A less than stellar beginning to 2016 has analysts across Indonesia taking steps to recalibrate industry projections for the year amidst concerns of a longer than expected blip in economic performance (See Indonesia’s Economic Outlook in 2016 and Beyond). In a particularly challenging position are the country’s many import-reliant industries, which for the most part have struggled to cope with their exposure to the fluctuation of the local currency. Amidst this context of a widespread move to keep expectations in check for 2016, however, are a handful of industries whose continued growth in spite of prolonged economic headwinds points to the archipelago nation’s resilience. Foremost among these thriving fields of business is the wheat and baked goods industry, buoyed by surging demand over the last decade that has been largely unencumbered by the recent downturn.
As reported by Bloomberg, Indonesia’s wheat imports have risen by a cumulative 63% over the last decade – a trend expected to persist going forward according to the USDA Foreign Agricultural Services’ projection of a 5.3% growth in imports to reach 8 million metric tonnes between 2016 and 2017. The Association of Flour Producers in Indonesia (APTINDO) is even more bullish in its outlook for domestic wheat demand, predicting that imports could reach a record 10 million metric tonnes in 2016 as an indirect result of government action to limit the import of corn for the animal feed industry.
Now already the world’s second largest importer of wheat grain, Indonesia has in recent years taken steps to capitalise on the market’s strengthening appetite for wheat-based baked goods. Having previously laid claim to only four operating flour mills as of 1998, the country now serves a production base for 31 flour mills with a total installed capacity of 11.2 million metric tonnes per annum (USDA). Given the ready availability of locally-processed wheat flour supply and the market’s growing taste for bread and noodles, the downstream wheat-based product industry presents opportunities abound for investors.
The rising popularity of wheat in Indonesia can in part be attributed to its suitability for use in a number of food products that have become increasingly ingrained in local diets. Noodles, as the wheat-based product to have enjoyed the most success in penetrating the local market, continue to dominate wheat flour use in Indonesia, accounting for 70% of total consumption. Having emerged as an inexpensive alternative to rice that offers the added advantage of convenience, instant noodles in particular have emerged as a consumer favourite in Indonesia, with the country placing second only to China in a 2015 Financial Times report on the world’s biggest consumer of this product.
The Indonesian market’s loyalty to a handful of firmly entrenched brands – such as Indofood Sukses Makmur and Wings Group, who together control nearly 80% of market share of instant noodles – however, means that opportunities for new entrants to this area of business in Indonesia are more likely to thrive by anticipating that demand for instant noodles will transition into a preference for more sophisticated varieties of this meal type. The launch of a host of new restaurant chains in Jakarta offering ramen and udon dishes certainly speaks to the early stages of this trend taking place. Investors requiring further evidence of this pattern should look to the current strategies of prominent wheat flour manufacturers such as Sriboga Raturaya that have increasingly turned their attention to restaurant franchise opportunities as a means of taking full advantage of strong wheat flour supply.
The scope of downstream opportunities in Indonesia’s wheat flour industry, as well as the growing popularity of wheat generally, is closely linked to the country’s expanding middle class and its openness to international foods (See Thirst Quenching: Indonesia’s Food & Beverage Industry). Though often used too readily in market analysis extolling Indonesia’s economic potential, this emerging middle class has indeed already made a considerable impact in driving demand for breads and cakes purchased in bakeries – a trend that bodes well for the ongoing push to integrate other wheat-based baked products into modern retail outlets. Research carried out by Rabobank found that the sale of baked goods rose by 11.7% CAGR in value and 5.5% in volume between 2010 and 2015, with half of the Indonesian bakery market value coming from artisanal bakeries specifically focused on catering to the needs of the middle-upper class.
BreadTalk stands among the most noticeable success stories in Indonesia, having leveraged its understanding of local consumers’ current preference for bread as a sweet snack, as opposed to a replacement for rice as the cornerstone of most meals. The Singaporean bakery franchise first entered the country in 2003 and has since opened 162 stores across the nation, thereby precipitating the entry of new competitors including South Korean franchise Tous Les Jours.
Greater appreciation for bread and its subconscious acceptance as an ‘aspirational’ product demonstrative of a globally-influenced palate has also seen this wheat-based good experience a marked uptick in sales in minimarkets and convenience stores. As reported in The Jakarta Post (8/6/2016), Indoritel Makmur International through its Indomaret retail outlets has witnessed a 25-30% jump in bread sales (value and volume) every year for the last five years. Its leading competitor, Alfamart, in the first quarter of this year saw sales of its private label bread products rise by 81.3% year on year, despite dampened consumer spending over this period of time.
With annual wheat consumption currently reaching only 29 kilograms per capita – a fraction of the level seen in more mature economies – Indonesia has considerable room to grow in building upon the recent boom in demand for wheat-based goods. Foreign investors keen to tap into this swelling market should look to make headway by actively seeking to provide solutions to challenges inherent to Indonesia; namely, logistics and the consequence of poor infrastructure in distributing wheat products across the country (See High Stakes for Indonesia's New Infrastructure Push). With longevity very much a central concern for both retailers and end-users, there are clear opportunities to be had for businesses offering expertise in effective supply chain management to lessen time needed for delivery. Insights into the use of natural preservatives, frozen dough and vacuum packaging are thought to be particularly sought after among local manufacturers in search of new methods to boost shelf life without sacrificing the product’s nutritional value.
Given the relatively recent addition of bread to local diets, the sheer scope of new wheat-based goods that can be introduced to the Indonesian market dictates that there are also openings for international entities with extensive experience in product development. Those that have succeeded in this domain have done so by paying close attention to the preferences of local consumers, and their aforementioned predilection for breads that primarily serve as a vehicle for sweet taste. Moreover, lucrative opportunities exist for companies within the field of branding; as Indonesia’s market for wheat-based baked goods becomes more saturated, the need will arise for well-defined marketing strategies centred around USPs that have long been emphasized in developed markets abroad such as health and the use of natural ingredients. Furthermore, as local consumers’ taste for wheat-based goods becomes more sophisticated so will their expectations for product packaging. This is especially true for wheat-based baked items such as pastries and cookies to be given as gifts – an ever-present aspect of Indonesian culture that becomes particularly evident during festive periods such as Ramadan.
Global Business Guide Indonesia - 2016
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.