BRICs and beyond: Competition rises in Indonesia's growing dairy sector
Demand grows for dairy in Indonesia
Drinking milk consumption in Indonesia lags neighbouring countries in Asia. However, demographic drivers and growing consumer awareness around the functional benefits of dairy mean demand is expected to witness dynamic growth. As international and domestic players vie for position in the market competition is also growing apace. Katy Askew reports.
New Zealand dairy giant Fonterra announced last month it will open its first manufacturing plant in Indonesia early next year.
The IDR375bn (US$31.3m) facility represents the largest investment Fonterra has made in the ASEAN region in ten years. Fonterra is betting big on growing demand for its Anlene, Anmum and Anchor Boneeto brands in Indonesia - and a number of factors would suggest it will pay off.
According to figures from Nielsen, Indonesia's dairy industry has seen demand grow around 10% on an annual basis for the past decade. The expansion has been fuelled by population growth, rising incomes and changing consumer habits.
With 246m inhabitants, Indonesia is one of the most populous countries in the world and more than half of its inhabitants are under the age of 35.
While dairy is not a traditional part of the Asian diet, products such as fresh and powdered milk, cheese and yoghurt are gaining popularity and becoming a regular feature on the shopping lists of a rising number of middle-income families.
A recent report from the US Department of Agriculture suggests Indonesia's middle class has expanded significantly over the last decade. In 2003, the middle class - defined by those spending US$2-20 per day - was estimated at 37.6% of the total population. By 2010, the middle class had expanded to 56.5%.
Although demand for dairy is on the rise, consumption in Indonesia remains well below neighbouring countries in Asia - meaning there is still plenty of potential for the sector.
As Mintel analyst Chris Brockman tells just-food, Indonesia consumed 3.2bn litres of milk products in 2012, up 9% from the prior year. However, he adds: "Per capita consumption is low at around 13 litres per head per annum - therefore [there is] significant opportunity for expansion."
That compares to 22 litres per capita in the Philippines, 31 litres per capita in Thailand and 51 litres per capita in Singapore and Malaysia.
Three types of consumer products dominate Indonesia's drinking milk market. Fluid UHT milk, sweetened condensed milk and powdered milk have market shares of 26%, 35%, and 39% respectively.
The majority of milk consumed in the country - around 70% - is imported. Most imported dairy products originate in Australia and New Zealand, which benefit from geographical proximity and long-standing trading relationships.
The Indonesian government has set a target of decreasing its reliance on imports. The authorities aim for domestic supply to account for 50% of consumption by 2025.
However, a lack of quality raw milk supply from local dairy producers continues to present a challenge to up-stream dairy manufacturers.
To this end, last year Dutch dairy group FrieslandCampina threw its weight behind Indonesia's Dairy Village Programme, which aims to provide small land holders with sufficient arable land and, by supporting them in seeking strategic cooperative partnerships with other small land holders, providing them with access to finance to invest in housing and mechanisation.
"The [programme] was launched in Lembang in July 2013, enabling more than 10,000 local dairy farmers to boost their dairy production, improving both quantity and quality," FrieslandCampina explains.
FreislandCampina operates two production facilities in Indonesia, where it offers products under the Frisian Flag, Yes! and Omela brands. In particular, the group points to growing demand for nutritional products to meet the needs of young families as a key growth driver.
"There are many families with young children, which explains FrieslandCampina Indonesia's great success with infant and children's nutrition and with its strong focus on health and balanced nutrition," the company says on its website.
Likewise, French dairy major Danone has focused its product development in Indonesia on meeting the functional needs of the country's youthful population. Through its consumer research programme, NutriPlanet, Danone has analysed data on attitudes to food and nutrition, including cultural and sociological issues, in order to develop products tailored to the market.
"In Indonesia, where most children leave for school without having breakfast, compact bottles of Milkuat, in the shape of a tiger's head, have created a sensation since the end of 2011," the company says. "Milkuat is fortified with iron and zinc, a recipe which helps to offset the nutritional deficiencies identified in 80% of Indonesian children."
Further innovation focusing on the functional benefits of dairy is likely to be key to the growth of the sector in the coming years. According to Mintel's GNPD database, in 2012 some 37% of dairy products were fortified and 27% were promoted as improving bone health.
Recent product launches from Indofood's dairy unit, Indolakto, have been dominated by functional products. The group's recent NPD includes Calciskim, a high calcium non-fat aimed at women, and Indomilk Liquid milk, a ready to drink flavoured milk high in calcium, phosphorus and vitamin D and aimed at children.
Euromonitor predicts the category will witness a compound annual growth rate 6% over the next five years. The research firm suggests that, alongside functional product development, efforts to educate consumers on the nutritional role dairy can play as part of a balanced diet will also be important to support growth.
"Long-standing drinking milk players, such as Nestlé Indonesia, Indolakto, Ultrajaya, Frisian Flag Indonesia and Fonterra, are expected to increase their efforts to educate consumers about the importance of drinking milk regularly," Euromonitor researchers suggest.
However, while the drinking milk sector in Indonesia is growing apace, competition is also intense as multinationals and local players alike vie to take advantage of the apparent potential.
As domestic food major Indofood noted in its annual report: "The increasing scale of the market at the same time is also attracting more competition."
Alongside Indofood's Indolakto, Ultrajaya is a key domestic player in the sector, while international players with a strong footprint in the country include Nestle, FrisianCampina and Danone.
Like many operating in the space, Indofood has responded to this increased competitive pressure by investing in capacity and production facilities as well as marketing and innovation efforts. "The [dairy] division continued to focus on adding new capacity in liquid milk and SCM, projects," the group noted. "Further efforts were made by the division in marketing, aiming to strengthen the brand equity of our flagship brand, Indomilk."
Likewise, Ultrajaya is investing heavily in consumer marketing in order to drive sales and defend its market share. According to the group's 2012 annual report, it is also adding production capacity and investing in improved efficiency.
Fonterra is not alone among the multinationals investing in Indonesian production. Last year, Nestle's US$200m production facility in Karawang, West Java, began production of powdered milk and its Milo malted drink brand. The production site is Nestle's fourth facility in the country.
Announcing the investment back in 2011, country president Arshad Chaudhry said the move was "consistent" with the company's "confidence in the rapidly developing economy" of Indonesia. "We are very optimistic about the growth opportunities in Indonesia. It has a large, progressive population and the economic environment is very conducive for growth."
Indonesia's rapidly developing market is clearly proving a tempting prize for both domestic and international dairy majors who are stepping up investment in the country. However, as they vie for a share of the market competitive pressures are also heating up. Providing well-positioned products that meet the functional needs of Indonesian consumers seems likely to prove key.
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