successful implementation of such measures coupled with Indonesia’s wide availability of suitable land and labour for cattle farming could well see the country return to being a dairy exporter for both fresh milk and value added processed goods.
Dairy industry players are rightly focusing their investment and marketing efforts on the domestic consumer market given the scope for growth at over 4.8% annually to 2014 (IFC). Local farmers and dairy producers must play a larger role in this trend given Indonesia’s potential in this area to limit its reliance on imports and thus insulate the industry against currency fluctuations and supply side shocks. Indonesia therefore needs to increase the number of dairy cattle, introduce more productive cattle breeds and ensure that the cooperatives play a role in the socialisation of new methods of production to local farmers. Such areas are key opportunities for international dairy players and investors who are prepared to work with cooperatives for supply chain management and invest in processing facilities to elevate the standards of locally produced milk. Such investment is also required in the downstream industry to develop the capacity of local producers in creating unique products and successful brands that effectively combine quality with local tastes that in turn could appeal to export markets with similar diets beyond Indonesia’s borders.
Global Business Guide Indonesia - 2013
Contribution to GDP: 13.88% (Q3 2015 including Fisheries & Livestock)
Number Employed in the Sector: 40.12 million (February 2015)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.