invest asean ANALYSIS
Indonesia’s blossoming middle class
Indonesia is the most populous country in the ASEAN regional trading-block, some 260 million strong. The country is the world’s 4th largest consumer market, trailing only China, India, and the United States.
A powerful nation marked by huge opportunity, Indonesia has had one of the most consistent growth rates among global economies over the past ten years with an annual GDP growth averaging six percent – the highest performance amongst the ASEAN-5 countries.
Indonesia’s Gross national income per capita has grown from $570 in 1990 to $3,440 in 2017, an increase of over 500% in a 17-year period. The economy is now worth USD 900 billion per annum, fuelling a large consumer base, second to none in South East Asia, and a burgeoning middle class and retail sector to match drawing in significant capital investment from domestic and international sources.
This growth has created a strong basis for an enhanced depth of demand for products and services among a middle class that has become a dominant force in its domestic consumer market.
Indonesia is expected to account for approaching 40% of ASEAN growth by 2030, private consumption being the primary driver. Additional key factors driving their explosive growth include its strikingly young demographics – with 60% of its people below 30 years of age – and a population expanding at a rate of 2.9 million a year. Undergoing a rapid period of urbanisation which is expected to reach 71% of the total population by 2030 – fuelled by a rise in incomes and the concomitant ability for Indonesians adopting a consumerist lifestyle – it one of the fastest-growing consumer markets in the world.
These positive underlying drivers underscore the potential of Indonesia’s vast consumer market and for any company willing to expand in Asia, perhaps even the main market. Assessing and seizing the opportunities that Indonesia presents requires careful preparation and patience to overcome the considerable complexity the country offers. It is thus essential that any company wishing to operate there interpret and understand the idiosyncrasies of the Indonesian domestic market and its needs.
Equally critical is being conscious of the considerable challenges for companies seeking to capture a share of this humongous commercial opportunity, including its fragmented geography, spread across 6,000 inhabited islands, and the heterogeneous nature of its people. Those companies also need to be prepared and ready to handle the associated logistics and cultural hurdles.
Indonesia is not Jakarta, nor is it Java; Indonesia is a complex country composed of many two-tier and three-tier cities with several affluent consumers who can only be served via proper operations and distribution networks.
Bong Chandra of the Triniti Property Group reiterated this sentiment to FDI spotlight, saying, “First and foremost, you cannot miss the fact that the Indonesia demographic dividend for the next ten years is the most exciting group for trade and investment, especially due to the continually growing middle class. The World Bank predicts that in the next five years the middle class will rise from $3,000 to $5,000 USD; and with 17,000 islands the potential for property development and infrastructure growth, in particular, is tremendous. However, you need to get out of Jakarta; otherwise, you only see 1% of the population and 1% of the potential.”
So where do the opportunities exist and how do you navigate such a diffuse population of one-quarter of a billion people? What consumption trends should companies track as consumer attitudes continue to evolve, and what products and marketing services will resonate with Indonesian tastes, cultures, and preferences? Understanding the needs and attitudes of this fast-growing consumer class will be critical as companies seek to expand their footprint across Indonesia.
The domestic retail sector has grown significantly and has been swiftly evolving since the late 1990’s, in tandem with a marked acceleration in Indonesia’s rising urban population. The contribution from urban Indonesia will play a critical role in driving its economy forward. Traditional retail channels, such as the local “warungs” and wet-markets still dominate the retail landscape which remains fragmented, with consumers relying on multiple channels, convenience stores, hypermarkets supermarkets and department stores.
Indonesians have a strong preference for trusted local brands and take particular, even jingoistic, pride in supporting local businesses. The perception of being “Indonesian” has a strong bearing on purchasing decisions. Successful international companies who have been able to capture a share of the local market have been those who have marketed themselves through localisation and acquisition strategies and by creating brands with local images and appealing to Indonesian value and cultural propositions.
It is critical for marketers to understand and respond to the behaviour and attitudes of urban consumers, and to recognise and which cities have similar consumption patterns and characteristics. This is particularly important when moving beyond the populous metropolitan centres – Jakarta and Surabaya – and into the tier-two cities such as Madiun, Bandar Lampung, Padang, Greski, and Denpasar, which are evolving into fast-growing middleweight cities, developing across the archipelago.
Thus understanding individual dynamics and regional differences is essential, and successful companies need to localise products and value propositions while crafting portfolios of local and global brands that may sometimes need local partnerships.
