Global Business Guide Indonesia

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Manufacturing | Thirst Quenching: Indonesia’s Food & Beverage Industry

Indonesia's economy is largely driven by rising household consumption, and one industry that thrives on this like no other is that of food and beverages. Sales growth is fuelled by rising personal incomes and increased spending on food and drink, especially from the growing number of middle class consumers. Consequently, this is also an industry where local companies have been particularly ambitious – and several of them have evolved into successful global exporters. At the same time, the internationalisation of local cuisine represents a prime opportunity for foreign companies to sell their products to Indonesian consumers, who are more and more open to new foods and flavours.

Thirst Quenching: Indonesia’s Food & Beverage Industry
More expedient is finding ways to strengthen the quality and especially the branding of local products both in Indonesia and the wider region
 

Lifestyle changes in Indonesia's urban centres largely follow the trends of established markets, with office workers having less time for cooking, or less interest in doing so, yet demanding health-boosting food. Importantly, shoppers are gaining access to a wider range of products thanks to the country's developing retail infrastructure, with hypermarkets and mini-markets moving deeper into the regions (See Indonesia’s Retail Boom is Far From Over). Improving logistics facilitate the distribution of perishable goods, such as frozen foods, across the archipelago (See Indonesia’s Logistics Sector).

A growing market for local and foreign brands

Rising steadily over the past years, domestic food and beverage sales totalled 900 trillion RP in 2013. The Indonesian Food and Beverage Producers Association (GAPMMI) predicted the market to grow by at least 11% to 1000 trillion RP in 2014. The market outperformed overall economic growth in recent years, and analysts expect this trend to last. Indonesian food consumption is forecasted to grow by 9.1% in 2014 and achieve a compound annual growth rate (CAGR) from 2014 to 2018 of +7.6% (BMI). Drink sales are expected to be even stronger, with alcoholic beverages to grow at 13.9% in 2014 and at 9.0% CAGR from 2014 to 2018, while soft drink sales are estimated to increase by 11.7% in 2014 and CAGR 2014 to 2018 of 9.3%. Mass grocery retail sales in 2014 are seen at +14.2%, with CAGR 2014 to 2018 of +10.7%.

Food and beverage processing is one of the most mature industries in Indonesia, with a large number of businesses competing for sales. The vast majority are small or micro-sized enterprises, though a fairly small number of large companies dominate the market, including Indofood Sukses Makmur, the world’s largest instant noodle maker with sales of 57.73 trillion RP in 2013, Wings Group, Mayora Indah and Garuda Food, a subsidiary of Tudung Group. Such companies have embarked on strategies to not only entice customers by price, but innovating to produce tailored, value-added products that appeal to the Indonesian consumer’s preference for traditional food in an instant form such as Mayora’s instant congee. Since the large businesses are better equipped to cope with cost increases or sudden policy changes and are in a stronger position to take advantage of an increasingly open export market in the Southeast Asian region, Indonesia's food and beverage industry can be expected to see significant consolidation over the coming years. Foreign companies and brands are also well integrated into the market, including Nestle, Kraft Foods and Unilever. The internationalisation of Indonesia's cuisine suggests that traditionally western foods, such as those based on milk or wheat, will increasingly suite the local palate (See Indonesia’s Growing Appetite for Wheat).

Rising trade

The food and beverage industry plays a vital role in Indonesian exports and the government actively promotes its companies abroad, as reflected in the visit of an Indonesian business delegation to the US and Canada in March/April 2014. The trade mission, led by Deputy Trade Minister Bayu Krisnamurthi, was aimed at exploring opportunities to sell more Indonesian products in the North American market. Major export products include snacks, special beverages, sauces, condiments, pickles, processed fruit and vegetables and shellfish in the form of crab meat or shrimp paste. In 2013, processed food and beverage goods worth $4.83 billion USD were shipped abroad (Indonesian Statistics Agency), and GAPMMI targeted export growth of around 11% in 2014 (similar to 2013). The United States ranked as the top export destination for Indonesian food and beverage products in 2013 with a value of $602 million USD.

While exports of processed and semi-processed food and beverage products grew faster than imports in 2013, a trade gap of more than $1.6 billion USD remained. There is continued popular and political pressure to stem what is sometimes decried as a flood of imports, either by giving greater support to local producers or by implementing measures to keep imports out. Nevertheless, Indonesia remains quite open to imports. Foreign exporters are advised to collaborate with local partners to facilitate both the import process and distribution of their products, especially if the partner has an established sales network across the country.

