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Indonesia's increasingly sophisticated consumer demand

Indonesia increasingly more sophisticated consumer demand, Indonesia Packaging, AsiaPhile, Stuart Hoggard, packaging market trends
INDONESIA -
In the first of a two-part series, Stuart Hoggard looks at the alternatives to China presented by South East Asia’s booming economies.

It’s election season again for Indonesia’s 251 million people; time to choose a new President and Senate. Cars, trucks and pick-ups range the roads festooned with political posters and sporting flags, every spare tree, lamppost and just about any vertical structure in small villages, towns and cities boasts enormous billboards featuring smiling men with some sort of reputation giving the thumbs-up and looking for all the world like estate agents.

Interspersed with the political hopefuls are the occasional election commission poster warning ‘No Korupsi, No Violence” for elections are big business and there is money to be made from printing the millions of posters (digital, of course). Then there’s the billboard space rental (what you were labouring under the misconception that the owners of the trees or houses put up the posters out of political conviction!). And of course there’s the cost of getting out the vote: per vote this can run to Rp20,000 ( US$1.78 ) in Java but up to Rp500,000 (US$44.54) in some of Indonesia’s 18,000 islands.

But if you have a couple of trees, a vehicle of some sort and a family of four eligible voters, “No Korupsi” is a laudable slogan but when a once-in-four-years windfall can bring in a year’s school fees for the kids, pay for a new LCD TV and put food on the table, then moral positions become mere sloganeering and are met with a shrug and knowing smile.

Profile: Indonesia

- Population: 251,160,124 (July 2013 est.)

- Age Structure:

   --- 0-14 years: 26.6%

   --- 15-24 years: 17.1%

   --- 25-54 years: 42.2%

   --- 55-64 years: 7.6%

   --- 65 years and over: 6.4%

- Median age: 28.5 years

- Population growth per annum: 1.03%

- GDP: US$1.212 trillion (2012)

- Annual Per Capita GDP: US$5,000 (2012)

        

Quite apart from the trickle-down financial benefits of a 17-year-old democratic system, money is sloshing around Indonesia like the boom time of the late 1980’s when as an oil producer and OPEC member, the Indonesian economy had the pedal to the metal and was seeing 12-13% annual GDP growth.

Today’s GDP growth, the fastest in South East Asia, is a more modest 6-6.5%. Even in non-election years, this is fuelled almost entirely by domestic consumer spending.

As a country of 251 million people, which is growing at a rate of 1.03% annually, the Indonesian domestic consumer market holds huge possibilities.

While the national per capita annual GDP is slightly more than $5,000, this is largely due to the size of the population, and the fact that 38.9% of the population is still employed in family-unit size subsistence agriculture (mainly rice).

Nevertheless, all income groups have benefited from Indonesia’s accelerated growth, although the middle class has enjoyed the most rapid advances in terms of spending increases and quality of life improvement, and increased demand in a range of consumer categories from home electronics and appliances to health and beauty products.

Indonesia’s growing middle class - defined by the World Bank’s Index of Developing Countries as those with incomes of above $10,000 annually - will reach 150 million people by the end of 2014.

Booming Retail

A strong economy has built a consuming class, if not overnight, then certainly in the past ten years. In 2009, less than a quarter of the country was middle class; now it is more than half.

In five years, household consumption expenditure in current dollar terms has more than doubled. After years of holding back, Indonesians appear to be increasing discretionary spending on what can be considered premium goods, according to research by global measurement firm Nielsen. According to Nielsen, the fast-moving consumer goods (FMCG) sector is growing twice as fast as the overall economy.

Economic wisdom holds that in developing countries, as people begin to earn more, they spend almost half their income on food, but as Indonesians become wealthier, it doesn’t necessarily mean that they will eat more - it means that they will buy more smartphones and tablets; a cursory straw poll of three packaging company executives at lunch in a German restaurant in Jakarta revealed that they carried two mobile phones each (the obligatory Blackberry and Samsung smart phones).

When the gadgets were laid on the table, one lady dug into her handbag and sheepishly pulled out her third phone “It’s the new Sony. Shock and waterproof!” I couldn’t picture this middle-aged lady abandoning her Honda Jazz for a more extreme action sports model. “Well, we’ve had a lot of heavy rain in the last few months!”

