Rising inflation, in combination with a weaker rupiah and a higher interest rate environment in Southeast Asia’s largest economy, will hurt sales at consumer-goods firms such as Unilever Indonesia, a director of the company said.
During a visit to the offices of BeritaSatu Media Holdings on Friday, Unilever Indonesia director and corporate secretary Sancoyo Antarikso said a weakening rupiah would result in an increase in the cost of imported foodstuffs.
Indonesia imports many of its food requirements such as soybeans.
The weaker currency does not only hurt consumers, but it also affects Unilever directly, as “50 percent of the raw materials are impacted by the weakening rupiah,” Sancoyo said.
As a comparison, raw materials and packaging costs accounted for 90 percent of the total cost of goods sold by Unilever.
The rupiah, which was traded at 11,142 against the US dollar on Friday, has declined by 15 percent so far this year.
Despite this, strong income growth could still provide good prospects for companies like Unilever.
“Some consumers reduce their usage, or move to less costly brands. Luckily, we have brands and products in many different segments,” Sancoyo said.
He said disposable income of Indonesian consumers had been hurt by price increases in many aspects of their life — from rising electricity tariffs since the beginning of this year, to a hike in subsidized fuel prices since June and higher interest rates that has also affected lending rates on mortgage loans.
The government raised the subsidized fuel price by an average of 33 percent in June, which caused inflation to accelerate to 8.61 percent in July.
Unilever produces and sells home and personal care products as well as packaged foods and beverages. Some of the company’s popular lines include Lifebuoy and Lux soaps, Pepsodent toothpaste, Buavita beverages and Rexona deodorants.
Banking on strong consumer goods spending in Indonesia, Unilever Indonesia has been able to keep annual profit growth of above 15 percent in the last 15 years.
Sancoyo said despite of the challenges, Indonesia still offered lots of opportunities. The $900 billion economy, the largest in Southeast Asia, still has a low per capita use of some consumer goods.
The country’s economy, which expanded by 6.23 percent last year, is forecast by the Bank Indonesia to expand by 5.9 percent this year.
Domestic consumption, accounting for around two-thirds of the economy, is expected to drive the growth in Indonesia.
In the past three years, Unilever has boosted investment, as it races to cash in on higher demand for fast-moving consumer goods in Indonesia.
Sancoyo said between 2010 and 2012, the company has spent up to Rp 4.3 trillion ($390 million) in capital expenditure to expand the capacity of some of its factories in the country. Prior to 2010, capex was typically less than Rp 1 trillion.
Unilever now employs around 7,000 people. The company owns eight factories in Indonesia, of which two are in Surabaya and six in Cikarang, West Java.