Local Firms at Risk of Losing in Battle for Indonesia’s Middle Class

Indonesia's middle class may double to 140 million people by 2020, according to the Boston Consulting Group. This new group of middle class Indonesians would have more money for pricey items like cameras, smartphones and cars. (JG Photo/Safir Makki)

Indonesia’s middle class may double to 140 million people by 2020, according to the Boston Consulting Group. This new group of middle class Indonesians would have more money for pricey items like cameras, smartphones and cars. (JG Photo/Safir Makki)

Local consumer goods companies are at risk of losing out to foreign competitors in their bid to win over Indonesia’s growing middle class as customers, the Boston Consulting Group says.

With Indonesia’s middle class and affluent consumers tipped by BCG to double to 140 million by 2020, home-grown companies such as instant-noodle maker Indofood Sukses Makmur, snack food producer GarudaFood and Mitra Adiperkasa, the franchise rights holder for Starbucks, Burger King and Zara, have enormous growth potential if they can overcome their foreign rivals.

BCG defines middle-income households in Indonesia as those with regular household expenses of Rp 2 million ($206) per month, excluding rent. Vaishali Rastogi, the Singapore-based analyst for BCG who presented the results of the group’s research to journalists in Jakarta on Wednesday, did not provide comparable data for other countries.

Rastogi said the increase in the middle class was unprecedented and would be a once-in-a-lifetime opportunity for companies. “This is not about linear growth anymore. We are going through a take-off point for many goods and products,” she said.

BCG’s survey of about 4,000 households across the country showed that Indonesians were “staggeringly” optimistic about their future income compared to other emerging countries and some developed markets, Rastogi said.

This optimism, in turn, may result in a progressive change in spending habits — which means consumers moving from obtaining their necessities, to achieving convenience, and later, comfort.

The growth in middle-income households is likely to prompt an intensification of competition among companies. Indonesian companies “have a good starting point, but they really need to up their game,” Rastogi said.

She said there were Indonesian companies competing in most consumer-based sectors, including Indofood and GarudaFood in the fast-moving consumer goods category and Mitra Adiperkasa and Alfamart in retail. But these companies will face more competition as more companies enter the Indonesian market.

Among the foreign challengers are Japanese apparel company Fast Retailing, which will open the first Uniqlo clothing store in Indonesia this year, and home furnishing store IKEA, which has formed an alliance with Hero Supermarket.

Still, lack of infrastructure to connect disparate parts of the country remains a logistical and distribution challenge, experts say.

Poor connections and processes and weak infrastructure are part of the problems of transportation in Indonesia, Gopal R., global vice president for transportation and logistics practice at Frost & Sullivan, had said in a statement on Wednesday.

Shinta Widjaja Kamdani, managing director of conglomerate Sintesa Group, last week said that consumption will only go so far in developing the nation’s economy if the government does not back it up with better-quality budget spending.

She said the government should invest in infrastructure rather than subsidize fuel. Poor infrastructure like roads and ports led to high distribution costs, pushing up prices and, in turn, were hurting consumers’ purchasing power.

Dean Tong, a managing director at BCG in Indonesia, said many consumer companies have “not yet geared up to serve this middle-class segment.”

In terms of products, he said, companies today cater mostly to upper and lower income bands, but overlook the wants and needs of middle-class consumers.

In term of distribution, the middle-class explosion will require companies to double their reach to customers, BCG said.

Rastogi said a consumer company only needs to be in 24 locations to reach 50 percent of the middle class now, but by 2020, companies will need to be in 54 locations to reach half of the market.

Java will continue to be home to the majority of the middle-income group, but more rapid growth will be found outside Java, BCG predicts.

Tong said companies needed to urgently focus their efforts on the middle-income group in Indonesia.

Most people moving into middle-income status will be doing so for the first time in their families, suggesting they are more open to experimenting with new products.

“This is a window of opportunity,” Tong said, adding that the BCG survey found that many Indonesians are highly susceptible to advertising, particularly from television commercials.