Indonesia increasingly more sophisticated consumer demand, Indonesia Packaging, AsiaPhile, Stuart Hoggard, packaging market trendsNowhere is this increasing distribution of wealth more evident than in Jakarta’s gridlocked streets. Traffic has always been a nightmare but even as times change, Jakarta’s infamous traffic jams remain; but where 15 years ago the majority of the vehicles honking and inching bumper to bumper through the dusty wide express-ways (sic) were rust buckets spewing black smoky exhaust fumes and radiator steam, today’s generation of vehicles sitting immobile in the baking heat are gleaming Toyotas, Mercedes, BMWs and SUVs, with their middle class occupants sitting in behind tinted windows in air conditioned comfort.  

Greater Jakarta is a significant stand-alone market. In itself a city of more than 28 million, it is one of the largest urban centres in the world – even larger than Beijing (19,6 million) or Shanghai (23.9 million).

It's also one of the fastest-growing cities on earth, growing faster than Beijing and Bangkok, with a population density inside the city’s official boundary of 15,342 people per square kilometre (39,740/square mile).

Indonesia has 11 cities with a population over 1 million.

Gone Shopping

The increase in consumer demand has driven a property construction boom, with the priority being new multi story shopping complexes. According to real estate agency Colliers International, total retail space in Jakarta has risen from around one million square metres in 2000 to 4.5 million square meters today.

In the past five years Jakarta has seen the opening of 178 new glittering polished marble and glass air-conditioned shopping complexes. International retail luxury brands such as Louis Vuitton, Cartier and Burberry rub shoulders with Marks & Spencer and H&M – both of which are regarded as up-market foreign brands.

Supermarket chains, such as Carrefour, 7-11 and Korea’s Lotte Mart, vie for business with local retailers Indomart and Alfamart.

The rise in consumer demand and availability of outlets has changed the way people shop. Malls, minimarts and hypermarkets are fast replacing wet markets and traditional outlets, and they are as advanced and sophisticated as any in South East Asia, Europe or Japan.

According to Ariana Susanti, Director of the Indonesian Packaging Federation (IPF), “The biggest change we’ve seen in consumer preference is that at all income levels, people no longer eat rice for breakfast” - this in the second largest rice growing country in the world.

“Rice needs to be cooked and is time consuming to prepare,” Ariana explained. “These days, most people eat instant noodles, just boil water and pour it into a bowl and each packet comes with its own seasoning.”

Indonesia increasingly more sophisticated consumer demand, Indonesia Packaging, AsiaPhile, Stuart Hoggard, packaging market trendsOver 54% of all packaged groceries are sold in modern outlets, up from 35% in 2000.

While the air conditioned malls offer an entertaining comfortable day out for consumers and window-shoppers alike, gridlock out in the streets turn household provisioning into a major expedition with complex logistics: how to get there, where to park, how long will it take to get there.

As a result minimarkets, such as Alfamart, Indomart, Circle K and 7-11 have sprung up in neighbourhoods all over the city offering basic packaged necessities a short walk or moped ride away. Minimarts now account for 17% of all grocery sales in urban areas.

An interesting trend that has emerged in the past five years is the diversification of the minimart into a sidewalk café. A few tables and chairs with umbrellas outside the store, inside they are equipped with a microwave, various hot food warmer displays and freezer/chiller units stacked with food service trays and flexible packaging pouches, and the minimart has been transformed into a neighbourhood café.

Indonesia is shaping up to become the next China, with strong markets in major cities as well as in the secondary urban locations.

Indonesia’s demographic trajectory makes it all the more attractive. While China faces major demographic challenges as much of its GDP future wealth will be spent on taking care of elderly citizens, by contrast Indonesia is facing a demographic dividend: as the number of children in the overall population is declining slightly, the percentage of working age people is increasing – the average age of the population is 28 years old - while the number of elderly is rising, but slowly.

Indonesia, and young working Indonesians are becoming relatively wealthy, pouring more into consumption as they climb the social ladder and want all the trappings of a modern lifestyle – that means packaged product….. lots of it!

 

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