A recent trip to Indonesia highlighted that, instead of the recovery of tourism, which dominates the headlines for other ASEAN countries, the domestic consumer’s confidence is a key area of growth. In 2022, household consumption was driven by pent up demand post-lockdown. In 2023, purchasing power will be driven by government policies and an improving macroeconomic backdrop.
Inflation is expected to normalise and, according to Bloomberg, economists have decreased their FY23 CPI estimates by almost 40bps from 4.4% in December 2022 to 4% in February. While this is still higher than pre-covid levels, the lower inflation estimate is driven by the expectation that input costs have peaked which is supported by companies’ reluctance to hike prices to the same extent as 2022.
In our previous article ‘Indonesia in the Spotlight’, we highlighted several macroeconomic tailwinds driving consumer demand. These will be supported by additional government policies. The national minimum wage increased by 7.5% and, in Jakarta, the monthly minimum wage increased by 5.6% to IDR4.90m (USD322). The government spent IDR157.6tn (USD10.5bn) on energy subsidies in FY22 and committed to allocate IDR210trn (USD 13.8bn) for FY23. In addition to this, the government allocated IDR479tn (USD31.5bn) to the social protection budget, which is 55% higher than pre-covid. These government handouts should continue to encourage mass consumer spend.
January saw an uptick in the consumer confidence index which will benefit leading domestic businesses who can use their brand heritage, knowledge of consumer preferences and established logistics networks to take advantage of improved consumer sentiment. In Indonesia, and elsewhere in our portfolio, the leading local players often prove the most lucrative investments given their advantage in fragmented markets.
An example of a domestic champion is Alfamart, a leading convenience grocery retail operator with over 20,000 stores and a company in which we are invested. Currently, there are around 50,000 mini marts in Indonesia and the company believes that total addressable market could be 70,000-80,000 stores. This supports a long-term growth outlook as Alfamart aims to open 1000-1200 stores p.a. Its stores see 4.5m transactions daily and its loyalty programme has 12m members. The company plans to leverage its member data-base to better estimate the demand for each store format and further optimise shelf space with the highest margin and turnover possible.
Avia Avian is a 3rd generation family-owned business and the market leader in paints and coatings. A key advantage is its logistics and delivery fleet which provides nationwide coverage, enabling the company to deliver 8,800 orders per day and achieve a 93% 1-day delivery service fulfilment. The company’s market share of >25% reflects its strong customer relationship with over 56,000 traditional retail shops.
Cisarua Mountain Dairy (‘Cimory’) is a leading dairy and premium food business. Its distribution strategy has been an important factor in its growth with almost 100% penetration in modern trade (hypermarkets, supermarkets, and minimarkets). For mom-and-pop stores, Cimory provides dedicated cold storage facilities to its distributors, giving it a reach of >100,000 general trade outlets. ‘Miss Cimory’ is its direct-to-consumer channel that operates door-to-door, selling directly to over 350,000 households weekly. The 4,100 female ‘Miss Cimory’ representatives can get immediate responses to new product launches and build brand equity with each household, 50-70% of orders are repeat orders, selling directly to over 200,000 households weekly.
The potential of the ASEAN consumer continues to gain the attention of the global consumer conglomerates, but domestic champions such as these companies will remain resilient as they tend to have the first mover advantage, brand heritage and localisation to be better positioned to capture this growth.
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