McKinsey's tips for marketers to tap into Indonesia's burgeoning consumerism

This jump of 90 million consumers is the largest increase expected in any country, barring India and China. According to the study, Indonesia will require companies to place calculated bets and be discerning about which products, channels, cities, and forms of media to invest in.

The study interviewed 5,500 respondents in 44 cities covering 24 provinces in Indonesia. The questionnaire spanned five sectors: automotive, consumer electronics, financial services, food and beverage, and home and personal care. It also looked at 192 brands in 116 product categories. In addition, the study also sponsored a panel of more than 1,500 consumers to facilitate further research and testing of specific issues.

The McKinsey report has put down some recommendations:

Promising categories

• Consumer response to the study indicates that big categories that have already reached penetration, including instant noodles and ready-to-drink teas, need to show innovation or reposition their brands to reach the next stage of market development.
• Also, big categories with potential for more penetration, like fruit juices and chewing gum, show attractive opportunities for new products, brands and wider distribution. Again, McKinsey recommends repositioning brands to attract new consumers and increase penetration.
• Midsize categories with high penetration, including sweetened condensed milk and carbonated soft drinks, would benefit from cutting prices and more promotion.
• Small to midsize categories with lower penetration, including yogurt, infant foods and quick-service restaurants, are still in developmental mode and present ‘compelling’ opportunities.

Indonesian idosyncracy

More than 90 per cent of consumers in Indonesia know which brand or brands they would buy before they visit a store. This number is far more than any other country, even China. Also, in every category McKinsey surveyed, it found two brands tended to come out on top. In many cases, the owner of the brand was either an established Indonesian company or a multinational with a decades-long presence in the country. Conversely, almost all brands struggled to convert consumers from purchase to loyalty.

Media

The McKinsey survey revealed that television and word-of-mouth remain the most important way of receiving product information in almost all categories.

• For food, beverage, home and personal-care categories, about two-thirds of consumers said they received credible information from TV.
• For consumer electronics, about 50 per cent got their information from TV.
• Other media are emerging in certain categories of the market, particularly for higher-income consumers. These include sponsorships and product placements in the food and beverage category. Advisory sessions seem to work well in the automotive segment.

Modern trade versus traditional trade

The sales and distribution channel structure in Indonesia is fragmented. Retail sales through traditional channels, such as mom-and-pop stores and wet markets, account for about 70 per cent of the market, but modern trade’s share continues to increase and is expected to reach about 50 per cent by 2015. Within that, the minimarket has shown promise, accounting for almost 50 per cent of modern trade. Minimarkets are gaining share in Indonesia because of their convenience—particularly important in bigger cities where traffic congestion and lack of public transportation make in-city travelling a challenge. The McKinsey study shows that channel importance differs by consumer segments and product categories.

• More than 80 per cent of urban shoppers prefer to purchase home and personal-care products in modern channels.
• For general food and beverage, however, traditional channels are preferred.
• Within food channels, minimarkets gain popularity with more than 50 per cent of consumers purchasing ready-to-drink juice and chocolate there.
• In categories like mobile phones, channel loyalty is as high as brand loyalty, with 36 per cent of those surveyed preferring to buy from a specific channel such as a digital mall or an appliance chain store.

Geographic diversity

Indonesia’s most striking feature is its geodiversity,  McKinsey notes. Consumers are spread across 17,500 islands in more than 500 cities and five main regions. Consumer needs and preferences vary considerably by location, adding greatly to the challenges companies face in Indonesia. Like China, city clusters offer a powerful way for companies to view and serve consumer needs because they provide a granular city-by-city route to the market.

• Indonesia’s economy is highly concentrated in Java and Sumatra; the two islands make up more than 80 per cent of the country’s GDP.  There appear to be two clear city clusters in Java, one around Jakarta and another around Surabaya, according to McKinsey’s city-level GDP and consumption forecasts.
• Another central Java cluster is likely to develop around Semarang, including cities such as Pekalongan and Surakarta.
• Three clusters are likely to develop on Sumatra—a north cluster around Medan, a central cluster around Pekanbaru–Batam, and a south cluster around Palembang.
• The eastern part of Indonesia could see the emergence of a Makassar cluster in southern Sulawesi and a Balikpapan cluster in eastern Kalimantan.

McKinsey observes that city clusters in the same region are quite different from one another. In Java, for instace, consumers in Surabaya cluster are driven by brand and image, while those in the Jakarta cluster are driven by their own practical judgement and experience. Surabaya consumers split their shopping basket far more between modern and traditional retail. Among products, for instance, Surabaya consumers more strongly favor global categories such as chocolate; for media preference, Surabaya consumers are two times more likely to take the advice of friends and family when purchasing a product, suggesting they are still less familiar with many categories than are Jakarta consumers.

CASE STUDY Unilever's success in Indonesia The McKinsey study highlighted the success of FMCG giant Unilever in the country. In 2010, Unilever Indonesia’s sales in food, home care, and personal care exceeded €1.6 billion. The company had gross margins of 52 per cent, earnings before interest and taxes of 23 per cent, and 4,800 employees. A balanced product portfolio: The company has a mix of brands that inspire consumers, brands that everybody grew up with, and brands that stand for family. It also offers a full spectrum of price points, with a focus on low-priced products to target mass consumers and higher-priced goods for trading up. Unilever entered the market in the 1930s with selected international brands, and by the 1990s, it had broadened its offer to include a wide range of price points and local brands. A streamlined route-to-market approach: All hypermarkets are managed directly as key accounts. There’s a single layer of more than 400 distributors for fragmented trade. Product and service offerings are clearly differentiated by channel and outlet type. Deep penetration: Unilever has a 53 per cent average market in the categories it serves, with its products available in 82 per cent of the country. Penetration has been aided by the development of a bicycle-assisted vendor network and a focus on making freezers available for rural and hard-to-reach areas. Strong marketing: McKinsey observed a creative above-the-line approach, sometimes involving the use of movies, and practical below-the-line execution, such as pervasive consumer touch points consistently reinforcing the brand and retailer incentives. A combined local and global supply chain: Unilever has a high-quality, low-cost supply chain, with factories present throughout the country. However, Unilever Indonesia may source products from any Unilever factory in the world that meets its price and quality requirements. The company has an extensive warehouse network, serving both dispersed key accounts and distributors. The ability to attract local talent: Unilever operates a highly local organization, with a largely Indonesian management team, and has invested great effort in becoming the local employer of choice.