Indonesia’s cosmetic sector has grown rapidly in recent years. Backed by an industry that has decades of experience, skilled and abundant human resources and a large domestic market, the Indonesian cosmetic industry remains robust amid a global economic slowdown.
According to data from the Ministry of Industry, the export value of Indonesian cosmetic products in 2015 reached $818 million USD or 11 trillion IDR. Meanwhile, the import value of cosmetic products in the same year reached US $441 million. This means that the cosmetic product trade balance recorded a surplus of about 85%.
That being said, the country’s cosmetic industry still faces a number of obstacles. One of the toughest challenges the industry faces is more than 90% of its non-herbal raw materials are imported. Meanwhile, the government's plan to implement mandatory halal certification in 2017 for cosmetic products presents both challenges and opportunities for the local and global cosmetic industry.
The cosmetic industry is one of the fastest growing sectors in Indonesia and has consistently recorded double-digit growth in recent years. In addition, the industry has been named as a priority and strategic industry by the government as it employs no less than 75,000 in terms of direct labours and 600,000 in terms of indirect labours.
According to the Association of Indonesian Cosmetic (Perkosmi), the organisation currently has 400 members that own 760 cosmetic companies, 23 of which are large companies and the rest are SMEs. The Food and Drug Supervisory Agency (BPOM) noted that from 36,642 cosmetic products registered in Indonesia in 2014, 14,656 of them are domestic products and 4,485 of which are produced by SMEs.
Cosmetic sales volume growth in the country has been underpinned by increased demand; particularly from middle class consumers. After all, the female population in Indonesia, the largest cosmetic users, has now reached 126.8 million people. In addition, there has been a recent increase in the number of men, especially in urban areas, buying and wearing cosmetic and skin care products.
Furthermore, cosmetic products typically have specific target customers. These customers tend to be loyal to a particular brand. This is different from food products that have a lot of substitution, so that consumers can easily switch to other products if they are not satisfied. Therefore, the demand for cosmetic products is relatively stable.
The Indonesian cosmetic industry, especially its herbal/traditional segment, has decades of experience in producing tested and quality cosmetic products that cater to local needs. In addition, herbal raw materials for cosmetic products are also abundant in Indonesia, which has the second highest level of biodiversity in the world after Brazil. The availability of skilled and cheap labour is another advantage of the domestic cosmetic industry.
To date, there are five players in the cosmetic industry which has listed its shares on the Indonesia Stock Exchange: PT Unilever Indonesia Tbk (UNVR), PT Mandom Indonesia Tbk (TCID), PT Mustika Ratu Tbk (MRAT), PT Martina Berto Tbk (MBTO), and PT Akasha Wira International Tbk (ADES).
The performance of these five cosmetic manufacturers continued to grow positively in the first half of 2015. On average, their revenue grew 7.06% annually, with an average profit growth of 14.45%. Mandom posted the highest revenue increase of up to 30.5% from 1.17 trillion IDR in June 2014 to 1.23 trillion IDR at the end of the first half of 2015. Mandom’s profit soared 432.75% from 94.41 billion IDR to 505.97 billion IDR.
Rather disappointingly given the potential of local brands, national sales of cosmetic products are still dominated by imported goods which account for 60-70% of the total. Products imported from ASEAN countries account for around 5% while those from Europe, China, USA and others account for 55%. This is in contrast to other countries such as South Korea and Japan whose national cosmetic industry dominates the local market by up to 60% leaving only 40% to multinational companies.
Indonesia is acknowledged as a manufacturer of quality cosmetic products by the international community. This is evident in the export value of Indonesian cosmetic products, which reached $818 million USD or 11 trillion IDR in 2015. The country’s export performance is higher than the value of its cosmetic product imports of $441 million USD.
Although this is less than previous years of $1.004 billion USD in 2014 and $975 million USD in 2013 due to the global economic slowdown, the sector managed to record a trade surplus of about 85%.
Indonesia exports cosmetic products, mostly spa products and essential oils, to Southeast Asia and Middle Eastern countries. However, the global economic slowdown has prompted cosmetic manufacturers to begin to look at a number of other potential markets such as the EU, the United States, and Africa.
Some local cosmetic companies such as Mandom Indonesia also continue to add new export markets in Southeast Asia by marketing its products to Vietnam, Cambodia, Laos, and Myanmar. The similarity of skin colour, race, and culture and the implementation of ASEAN-China free trade agreements provide opportunities for Indonesian cosmetic companies to increase their market share in ASEAN countries thanks to lower import duties.
