01The shape of Indonesia’s FMCG landscape
Anticipating the trend and aligning brands’ growth strategy
Indonesia has posted steady year-on-year GDP growth of around 5% over the past five quarters, while inflation has been coming down and settling at 2-3%. The economy is showing resilience, making gradual progress rather than any significant improvement. The consumer confidence index has slightly improved over the past year, stabilising at around 120.
However, the increasing cost of living post-pandemic is challenging consumers’ purchasing power. To manage their household budget they are prioritising primary needs such as transport and utilities, and holding back spend on secondary needs like travel, fashion, and durable goods. This trend is similar across all consumer groups, from upper class to lower class.
Households continue to allocate most of their overall budget to FMCG and fresh food, but within that they are adjusting their spending differently from one individual sector to another.
Zooming into FMCG spending, consumer behaviour varies from one sector to another. For in-home purchases, downsizing and downtrading are the key trends in the Home Care and Personal Care sectors, but shoppers are willing to spend more in the Beauty sector which brings an opportunity for premiumisation. When it comes to the pantry essentials that meet shoppers’ basic needs, value growth is only coming from price increases as shoppers cope with inflation. In the Baby Care sector there is a trend for upsizing, as shoppers balance higher prices by purchasing a bigger pack size to maintain value for money.
As consumers rationalise their spending by managing priorities within FMCG categories, brands need to develop a more appropriate strategy to win share of wallet. Brands that improve affordability might benefit from the situation, but a cheaper price is not the only way to win shoppers. Those that communicate a clear justification, deliver product quality, and offer optimal usage benefits can earn a more premium price.
In addition, shoppers are now being challenged with an overwhelming choice of available options for new products. Innovation is one way to grow, but it’s vital to accommodate consumers' needs and wants. Brands that deliver relevant innovations are likely to grow their buyer base faster than others. For example, a beauty brand can ride the trend of higher demand for sunscreen and offer extended benefits of protecting and moisturising.
For out-of-home (OOH) purchases, volume growth is being driven by both snacks and beverages, mainly non-dairy beverages. This is likely to be due to higher post-pandemic mobility and school activity. To recruit shoppers for OOH occasions, products need to find a good fit. Some brands achieve this by launching relevant innovations that offer both affordability and practicality. Above all, high availability is the most crucial factor, given the impulse purchase behaviour exhibited by consumers.
Although population growth in Indonesia is slowing, Next-Gen (millennials and GenZ) consumers are gaining importance as decision-makers within households. They are driving FMCG growth beyond the price increase which can also grow volume, and they behave differently from the older generations. They are more open to novelty and willing to try new products, which can be a great opportunity for brands to promote their innovations. Kantar Insights’ study on Generation 360 found that Gen Z consumers are striving for a better quality of life, and around 78% of them want to spend time with their family, which suggests a willingness to spend more on high quality products that support this goal.
To reach this group of shoppers, brands and manufacturers should be able to accommodate different needs in different regions. Next-Gen shoppers in key cities might demand more convenience and strong availability across channels, including online and specialty channels. Meanwhile, shoppers in rural areas might be more open to product innovations. For instance, in the Pantry Essentials sector, shoppers in rural areas have more Cooking Aids categories in their shopping baskets, showing their willingness to experiment.
In addition, Next-Gen shoppers are more digitally savvy than the older generations. Reaching them through digital media has become fundamental. Making relevant noise in digital media is important, but optimising the right touchpoints to recruit new buyers is another challenge. Almost 90% of Next-Gen shoppers use YouTube as their main digital touchpoint, and more than half of FMCG shoppers from this group use TikTok. Finding the right balance to reach target groups and convert their awareness to sales is now the main homework for brands and manufacturers.
With the upcoming election in 2024, Indonesia’s macroeconomic situation will become pivotal to consumer spending. Since the last election year in 2019, the government has maintained the inflation rate and GDP growth to keep the macroeconomic scenario steady. The excitement surrounding the election, combined with greater political stability, might drive households to feel more optimistic about the economy and overall cost of living, and increase consumer confidence.
Overall, we project a modest 5% value growth for Indonesia’s FMCG industry this year compared to 2023, in alignment with the expected GDP increase – assuming status quo in the market’s economic condition. Growth across sectors is likely to be slower in 2024 – in particular Pantry Essentials – except for Baby Care, which is projected to fare slightly better.
Due to economic pressures across all cohorts, shoppers need to rationalise their spending. This means manufacturers must emphasise the value for money of their products to better compete in today’s market, which includes offering affordability, or justifying the price through strong propositions.
For out-of-home consumption, the opportunity lies in the return of mobility following the pandemic, and the higher need for practicality and availability. Consumers are exhibiting impulse purchase behaviour, making it important for brands to be present mentally in the moment, and physically in the store.
The younger generations hold strong growth potential in today’s market, due to their desire to explore new purchases that will help them achieve a better quality of life for themselves and their families. Securing future shoppers’ interest today through understanding their media preferences will help to unlock growth in the long run.
