You are what you eat: An increasingly prosperous populace means more room for growth in the food and beverage segment

The food and beverage industry is changing along with the rest of the country, and facing very much the same opportunities and challenges. As Indonesia becomes more prosperous, business becomes better; but just as food and beverage firms experience the demand that comes with prosperity, they are also facing some of the more frustrating aspects of economic development.

As the country has advanced over the years, eating patterns have changed dramatically. Between 1999 and 2010 consumption of meat, eggs and milk more than doubled, according to the USDA’s Foreign Agricultural Services. Prepared food consumption was up more than 60% in that time, while the consumption of tubers and cereals dropped. A larger middle class has meant a change in preferences and spending power.

MORE & BETTER: While the food and beverage market is advancing, it still has quite a ways to go, and this bodes well for the industry as there is much more upside to be had. Modern trade as a percentage of the total did go from 22% in 2000 to 41% in 2012, according to Bahana Securities’ estimates, but that is still less than in most other countries in Asia. In the Philippines modern trade is 45% of the total. In Thailand it is 48%, and in Singapore it is 94%. Modern retail sales as a percentage of GDP in Indonesia is the lowest in the region, at 1.2% – that is less than half the regional average of 2.6%; in Thailand it is 2% and in the Philippines it is 3.4%. Importantly, as means of delivery become more advanced, it is likely that consumption will also increase, particularly of higher-value-added products.

According to the Indonesian Food and Beverage Association (GAPMMI), the market grew almost 10% in 2011 and close to 10% in 2012, beating general economic growth by a number of percentage points (though growth in the food and beverage sector has been quite volatile, dropping to 2.73% in 2010). Sales of modern packaged goods have been especially strong, growing consistently at double-digit rates since 2010. All along, the food and beverage industry has been becoming a larger part of the overall economy. In 2005 the food and beverage and tobacco subsector was 23.38% of all manufacturing. Five years later, that number had hit 29.17% (and the food and beverage part of the subsector may have grown faster, given challenges in the tobacco market). But because of a number of issues, it may be tough for the industry to meet its targets, particularly that of 10% growth. “Our target is about 10% growth,” said Adhi Lukman, the chairman of GAPMMI. “But it will be difficult because of changes in the industry, because we face regulation.”

HIGHER WAGES: The changes coming to the sector are many and diverse. The biggest worry is the rise in Jakarta’s minimum wage from Rp1.5m ($150) to Rp2.2m ($220) in 2013. While food manufacturing and retailing are nowhere as labour-intensive as textiles, the rise will nevertheless hit margins and result in higher costs, particularly distribution costs. A rise was expected, but the size of the jump has the industry worried. According to GAPMMI secretary-general Franky Sibarani, 10-15% is manageable, but more than 20% is a problem. The increased costs of other major inputs are also taxing the sector. Industrial gas prices are rising 55%, and that will be difficult for companies to digest. ONLY 8%: More generally, GAPMMI is worried about the government’s inability to control demonstrations and manage populism. The industry believes that stability and security are of the utmost importance and that the government must be careful before making decisions that affect business. Failure to properly set policy, and set it in a balanced way, makes it very difficult for companies in the sector to plan, especially in terms of pricing their goods.

GAPMMI is concerned that the measures taken by the government, and their effects on public sentiment, will cause prices for the sector to rise around 10-15% in 2013 and hinder growth, keeping it at about 8%. The association is especially worried that these price rises will put the local industry at a disadvantage, in particular while competing with companies from countries without such problems, and result in a flood of imports.

The industry is already being challenged by goods coming in from overseas. In 2011 food imports grew 30%, and they were up an estimated 10% in 2012. The biggest source of the growth in imports has been the ASEAN region, which has been benefitting from zero tariffs on food products since 2010.

Indonesia is a bit of an agricultural powerhouse. It is the world’s largest producer of nutmeg and crude palm oil, the second-largest producer of black pepper and cocoa, and the third-largest producer of rice and white crystal sugar. It is ranked as the number 10 agricultural country in the world. Indonesia has long been focussed on food security and self-sufficiency and has had an on-again-off-again rice import ban in place since 2004. But the policy, say critics, has been ineffective. Rather than promoting development, it has led to under investment and a lack of competitiveness in the food sector.

PROTECTIONISM: Protections appear to be on the rise. The new food law passed by the House of Representatives on October 18, 2012 may turn the clock back significantly. The law, which replaces the 1996 Food Law, creates an independent food agency and brings all the various restrictions and protections, including import bans and tariffs, under one statute. According to the government, the law is designed to ensure food autonomy and sovereignty. Analysts see it as just the latest in a series of moves promoting economic nationalism, and the industry in part agrees.

There are some other aspects of the law that play a positive role in the industry and are not protectionist. It also covers nutrition, food labelling, advertising and food safety. The Ministry of Health will be coming out with its own regulations in 2013, according to Lukman, that will cover subjects such as sugar, salt and fats in foods. As the Indonesian economy advances, the customers get more demanding and better educated, and the regulators will have to move with the times.

The minimum wage law is much the same. Firms are starting to understand that their futures lays not in squeezing out profits by using a low-cost workforce, but in selling high-margin products. Indeed, Wendy Yap, the president director and CEO of Nippon Indosari, told OBG, “We have evidenced the rise of disposable income in Indonesia in the past few years which has resulted in consumers’ preference for packaged bread products which complements their faster-paced lifestyle as well as healthier branded bread products.” They are still very much against sudden wage increases and massive jumps over many years, but they recognise that reasonable increases over time are good for everyone. “This is a chance to improve the buying power of the people,” said Lukman.

Indeed, while the industry is fragmented, it has some very large players, such as Indofood Sukses Makmur, the world’s largest maker of instant noodles. In an open market, they compete against international giants. If they can succeed at that, they might be able to become global brands. In this way, the benefits of free competition will be fully realised and the Indonesian food and beverage sector will go from a large local industry to something more efficient and more international.

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The Report: Indonesia 2013

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