Indonesia’s middle- and affluent-class consumer (MAC) population is predicted to grow by 90% to 141 million by 2020, providing one of the brightest opportunities for companies to sell non-essential goods and services in Asia.
But to succeed in the rapidly growing economy, companies must take a medium- to long-term view on operations, overcome infrastructure challenges to reach new MAC markets and tailor marketing messages to a family-oriented, bargain-hunting society, according to Asia’s Next Big Opportunity: Indonesia’s Rising Middle-Class and Affluent Consumers, a report by the Boston Consulting Group.
The report uses the BCG’s population expenditure model to predict future wealth patterns, as well as data from a survey of 3,950 households in 31 locations. MACs are defined as those who spend at least IDR 2 million ($204) on regular goods and services per month.
A regional powerhouse
Indonesia’s population is 248 million, with 60% between the working ages of 20 and 65 – three times the size of South Korea’s total population. Indonesia also has a stable political environment and a rich base of natural resources, including crude oil, metals and coal.
The country’s economy, as measured by GDP, is predicted by the International Monetary Fund to grow by more than 6% per annum over the next five years, lifting more than eight million poorer Indonesians into the MAC category each year.
By 2020, Indonesia’s most populated island, Java, on which the capital Jakarta is located, will have more MACs than the population of South East Asia’s second largest country, Thailand. The second most populated island, Sumatra, will have more MACs than the population of Malaysia and Singapore combined.
“These consumers are the sweet spot of this market,” said BCG partner Vaishali Rastogi, who co-authored the report. “They’re beginning to move beyond basic necessities to products that offer greater convenience and comfort, such as home durables, white goods, cars and financial services.”
Businesses operating in Indonesia need to pitch goods and services to consumers who are family-oriented and enjoy bartering. Even as their wealth rises, 63% of respondents to the BCG study said they would prefer to spend their money on goods and services that improve the living conditions of their families, rather than on themselves. By comparison, 46% of MACs in China indicated a family-first view on spending in a similar study.
Indonesians from all classes enjoy bargain hunting, despite 91% of the population feeling financially secure, which is more than any other country surveyed in the BCG’s Global Consumer Sentiment Survey 2012.
MACs justify spending on big-ticket items by focusing on functional benefits. For example, consumers rationalise buying DVD players and flat-screen televisions as a way to save money on going out to the cinema.
“Because functionality is so crucial, brand-name recognition and clear messaging regarding product features will become increasingly important,” said Dean Tong, a BCG partner and the report’s co-author.
As the MAC population grows, business faces a logistical challenge to maintain penetration levels. Indonesia, the largest archipelago in the world, has more than 900 populated islands spread across 1.9 million square kilometres.
Today, if companies want to reach 50% of the MAC population, they need to have a presence in 25 locations, mostly in densely populated Sumatra and Java. To maintain the same reach in 2020, the number of locations will more than double to 54, with major MAC centres spreading throughout Java, Sumatra and Borneo, and minor centres sprouting in the remote eastern islands.
“Companies will need to be in locations they used to consider second-tier in order to capture the opportunity,” Rastogi said. “This will have implications on companies’ go-to-market strategy, organisation structure and supply chain.”
Exacerbating the problem, said Rastogi, are Indonesia’s infrastructure bottlenecks, as the development of roads, ports and power plants has not kept pace with the economy.
“In addition, while the sheer size of the working-age population is attractive, a large part of that labour force will need upgraded training to become fully effective,” Rastogi said. “Both of these issues require significant investment from the public and private entities in order to sustain the country’s long-term economic growth.
“Most importantly, this is not a market to enter with just a short-term aspiration. Businesses need a bold vision for the next three, five and ten years to be successful.”
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Doing Business in Indonesia
The World Bank’s Doing Business 2013 report says setting up a business in Indonesia takes 47 days, compared with the East Asian average of 36 days.
In the report, Indonesia is 128th out of 185 countries in ease of doing business. For an emerging economy, Indonesia ranks well in cross-border trading (37) and investor protection (49).
However, it ranks among the bottom 25% in securing electricity (147), enforcing contracts (144) and resolving insolvencies (148).
The World Bank’s report provides objective measures of business regulations and their enforcement across 185 economies and is used by businesses, academics and researchers to analyse the business climate of countries.