Indonesia Food and Drink Report Q3 2012

Indonesia has an ace up its sleeve relative to Asia's more external demand-driven economies. Consumption comprises approximately 63.6% of Indonesia's economy, endowing it with a considerable buffer against an external slowdown. The Indonesian consumer remains in good shape, and this is borne out in a strong showing in retail, although we acknowledge growing downside risks to our near-term domestic demand outlook. Looking long term, robust macroeconomic fundamentals, an enticing demographic profile and the spread of organised retail underpin a highly dynamic consumer growth story in Indonesia.

Headline Industry Data

Food consumption growth for 2012 = +7.7%; CAGR forecast to 2016 = +7.2%

Alcoholic drinks sales growth for 2012 = +11.5%; CAGR forecast to 2016 = +9.4%

Soft drinks sales growth for 2012 = +12.7%; CAGR forecast to 2016 = +9.7%

Mass grocery retail sales growth for 2012 = +13.0%; CAGR forecast to 2016 = +11.0% Key Industry Trends Indonesia Steadily Adopting Consumerism – While per capita food consumption levels in Indonesia are relatively low, the country is on the cusp of a consumer spending boom as the lower-and-middle classes reap the fruits of the country's rapid economic boom over the coming years. Unsurprisingly, Indonesia continues to hold a great deal of interest to global and regional consumer-facing firms. Swiss food giant Nestlé announced in June 2011 that it plans to invest around US$100mn in Indonesia to expand its production operations, which follows its investment of US$200mn in 2010. British-Dutch fast-moving consumer goods company Unilever has also been eager to hop on the Indonesia consumer bandwagon as it plans to invest up to US$600mn in the country through 2013. Retail A Big Attraction In Indonesia – French-owned subsidiary retailer Carrefour Indonesia has revealed plans to launch between five and 10 new stores during 2012, concentrating on areas in eastern Indonesia. Indonesian retailer Indomaret is set to open 1,000 new outlets throughout the country in 2012.

The retailer expects to deliver 30% growth in total sales to IDR23.4trn (US$2.62bn) during 2012. As an ageing population weighs on the growth prospects of the Japanese mass grocery retail (MGR) sector, local convenience store retailer FamilyMart plans to open around 600 outlets in Indonesia and the Philippines. The retailer plans to have around 300 stores in each of these countries by 2015. While the aforementioned foreign retailers have found relative ease in expanding their footprint across Indonesia, Lawson faced expansion hurdles in the country. The Jakarta City Tourism Agency has ordered Lawson to suspend operations in the city as it lacks certain necessary permits.

Risk To Outlook One of the more obvious headwinds that Indonesia faces in 2012 is a slowing regional economy. The developing hard landing in China means that regional growth will be subdued compared to the heady rates of 2010-11, and trade in particular is set to suffer. Indeed, Indonesia's own links to China have become considerably deeper since the enactment of the ASEAN-China Free Trade Agreement, and exports to the mainland now account for approximately 13.4% of total exports, passing the US, Japan, and the eurozone to become one of Indonesia's largest markets.

Accelerating inflationary pressures represent another downside risk to our near-term domestic demand outlook. Food price inflation has ticked up from 4.6% year-on-year in March to 6.7% in April. Furthermore, core inflation looks to have bottomed out at a high 4.3% and could begin ticking higher once again as well. High oil prices could again curtail consumer as the middle class finds its disposable income pressured by both energy prices and bleed through effects. With all signs pointing to rising inflation, our Country Risk team expects the central bank to introduce a rate hike of 25 basis points to 6.00% by end 2012. Tightening credit conditions will inevitably dampen consumer appetite for discretionary goods.