This has been successfully done in Malaysia where the export of cosmetics from Indonesia in 2015 reached 176.95 million Malaysian Ringgit, up by 19.26% compared to 2014. With an average growth of 11.8% in the last three years, Indonesia is the 7th largest beauty product supplier to Malaysia, with a market share of 5.54% after Thailand, Singapore, China, the United States, France, and South Korea.
Despite strong growth, the Indonesian cosmetic sector still faces a number of obstacles and challenges. One of the main obstacles is the sector’s high dependence on imported non-herbal raw materials reaching 90%. This makes the cosmetic industry more vulnerable to fluctuations in the rupiah exchange rate and the rise in raw material prices which ultimately affect the product’s selling price at the consumer level.
To that end, the Ministry of Industry calls for integration of the Indonesian cosmetic industry from the upstream to the downstream sectors by increasing raw material production in order to reduce imports. In addition, the industry is also expected to spur research and development, product innovation and market research.
Another challenge faced by the cosmetic industry in Indonesia is the dominance of imported cosmetics products in the domestic market, which is bolstered by the rising demand for premium and branded cosmetics and lower tariffs resulting from ASEAN-China free trade agreements. According to data from the Ministry of Trade, imported cosmetic sales in 2015 reached $441 million USD.
To deal with the rise of imported cosmetic products, local cosmetic companies have been aggressively educating consumers that foreign cosmetics are not necessarily suitable for the tropical skin type that most Indonesians have. In addition, local cosmetic manufacturers have begun to improve their product packaging and design which is one of the key weaknesses of domestic cosmetic products.
Another obstacle faced by the local cosmetic industry in Indonesia is the lack of communication and negotiation skills with potential partners abroad which hinder them to tap into export markets. Furthermore, local cosmetic producers are also weak in product branding. As a result, many consumers are not aware of the benefit of domestic cosmetic products.
In addition to competition from legal imported products, the local cosmetic industry is also battered by illegal and fake cosmetic products which are often poisonous and dangerous. According to the Indonesian Cosmetic Producers Association (PPAKI), the sales value of illegal cosmetics in Indonesia is estimated at between 15%-20% of total sales of cosmetics in Indonesia with double-digit growth per year.
The industry points to Article 9 of Regulation of Minister of Commerce No. 87/2015 on the Provisions of Imports of Certain Commodities which exempts imported cosmetic products from compulsory verification which has created loopholes that allow illegal, foreign cosmetics to enter the country. However, the Ministry of Commerce argued that the rule was based on the President's instructions and the institution that holds the authority to inspect cosmetic products is BPOM. At present, the agency already has an online cosmetic notification system that aims to determine whether cosmetic products have been registered. Almost every year, BPOM confiscates illegal and fake cosmetics worth billions of rupiah.
At the end of this year (2016), the government plans to issue a government regulation on halal product assurance as a derivative regulation of Law No. 34/2014 on Halal Product Assurance.
An important point of the regulation which is scheduled to be passed on 17th October 2016, is that any product that enters, is distributed and traded in Indonesia that claims to be halal must be halal-certified. Mandatory halal certification requires companies to conduct laboratory tests on all raw materials that are used to make the final product.
Besides adding extra costs to the certification process, the challenge for the cosmetic industry is that a lot of its raw materials come from global distributors and are manufactured by international companies which may not be familiar with halal requirements. Fortunately, the government will not require all products to be certified this year. In 2016, it will be applied to food and beverage products, followed by cosmetic products in 2017 and medicines and medical devices in 2018.
After the implementation of halal regulations, all products that claim to be halal must be halal-certified. Companies that do not follow the rules will be given a warning letter up to three times followed by the revocation of their products.
This regulation can bring significant new opportunities for the cosmetic industry in Indonesia. After all, the majority of the country’s population and cosmetic consumers are Muslims. Local cosmetic companies can use halal certification to grow their market share in overseas markets with large Muslim populations and utilise the opportunity to build an effective consumer brand within the halal niche. As the demand for halal cosmetics increases both in Indonesia and globally, both local and international brands will have the chance to capitalise on this relatively new but increasingly important market segment and Indonesia is the ideal testing ground for new halal cosmetic products.
Global Business Guide Indonesia - 2016
Beauty and skincare products are set to benefit from consumers’ increasing ability to afford everyday luxuries. While sales of cosmetics have grown fast over the past years already, there is a lot of untapped potential as Indonesia’s population grows in numbers and in affluence.
Contribution to GDP: 20.41% (Q3 2015)
Sector Growth: 4.33% (yoy, Q3 2015)
Number Employed in the Sector: 16.38 million (February 2015)
Highest Minimum Wage by Province: 3,100,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,482,950 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.