Why Western retailers are scrambling to get a foothold in Indonesia

Consumer spending makes up more than half the Indonesian economy, making it an attractive new market for Western companies like L'Oreal whose traditional customers are in recession-mired countries.

Consumer companies in the United States are suffering from a prolonged economic slowdown, and recent figures show the European economy is shrinking. So deep is the malaise in the West, some are calling this the lost decade. 

But many emerging markets in Asia are powering ahead, and Indonesia, to the surprise of many, is leading the pack.

In recent weeks shopping malls, superstores, and outdoor markets here have been packed with shoppers stocking up for the Eid al-Fitr celebrations that mark the end of Ramadan, a month when Muslims fast from dawn to dusk. In Indonesia, home to the world’s largest Muslim population, spending spikes during Ramadan as Muslims buy food for elaborate fast-breaking ceremonies. Toward the end of the festive season, which concluded this weekend, they also buy new clothes, and increasingly, big ticket items like cars and electronics.

In years past consumers would spend a year’s worth of savings on the holiday. But spending like this now occurs throughout the year.

A strong economy, rising wages, and easier access to credit are the main factors driving domestic spending. And as wealth levels rise, Indonesian consumers have begun to splurge on higher quality brands.

'It's down to lifestyle'

“It gives me a shock how women here shop,” says Patricia Mulyadi, a public relations executive pondering the $45 price tag on a black ruffled skirt at Zara, a Spanish clothing retailer, in one of the city’s ritzier shopping malls. She says she spends more on her clothes and personal appearance because she feels the pressure to keep up with friends.

“I make a decent income, but it’s down to lifestyle,” she says. 

Ms. Mulyadi is just the type of shopper international companies are targeting as they seek to profit from rising wealth in a country where more than half of the economy depends on consumer spending. 

Last month Indonesia beat economists’ expectations by posting second quarter growth 6.4 percent above the same period last year. That makes it the second fastest growing economy among the world’s top 20, just behind China, and the only one where growth is expected to continue.

Despite a rising trade deficit and yawning gap between export revenue and the cost of imports, Indonesia has overcome the global slowdown, mainly through rising investments and soaring domestic spending, driven by Indonesians' growing wealth. 

“Many international brands are wanting to open a store in Indonesia,” says Astri Permatasuri, a marketing manager for Plaza Indonesia mall in Jakarta. “From high-end brands to middle brands, they’re pretty excited because they know this is a very [big] potential market for them.”

Rapidly growing middle class

The reason Indonesia is now drawing attention from investors in the US and Europe is obvious, say analysts: a young, rapidly growing middle class that accounts for more than half the population in a country of 240 million people.

For now, the majority sit at the bottom of the middle class band, defined by the World Bank as those who spend between $2 and $20 a day. Multinationals that already have a foothold in Indonesia have long targeted this market.

They include Anglo-Dutch multinational Unilever, which sells individual sachets of shampoo for less than $1, and Swiss-based Nestle, which is expanding production of individually wrapped chocolate wafers and snacks that are cheap and easy to transport.

But companies just starting to look toward Indonesia see potential among the middle class that is driving sales of cars, mobile phones, cosmetics, and housewares.

Ace Hardware and Procter & Gamble

Chicago-based home appliance retailer Ace Hardware recently announced plans to spend around $20 million this year to open more outlets in Indonesia, while Procter & Gamble, a consumer goods company headquartered in Ohio, is building a factory in West Java to produce baby diapers for Indonesia’s nearly 20 million infants.

“That is certainly a message: that a company like P&G understands what opportunities there are in the consumer sector here,” says Dennis Heffernan, an independent consultant and governor with the American Chamber of Commerce in Jakarta. “They not only want to market their goods, but they also want to make their goods here." 

Multinationals, particularly textile and footwear companies, have long taken advantage of cheap manufacturing costs to produce goods here for export. But now more companies are producing goods to sell within the country.

Heffernan says the amount of attention US companies are devoting to the retail and consumer sector has “ramped up radically” in the past two years. The US Commercial Service has been leading trade missions here to seek opportunities for small- and medium-sized businesses.

“A lot of multinationals have been running to China and India in the past, but now it’s becoming clear that Indonesia is a good place to invest and do business,” he says.

Major European retailers are also scrambling to get a foothold. Swedish retailer Ikea, for instance, plans to open its first Indonesian outlet in 2014, while cosmetics company L’Oreal is set to open its new factory, its largest in the world, in the coming months.

Market research firm Roy Morgan, which monitors the consumer market, says consumer confidence is at a record high. But some investors remain reluctant about putting money into a country still plagued by a lack of infrastructure, high costs of doing business, and unclear regulations governing investment.

Chatib Basri, the head of Indonesia’s Investment Coordinating Board summed up the interest last week. “Indonesia is no paradise for investors,” he says, noting a gross lack of infrastructure and high costs of doing business. But, “where else do they go? You can’t miss Indonesia simply because of its size.”