Overview of the Food & Beverage Sector

The food and beverage sector is where Indonesia’s local companies have made a mark in value added products both domestically and worldwide. The growth of the sector has been fuelled by rising incomes and increased spending on food by the middle class that now make up a 30 million person market. Urban lifestyles are giving rise to a more varied diet which is supported by the development of retail infrastructure in the form of malls and hypermarts (see The Rise of Modern Retail Outlets). For the country as a whole, price fluctuations brought about by the increasing price of imported goods such as wheat and processed chocolate can have a significant impact on consumer behaviour. The challenge for the food and beverage industry is to get a handle on import reliance to keep prices down and to strengthen branding for consumers in Indonesia as well as the rest of the ASEAN.

The Indonesian processed food market is dominated by several large local companies including Indofood Sukses Makmur, one of the world’s largest instant noodle makers, Wings Group, Mayora and Garuda Food. 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. Foreign companies and brands are also well integrated into the market, including Nestle and Kraft Unilever, often in joint ventures with local companies to access distribution networks. Multinational firms have been successful in appealing to the growing health consciousness of Indonesian middle class consumers. The sector as a whole is estimated to have over 6,000 companies; approximately 90% are classified as large and medium sized companies which are all mainly appealing to the price sensitive lower income customers.

Output of the sector grew by 176.3% over the period of 2000 to 2009 putting the industry as a whole at a value of $194 billion USD at the end of 2010 according to the Indonesia Food and Beverage Business Association, GAPMMI. Both domestic consumption and spending on food and beverage, particularly processed foods, has been steadily increasing at a rate of 14.1% a year from 2006-2010, driven by rising incomes as well as inflation of food prices. Total sales for 2010 reached $63.4 billion USD and are projected to grow by 13% to $76.59 billion in 2011 according to GAPMMI. The processed food sector had previously been confined to the domestic market, but its contribution to exports has been increasing from $3.7 billion in 2009 to $5.7 billion in 2010. The Ministry of Industry has put targeted exports from the sector at around $6 billion for 2011 and sector growth as a whole at 8.4% annually to 2013.

The ready availability of natural resources such as cocoa and palm oil (see Overview of Palm Oil in Indonesia and Agriculture: Moving Downstream in Cocoa) as well as the size of the domestic market makes Indonesia an attractive production base for multinational companies. However, the sector still faces the challenge of being regionally and globally competitive. Imports of essential raw materials such as wheat, milk and sugar make the sector far from self sufficient. Imports of processed foodstuffs such as seasonings make up substantial part of total sales and have been increasing with the introduction of the AFTA and CAFTA. In 2011, the amount of imports is set to increase to $2.79 billion USD, up 15% from 2010 (GAPMMI). High logistical costs from poor infrastructure add to domestic operating costs as the country has only 6 ports that can be used for large scale importation of foodstuffs, while others for nationwide distribution are heavily congested. The rise in electricity tariffs and increasing inflation impacting raw material such as wheat and sugar are also placing pressure on operational costs for manufacturers. In a low income market such as Indonesia, consumers are highly sensitive to small increases in product prices given that an average of 50.62% of total per capita income is spent on food (Statistics Indonesia).

The World Economic Forum that took place in Jakarta in June 2011 saw the announcement of large scale investments by food & beverage manufacturers into the country including Coca Cola which plans to invest up to $500 billion USD and Nestle that will set up a $200 million USD new dairy plant in West Java. Such investments are a positive signal for the manufacturing sector as a whole, however new challenges in infrastructure will continue to be a major obstacle to increasing output and keeping prices competitive for the Indonesian consumer. The lack of availability of gas and electricity is a hindrance to the large scale production methods required by manufacturers in order to keep prices competitive for the market