At 55 million, and growing fast, Indonesia’s urban consuming class is a sizeable opportunity. Projected to reach 86 million by 2020 the population will share characteristics such as being family orientated, risk averse, and brand loyalty, yet with a growing affluent consumer class who are experimental, will try new products and buy premium goods and services. Furthermore, they are willing to make use of modern retail formats such as hypermarkets and supermarkets, which fosters increasing opportunities for investors in the retail sector.
Donny Pramono CEO of local luxury frozen yoghurt manufacturer Sour Sally explained, “It is important to know that here in South East Asia; a special significance is placed on shopping malls. The burgeoning middle classes of this region do not want to spend their days off in the baking sun, they would much prefer to come into a fashionable, air conditioned area with activities.”
Currently, much of this latent retail demand remains untapped, particularly outside of the primary urban centres. PWC estimates that total retail sales stood at $376.9bn in 2016, which means that Indonesia’s market is now outpacing Malaysia, the Philippines, Thailand, Vietnam and even South Korea.
Thus the dynamics of the retail environment continue to evolve. It has only been in the past decade that modern retail has made serious inroads into Indonesia’s urban areas, a trend that has catalysed by a decree signed in May 2016 by Indonesian President Joko Widodo, allowing foreign investors to own up to a 67% stake in department stores.
Whilst Indonesia’s growing middle class creates an enticing market for retailers, dispersed across vast geographic distances which pose significant challenges for vendors looking to plan integrated, nationwide distribution networks. Therefore creating a footprint across Indonesia demands being mindful of the multidimensional aspects of the population. What works in Jakarta will not necessarily translate into the second tier markets or rural areas for both cultural and economic factors, exacerbated by notable regional variances depending on the primary income generators of each region.
In other words, Java has been negatively affected by the declining demand for its exports such as palm oil, coal, and precious metals, resulting in an overall decline in their spending power in recent years, as opposed to Eastern Indonesia. In areas in the east, such as Sulawesi, the local economy has seen a mini-boom due to the rising international prices of cash crops such as coffee, spices and other commodities.
Compounding the regional disparities are the logistical challenges inherent by extending supply chains across a country that remains poorly served due to insufficient transport infrastructure. The consequence is that outside of the major conurbations retail markets stay highly fragmented. Therefore modern malls and shopping centres remain restricted to Jakarta and its environs. Indonesia’s long history of protectionist policies has further frustrated the ambitions of international firms willing to invest and expand. In the retail sector, in particular, there have been limits on foreign ownership in various strategic sectors, particularly those related to SME’s, which prevent too much market dominance or oligopolies emerging and protecting smaller local players and engineering a more level playing field.
Indonesia’s expanding digital economy received a shot-in-the-arm in 2016 when it was included in President Widodo’s “Big Bang” plan to loosen restrictions on foreign investment in 50 sectors to encourage competition. Removing e-commerce from a negative investment list has now opened the industry and encourages foreign investors to invest in e-commerce businesses.
E-commerce is the fastest-growing retail segment in the country and is gaining popularity, primarily amongst the middle and upper classes. A percentage of the ecommerce industry is expected to capture 5/6% of the total retail market in Indonesia by 2020, a trend that will continue to present exponential growth opportunities, particularly with the usage of smartphones continuing to climb, prompting retailers to make prolific use of social media promotion.
Donny Pramono CEO of Sour Sally, stressed, “The millennials are very quick to pick up and drop new trends which are heavily influenced by the fashionability and exclusivity of a product. In the day and age of the social media phenomenon, consumer groups are looking for brands that reflect their values, so we position our brand to help our customers express themselves and as such we receive a lot of tags and acknowledgement over social media such as Instagram and Facebook helping our products go viral.”
Digital and e-commerce technologies are only continuing to proliferate as high-income Indonesians flock to the internet to make purchases. Indonesia’s web access is increasing at an annual rate of 20%, with a conservative projection that 100 million Indonesians will be connected and online by 2020.
Indonesia’s enormous domestic population, growing, young and increasingly affluent middle class and the pervasive urbanisation creates an abundance of untapped retail potential. The highly fragmented supply chains, a by-product of traditional and informal retailing, is becoming far more efficient, a cost-reduction trend that will be further improved and bolstered by the massive and coordinated infrastructure investment now being made. Indonesia’s mass consumerist middle class is now poised for a breakout.
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