Foreign investment still dominates

According to GAPMMI estimates, investment in the food and beverage industry could surge to a record 50 trillion RP in 2014, up more than 42% from 35 trillion RP in 2013. While roughly 60% of the total 2013 investment was foreign direct investment (FDI), domestic direct investment is forecast to grow faster than FDI in the coming years. A number of foreign players have recently announced investment plans, including Coca-Cola Amatil and Danone Group, while 20 Japanese companies were assessing investment prospects as of June 2014. GAPMMI Chairman Adhi S. Lukman told media that most of the Japanese businesses were looking to enter the market in 2015, preferably by partnering with local enterprises. Companies from China are also reportedly mulling investment.

Aside from the large population and rapid economic development, what makes Indonesia attractive for investors in the food and beverage industry is the domestic availability of numerous agricultural commodities, such as coffee, cocoa and palm oil. That said, farmers have in many cases become the weak link in the national food production chain to the extent that even cocoa is now imported from abroad to meet demand for processing industries (See Indonesia's Booming Cocoa Industry Puts Farmers to the Test).

Challenges

The reliance on the domestic market means that food and beverage businesses are less exposed to fickle global markets than many other industries. Local producers are sill, however, vulnerable to fluctuating global prices for ingredients they need to import from abroad. This became very obvious in the first half of 2012, when droughts in the US and Brazil led to a spike in global soybean prices and drove up the cost for Indonesian producers of tofu and tempeh, two popular soy-based staples in local cuisine. The Rupiah depreciation in 2012 and 2013 also dealt a serious blow to Indonesian businesses that rely on imports of wheat, sugar, milk or other ingredients.

Imports of processed foodstuffs will continue to make up a substantial part of total sales, since some of them cannot be viably produced in Indonesia. Locally-based food processors need to find other ways to keep their costs in check and improve their competitiveness amid intensifying regional trade. SMEs are under the greatest pressure from rising wages, electricity tariffs and lending rates. Improving operational efficiency and energy consumption with new equipment and optimized processes is one way for these businesses to alleviate cost pressure, but more expedient, perhaps, is finding ways to strengthen the quality and especially the branding of local products both in Indonesia and the wider region. Justified or not, many Indonesians still associate higher quality with foreign brands and prefer them to local ones, particularly with regards to food for babies and children. In the case of small producers, even enhancing just the packaging can often go a long way to boost the appeal of local products.

Healthy eating and frozen foods

Adapting to trends will be crucial as Indonesia's eating culture remains in flux. One of the major trends is a growing health consciousness among Indonesia's young population, which creates opportunities for products such as nutritional drinks or cereals enhanced with vitamins and minerals. Fortified milk products target weight-losers, body-builders and breastfeeding mothers. Convenience foods are also benefitting from urbanisation and the growing office workforce. Ready-to-drink coffee and tea is seeing particularly fast growth (See Teatime in Indonesia), while fruit/vegetable juices as well as sports/energy drinks are also outperforming.

By and large, consumers are looking for fast and convenient food without significantly compromising on healthy eating. One product category that fits the bill is frozen foods, which reduces cooking time, but maintains much of the 'goodness' contained in vegetable or animal products. Frozen food sales are mainly driven by the expansion of modern retail outlets across the archipelago. Equipped with freezers and modern storage facilities, hypermarkets and supermarkets help to supply frozen goods even to formerly underserved regions such as eastern Indonesia. A December 2013 report from market research firm Euromonitor estimated growth in frozen processed food in Indonesia at 18% in current value terms and forecast continued robust sales growth with a constant value CAGR of 10%.

Outlook

The ASEAN Economic Community (AEC) will further open trade within the region and provide growing export opportunities for companies operating in ASEAN or in countries that have bilateral free trade agreements with the ASEAN block. As a very significant market in its own right, Indonesia is an attractive investment base from which to supply to local customers and neighbouring countries.

Despite fast growth in recent years, the market's potential is far from exhausted. Personal incomes remain on the rise and the spread of modern retail continually improves access to remote areas of the country, with major cities such as Makassar, Medan and Manado developing into new growth centres. Opportunities also abound for providers of machinery that can help manufacturers increase the quality and quantity of production or decrease energy consumption.

Global Business Guide Indonesia - 2014

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Indonesia Manufacturing Snapshot

Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.