Over the coming decade, Indonesia will experience a huge increase in the number of middle-class and affluent consumers (MACs), thanks to strong economic growth and favorable demographics. Many of these consumers will make major purchases for the first time in their lives, such as cars and durable white goods (including refrigerators, washing machines, and air conditioners), along with services such as private education, travel, and banking. As a result, Indonesia represents a significant opportunity for companies to establish brand loyalty during this critical window when MACs are adopting consumer goods and increasing their spending. Indonesian consumers are not a single, homogenous block, and companies that wish to reach MACs must understand the underlying shifts behind the growth of this segment in Indonesia.
Simon Targett, the editor in chief at The Boston Consulting Group, spoke with Vaishali Rastogi, a partner and managing director in BCG’s Singapore office, about the scope of the opportunity, the firm’s recent research in Indonesia, and the factors that can help consumer companies succeed in capturing the Indonesian opportunity.
How does the research from BCG’s Center for Consumer and Customer Insight give a more detailed picture of Indonesia’s MAC population?
To date, there has been scarce detailed analysis about the middle class in Indonesia, beyond raw demographic data that was typically based on broad definitions. As a result, companies that want to target this audience have limited insight into these consumers and their regional expansion, attitudes, consumption patterns, and spending behavior. To address this, CCCI developed a proprietary model that gives a holistic macro and micro picture of the MAC population in Indonesia. The model looks at spending patterns and population growth to forecast the size across different wealth segments through 2020 for the country’s 99 cities and 398 regencies, which will allow consumer-facing companies to drill down to specific geographic markets. We looked into consumption patterns in various product categories, such as home care, personal care, food, and consumer services, including mobile communication and tourism. In addition to these quantitative elements, CCCI also conducted consumer interviews to understand the behavioral triggers and other factors that drive purchases among Indonesia’s MACs.
Our goal with this research was to generate clear insights that companies can use to reach the MAC population in Indonesia, and clear guidance for how they should tailor their strategies around those insights.
What are the key findings from the model?
The most notable finding is the sheer growth in the consumer population. Our research projects that the number of MACs in Indonesia will grow from 74 million today to 141 million by 2020. At that point, the island of Java alone will have more MACs than the entire population of Thailand, and Sumatra will have more than the populations of Malaysia and Singapore combined.
That population is also becoming more geographically dispersed. Currently, 12 cities have more than 1 million MACs, and another 13 have more than 500,000. By 2020, the landscape will have changed dramatically—22 cities will have more than 1 million MACs, and 32 will have more than 500,000. If a company currently reaches about half of the MAC population and wants to maintain that level through 2020, it will need to roughly double its presence, targeting cities that today are considered second tier. That means companies will need to rethink the way they operate and scale up—how they organize their sales force and the organization, how they manage their supply-chain networks, and how they distribute goods.
You talk about companies needing to alter their go-to-market strategies to keep up with growth. How exactly can companies do this?
Today, the majority of Indonesians still shop at a mix of traditional trade and modern trade channels. Warungs, or small local shops, and minimarts are the most popular shopping destination for regular household supplies. These formats are popular because they offer a reasonable product assortment and are generally within a short distance of customer households—critical for a country in which much of the population still does not own a car. Large retail formats such as supermarkets and hypermarkets are making inroads, yet their penetration is still relatively low. We expect to see a gradual shift to this channel as more and more consumers move into the MAC segment.
Different types of channels require different skill sets for companies. To win in traditional trade, companies must ensure a level of reach to keep pace with the geographical expansion of consumers. However, availability alone will not be sufficient given intensifying competition. Companies need to have a clear segmentation strategy, providing distinct service levels, offerings, and in-store execution depending on the channel.
To win in modern trade, the capabilities required include key account management, in-store execution, and shopper insights, which are very different from those used in traditional trade distribution. If companies are to succeed, they will need to develop these skill sets.
In addition, companies will need to have a more sophisticated sales force, which may entail overcoming staffing challenges. Indonesia has a sizable local working population, however many of those workers will need upgraded training to become fully effective.
Given the amount of literature on emerging-market consumers, what makes Indonesia’s consumers unique?
They’re unique for a couple of reasons. First, they are extremely optimistic. Some 91 percent of Indonesians feel financially secure—a higher percentage than every other country in the world, including all of the BRIC economies. Our research also found that 66 percent of survey respondents believe that they have lived a better life than their parents did, and 71 percent believe that this trajectory will continue for the next generation.
In addition, Indonesia’s MACs tend to be extremely family-oriented. As they move from lower and aspirant classes into the middle and affluent classes, they initially focus their spending on improving living conditions for their families rather than splurging on themselves. Indonesians emphasize the needs of the family over those of the individual, and this dynamic underlies most, if not all, purchasing decisions. Our data make this very clear.
Last, Indonesia’s MACs are extremely socially connected. For example, in 2012, there were more than 50 million Facebook users in Indonesia (the fourth-largest Facebook population in the world), along with 29 million Twitter accounts (fifth-largest worldwide). More Twitter posts originate in Jakarta than in any other city on the planet. There is significant room for companies to leverage this social connectivity of Indonesian consumers to create buzz around their products and tap into the desire among Indonesians to be “in the know” and ahead of trends.
What is the risk for companies that don’t respond now to these new and evolving consumers and their needs?
Because this is such a critical window for companies to build up brand loyalty, we’re seeing companies expand aggressively to reach the MAC population—multinationals and local companies alike. For the companies that understand Indonesia’s MACs and sell to them in ways that resonate with their lives, the prize will be a significant increase in spending over the coming decade. Conversely, the companies that don’t take such steps will put themselves at a clear competitive disadvantage. They’ll miss the window.