Indonesia: Consumer Heaven?

Global giants are finding a rich market in the world's fourth-biggest nation

A country that has seen its currency slide 75% in the past six years, where per capita income is just $760 annually, and where distribution means moving products to thousands of islands splayed across 5,000 kilometers of ocean might not seem like an ideal market for consumer-goods companies. So why have the likes of Unilever, Danone, and H.J. Heinz spent a total of more than $1 billion snapping up Indonesian makers of everything from soy sauce to toilet-bowl cleaner over the past five years? Simple: Despite poverty, political turmoil, and religious strife, consumers still consume. "We're getting into an increasing number of homes every year," says Nihal Kaviratne, chairman and CEO of Unilever Indonesia.

And Indonesia offers plenty of homes to get into: The country is the world's fourth-biggest nation, with a population of 220 million. Other factors are making it more attractive, too. The drop in the value of the rupiah means it's cheaper to buy Indonesian companies. The government has made investing easier by removing barriers such as a 49% limit on foreign shareholding in Indonesian companies and a ban on foreign investment in the distribution business. And using Indonesia as an export base makes more and more sense as new trade agreements with the country's Southeast Asian neighbors have lowered tariffs on most products to 5% or less.

As a result, most of Indonesia's leading household brands are in foreign hands these days. Danone owns the top-selling bottled water, Aqua. Unilever has the leading soy sauce, Bangso, and the best-selling tea, Sariwangi. The second-biggest maker of cookies and crackers, Helios Arnott's Indonesia, is owned by Campbell Soup Co. (CPB ) In 2000, Campbell relaunched Helios Nyam-Nyam cookies in new packaging, and it's now Campbell's top-selling brand in the archipelago.

Those brands are fattening the profits of multinational marketers. Unilever's (UL ) Indonesian earnings will surge 24% this year, to $109 million, on sales of $780 million, more than double its 2002 profit growth, predicts Crédit Lyonnais. Sari Husada, Indonesia's biggest infant-formula maker, which Dutch baby-food giant Royal Numico bought in 1998, will see its earnings this year jump 15%, to $33 million, on $148 million in revenues. Few other foreign-owned consumer-goods makers are listed on the Jakarta Stock Exchange, but industry watchers say most will see profit growth of 10% to 20% this year. Some of these brands will even have an important effect on global results: Aqua, which Danone bought in 1998, turns out 3 billion liters of water a year, says Own Ow, chairman of Danonegroup Indonesia. The brand accounts for about 12% of Danone's worldwide production of bottled drinking water, including its Volvic and Evian brands.

The challenge now is to keep that growth on track. Indonesia has been a wobbly place to do business since the fall of President Suharto in 1998, but things are getting especially rocky now. Multibillion-dollar investments in infrastructure, mining, and petroleum are all on hold because of concerns about terrorism and political instability, and that's stifling the creation of new jobs. The archipelago's labor-intensive factories are shutting down because of competition from China, putting workers out on the streets. And the government is planning to cut subsidies for gasoline, kerosene, and electrical utilities by 40%, resulting in higher household bills. After nearly doubling in 2001, private consumption growth this year may start falling, says Stephan Hasjim, head of research at ABM Amro Securities Indonesia. "Consumer buying power is being eroded by the government's fiscal policy," he says.

The multinationals are preparing for a downturn by implementing strategies intended to keep profits growing even as demand slows. Since making their acquisitions, they have streamlined production and have started hawking their products more aggressively in remote areas -- places that lack passable roads and reliable electricity. Unilever recently signed agreements with 12,000 wholesalers that reach 800,000 traditional vendors, and it has also started selling bottled Lipton iced tea from motorcycle saddlebags in villages where the lanes are too narrow for cars. Such tactics now account for 72% of Unilever's sales. In addition, Unilever runs ads exhorting Indonesians to brush their teeth twice daily with Pepsodent toothpaste instead of the single brushing common in the country. "If we are to disconnect from the gloom around us and continue to grow at 15%, we've got to find new ways to [do it]," says Unilever chief Kaviratne.

With labor costs 25% to 50% lower than in other Southeast Asian nations, plus the reduced tariffs, Indonesia is becoming an export base for the multinationals, too. Last year, Unilever transferred production of Lipton tea from Australia to its Sariwangi tea bag plant in Jakarta, which now supplies the rest of Southeast Asia. Heinz, which bought condiment maker ABC Central Food Industry in 1999, exports Heinz ketchup from its Jakarta plant to Malaysia and the Philippines. And Campbell is setting up sales and distribution networks in the Philippines and Indonesia for cookies and crackers made in Indonesia. "We are using Indonesia as a successful model for growth," says Peter Rowe, president-director of Arnott's Indonesia, Campbell's local subsidiary.

Judging from their investment plans, the multinationals appear to have plenty of confidence that they'll keep expanding their sales in Indonesia. During the next 10 years, Unilever plans to sink at least $500 million more into the seven local brands it owns. Coca-Cola Co. (KO ) acquired the Ades bottled-water brand for $20 million in 2000 as part of its $45 million investment in the country since 1999. And since buying an 82% stake in Sari Husada, Numico has invested a further $35 million in a new plant in Central Java. It now churns out four brands of baby formula, which makes the company the region's biggest milk processor. "There are a lot of opportunities," says M.J.A. van der Meer, a Numico director seconded to Sari Husada from the Netherlands.

Stockbrokers say at least two more deals are in the offing. In 2000, Citicorp Capital Asia, a venture outfit, bought a 10% stake in Ultrajaya Milk Industry & Trading Co., which has 62% of the long-life sterilized milk market -- in a country where most families don't have a refrigerator. Industry sources say the company is in talks with several potential buyers, but Ultrajaya managers couldn't be reached for comment. And Bentoel International Investama, the country's leading manufacturer of mild clove cigarettes, is considered an acquisition target by foreign tobacco concerns. "There's a lot going on," says Michael Chambers, head of research at Crédit Lyonnais in Jakarta. Now, if only consumers will keep buying.

By Michael Shari in Jakarta

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