Unilever Indonesia: "Using All the Levers"
By Michael Shari
Since the Indonesian financial crisis and the fall of President Suharto in 1998, multinationals have been taking over Indonesia's consumer market by snapping up local brands and dominating traditional retail networks (see BW, 3/24/03, "Indonesia: Consumer Heaven?"). The undisputed leader of this invasion is Nihal Kaviratne, chairman and CEO of Unilever Indonesia, the local subsidiary of the Anglo-Dutch consumer-goods giant (UL ).
Since 1999, Kaviratne has acquired seven leading brands of soy sauce, tea, and cleaning agents, and now he's relentlessly marketing them in tiny villages across the vast Indonesian archipelago. As a result, Unilever's profits grew 10% last year, and Crédit Lyonnais predicts 24% growth this year and 17% in 2004.
At the same time, however, Unilever and its competitors in Indonesia, such as H.J. Heinz (HNZ ) in Pittsburgh and Campbell Soup (CPB ) in Camden, N.J., face a new challenge: Once-strong consumption growth is flattening out. On Mar. 6, I spoke with Kaviratne about why this is so and how Unilever's profits keep growing regardless. Edited excerpts from our conversation follow:
Q: How fast is Unilever's business growing in Indonesia? A:
Q: How fast is Unilever's business growing in Indonesia?
A:Five years from now, it will have doubled. But growth is becoming extremely difficult here, if you were to go about it the conventional way. This year we expect private-consumption growth to dip below gross domestic product growth for the first time. We're expecting 1.5% to 2% private-consumption growth, with GDP growth at 3.5%.
Consumer spending is definitely falling off. First, it flattened out. Now it's starting to decline. That's tough. A lot of companies are discovering that now.
Q: Why are Indonesian consumers spending less? A:
Q: Why are Indonesian consumers spending less?
A:There are a few reasons. First, the infrastructure and mineral-extraction industries aren't being allowed to invest. British Petroleum (BP ) and ExxonMobil (XOM ) [have said] they'll invest $2.5 billion, but it's not taking place. There's a limit to how much consumption can [continue to grow] without new investment.
The second [reason] is inflation. The inflation rate came down dramatically [last year]. But with the removal of subsidies, people's incomes have been squeezed. Also, income coming in from Indonesians working aboard is declining. Many are coming back [from the Middle East]. The whole economy has been driven by consumption growth rather than new investment, [and much of the consumption growth] has been driven by Indonesians receiving money from relatives working abroad. That source is drying up.
Q: So what's the best strategy for a company to grow in Indonesia's consumer market? A:
Q: So what's the best strategy for a company to grow in Indonesia's consumer market?
A:You've got to keep extending the consumer base, the number of homes using your brand. We're using all these new levers. One is the number of times in a week people use these products. Take shampoo, for example. In 2001, the average frequency was 3.7 times per week. In 2002 it went up to 3.9. Increases in use frequency drive growth.
There is tremendous [growth potential in personal care]. We're getting people to brush their teeth not once but twice a day. Each year, you get 6% to 7% more people switching from once to twice a day. That's huge when you see it in terms of dollar value. We're monitoring that through AC Nielsen and our own consumer-market index.
Q: How do you move your products to the consumer? A:
Q: How do you move your products to the consumer?
A:We've got something like seven new channel initiatives, all of which are bringing growth. They're reaching people in places we haven't reached before. We have one new project on partnering with wholesalers. There are about 10,000 to 12,000 wholesalers who reach 800,000 shops.
Most were uncovered by us because they're very small. We launched the equivalent of a frequent-flyer loyalty program with these wholesalers, which is producing huge results.
Q: What else are you experimenting with? A:
Q: What else are you experimenting with?
A:We started an initiative with pesantrans, the Islamic boarding schools, where you've got a [steady, fixed market]. They have students with daily needs who cook for themselves. They need our food products. In the town of Pekalongan in Central Java, we've got 200 pesantrans to which we regularly supply products. We will extend that to pesantrans all over country.
Q: Who do you recruit as salesmen? A:
Q: Who do you recruit as salesmen?
A:With the unemployment situation, there are a lot of people out of jobs and looking for self-employment. They go out on motorcycles and distribute to those shops. Then there are pushcarts, [wagons], and so on. We've now started doing that for Lipton Iced Tea in a bottle -- you can get it served to you from one of these hawking units.
Q: What percentage of your sales comes from traditional retailers as compared to modern supermarkets? A:
Q: What percentage of your sales comes from traditional retailers as compared to modern supermarkets?
A:We think this year it will be 28% modern stores and 72% traditional pasars [large markets] and warungs [tiny stalls]. Modern trade collapsed suddenly in 1998 [after riots toppled Suharto]. Many stores burned down, investment stopped, and they didn't recover for a while.
Q: What's your strategy in acquiring local brands? A:
Q: What's your strategy in acquiring local brands?
A:You go to companies that are in your core, or close to your core.... When we see an opportunity to migrate a [local] brand to one of our international brands, we do that. Where we find it enjoys a unique position of its own as a local jewel, we don't migrate it. We rebuild it.
We've actually kept in their original form seven local brands: Sariwangi tea, Bangso soy sauce, Molto fabric conditioner, Trika ironing aid, Superpell floor cleaner, Sunclin laundry bleach, and Vixal bathroom cleaner.
Q: How much are you investing in your brands? A:
Q: How much are you investing in your brands?
A:The numbers surprise even me. We spend the same on local brands as on international brands. We spend [about] 17.8% of the sales value of [each category] to support them. I wouldn't take credit for planning it this way, [but] this is working. We expect to invest another $500 million in this county over the next 10 years.
Shari is BusinessWeek's Singapore bureau chief
Edited by Patricia O'Connell
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