Indonesia is at a crucial inflection point in its economic transformation. While still classified as a rapidly developing economy (RDE), it is also a nation undergoing an admirable transition to maturity.

This means that understanding the market is vital to companies’ success as the consumer paradigm evolves.

Maturing landscape

The transforming economy sees Indonesia on the cusp of becoming a middle-income country by 2030, according to the World Bank’s definition. So what does this mean in practice?

The Centre for Customer Insights (CCI) of the Boston Consulting Group (BCG) measured the growth and evolution of Indonesia’s Middle and Affluent Consumers (MAC), defined as consumers whose purchase basket is significantly larger than lower-income bands.

The nation’s MAC comprises 47 percent of the population and is expected to exceed 50 percent by the end of 2020. Rapid expansion of this demographic has stabilized, with projected 5 to 5.5 percent growth of the middle class until 2030. While this is a notable reduction from the 11 to 12 percent growth rate witnessed in 2015-2018, it is still a very healthy pace, framed by an economy projected to exceed 5 percent GDP growth this year.

Yet consumer sentiment remains cautious, with 48 percent of those surveyed believing that the Indonesian economy will not improve in the next few years, 57 percent saying they want to cut back on unnecessary spending, and 46 percent wanting to save more in the future.

At the same time, Indonesia continues to be an exciting area of growth for global and local companies, with sectors such as food and beverages (F&B), watches and jewellery, and travel and tourism showing signs of increased consumer willingness to buy as their income grows. So how do businesses balance this contradiction in consumer behavior and consumption?

Pockets of growth

We believe growth opportunities are substantial in Indonesia’s dynamic and growing market. However, a greater burden is being placed on businesses to employ a more nuanced approach in leveraging pockets of growth. At BCG, we’ve identified three notable consumer themes in Indonesia that present an opportunity.

Growing affluence

The affluent upper-middle class is growing at a rate of 6.5 to 7.0 percent — twice as fast as the emerging middle class. This means that consumers are rapidly graduating out of the entry-level middle class and maturing in terms of buying behaviour and use of premium products.

An important implication is that premiumization of products is becoming a key theme, ahead of the adoption of products for the first time. People are upgrading their basket of products more than buying in new categories. Therefore, we are seeing slower growth in basic and small indulgence products such as instant noodles, toothpaste and ice cream. However, premium categories like watches, jewellery, eyewear, eating out at sit-down restaurants and leisure travel offer pockets of strong growth. Therefore, growth has shifted to higher-end products.

Channel landscape

Indonesia has predominantly been a hybrid channel market, with both modern and traditional trade channels being equally important. This hybrid landscape is growing increasingly complex, requiring companies to adopt a more deliberate approach in their channel strategy.

The role of traditional trade remains strong in Indonesia alongside the established importance of hypermarkets and supermarkets. More than 40 percent of consumers still buy through traditional channels. This is much higher for categories like cigarettes, candy, instant noodles, and bottled water. More than 50 percent of surveyed consumers buy these products through traditional trade channels.

Now, minimarkets and ecommerce channels are also entering the mix, becoming a highly significant route to market for companies to consider.

Convenience stores and minimarkets offer a fascinating insight into the evolving reality of Indonesia’s channel landscape, enjoying 19 percent growth in retail sales from 2012 to 2017, driven primarily by F&B consumption and a drive for convenience. This indicates that the line between main grocery shopping in supermarkets and top-up shopping is blurring.

Minimarkets are key for impulse purchase categories such as ice cream, chocolate and tissues, which were bought in such stores in more than half the cases. Blurring the lines further, consumers are evolving to buy a wider variety of products at minimarkets, such as milk and diapers. What this means for companies is that players in several categories need to plan a minimarket strategy, accounting for limited shelf space and chain-wide planning.

Digital proliferation

Digital proliferation is transforming Indonesia’s consumer landscape. According to the BCG’s CCI data, 46 percent of Indonesians regularly access the internet, primarily to use social media platforms. Crucially, 23 percent of consumers are digitally influenced when they make a purchase decision, with 14 percent of consumers making online purchases. Comparing online purchases reveals some particular high-performing categories, led by travel bookings (73 percent), beauty products (44 percent), baby care products (56 percent) and apparel (36
percent).

Indonesia is at a digital tipping point. It’s evident that investments by Chinese tech companies and the digital payment revolution are accelerating this trend. However, leveraging the digital revolution is not simply a matter of placing products on major marketplaces. Social commerce — buying and selling on social media channels like Facebook and WhatsApp — makes up a major share of digital sales, accounting for online sales of 41 percent of baby care products, 37 percent of cosmetics and 31 percent of footwear and apparel. Even when it comes to holiday purchases, half of all online purchases are completed via social media channels.

Evolution

In this changing landscape, the ability to evolve is a vital enabler of success. Companies need to think of Indonesia not as an emerging market, but a mature RDE.

This means pivoting their strategies to recognize the evolution of the market. For example, do we have a portfolio that supports premiumization and allows consumers to upgrade their purchases? Do we have an explicit minimarket strategy? What is our company’s plan to drive our e-commerce presence beyond being available in marketplaces?

We are confident that Indonesia remains a country with substantial growth potential. However, the days of broad-based growth across the entire landscape are behind us. Companies that win in this newly mature Indonesian market will be those that adopt a more nuanced and disaggregated strategy for growth. The devil, as is so often said, is in the details!

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Aparna Bharadwaj is a partner and managing director of the Boston Consulting Group (BCG) and the head of BCG's Centre for Customer Insights in Southeast Asia. Patrick Witschi is a project leader at the BCG.

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