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October 27, 2015

Indonesia – The potential and pitfalls of the infant formula sector

Indonesia has become one of the world's largest markets for infant formula by volume, supported by demographic trends such as a large – and young – population. However, the country's economic situation means selling prices are low. Meanwhile, poor sanitation and high poverty levels leave infant formula makers in a very precarious position, with their products linked to infant mortality. Katy Askew looks at the potential and pitfalls of selling infant formula in Indonesia.

Indonesia has become one of the world's largest markets for infant formula by volume, supported by demographic trends such as a large – and young – population. However, the country's economic situation means selling prices are low. Meanwhile, poor sanitation and high poverty levels leave infant formula makers in a very precarious position, with their products linked to infant mortality. Katy Askew looks at the potential and pitfalls of selling infant formula in Indonesia.

The Indonesian infant formula sector generated sales of INR28.15trn (US$2.06bn) in 2014. According to figures from Euromonitor International, that represents an increase of almost 70% in market value from 2010, when the sector was valued at INR16.62trn. 

Growing demand for infant formula is supported by Indonesia's comparatively high birth rate, which stood at 17.04 births per 1,000 people in 2014. While the birth rate has declined  in recent years, in a population nearing 250m people – the fourth most populous country in the world – this still equates to around 4.26m births per annum.

In contrast to developed economies, Indonesia also boasts a youthful population. Aound half of the population is under 30 years old and 29% are under 15. There are approximately 25m children under the age of five in the country. Indonesia therefore represents a growing market for products that target the needs of infants. 

Other trends are also supporting the growth of the sector. Improved market access is being facilitated by a process of urbanisation. World Bank data suggests the number of urban dwellers rose from 51% to 53% of Indonesia's population between 2011 and 2014. It is forecast this rate will rise to 71% by 2030, with an estimated 32m people moving from a rural to an urban setting. 

While the capital, Jakarta, is likely to remain Indonesia's largest city – accounting for 22% of GDP – growth is expected to be fastest in other large and mid-sized cities, such as Medan, Bandung and Surabaya. The country's second-tier cities are therefore likely to prove fertile ground for continued expansion of infant formula makers – and other CPG sectors – in years to come. 

This increasingly urbanised population has demonstrated a steady female workforce participation rate of 51% in recent years. Mothers balancing the needs of young children and working provide a ready market for infant formula products.

Consumption levels are also on the up in the country, supported by continued growth of the middle class despite recent economic turbulence. Indonesia's consumer class, defined as those with an income of more than US$3,600 per annum, is projected to grow from 45m people today to 135m people in 2030. 

Significantly, these emerging consumers are most likely to spend on products that benefit the wellbeing of their families, research from Boston Consulting Group suggests. "Indonesian consumers are extremely family oriented, and 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."

To this aspirational consumer group, a balance must be struck between delivering quality infant formula products at affordable price points, Preben Mikkelsen, of dairy industry consultants PM Food & Dairy Consulting, suggests. "The quality and nutritious value is the most important for affluent consumer but [for] the mainstream consumer it is the highest quality for the lowest price," he tells just-food. 

This demand for quality has worked to the benefit of multinational infant formula manufacturers who currently dominate the market. Mikkelsen continues: "The international players dominate almost totally the market with Nestle in the lead (22% value share) followed by [Danone-owned] Sari Husada (15%)… [FrieslandCampina-owned] Frisian Flag (13%), [Danone-owned] Nutricia (13%), Mead Johnson (6%), Abbott (5%), [Nestle's] Wyeth (4%), Fonterra Brands (1.5%)." Indonesian companies represented in the mass market include Kalbe Farm, with a 14% market share, and Indofood Sukses Makmur with 1% value share, Mikkelsen says. "The main reason for this dominance is the high quality and security measures in relation to manufacturing infant formula."

While quality is important, the market is nevertheless highly price sensitive. Indeed, according to Mintel, Indonesia's formula sector is shaped by "the very low average price". Infant formula makers are working to add value and have met some success in this area. The sector has seen a 14% compound annual growth rate in terms of value between 2009 and 2013, outpacing the 6% in volume CAGR, Mintel reveals. However, the price gap between infant formula sold in Indonesia and the world's other largest markets is steep. 

Mintel research manager Caroline Roux concludes: "International players expect the Indonesian baby food market to enjoy steady growth, boosted by the increasing consumer spending, a high number of births and a relatively low breastfeeding rate. However, the market is not yet ready for high value products."

Part of the reason why prices remain low in Indonesia is that poverty levels in the country – in both urban and rural areas – are high. According to the World Bank, the number of people living below the national poverty line in Indonesia stood at 11.3% of the population last year. Poverty is somewhat in retreat in the country, down from 14.2% of people below the poverty line in 2009. However, poorer populations face severe problems in accessing clean water and adequate sanitation. Some estimates suggest that as much as 45% of the Indonesian population lacks adequate access to clean water. These issues are exasperated by rapid urbanisation and inadequate infrastructure in both rural and urban settings. 

Unsafe water supply and malnutrition among poorer families are linked to the country's high infant mortality rate, which stood at 24 children per 1000 births last year. For this reason, the Indonesian government has thrown its weight behind initiatives designed to increase breast feeding. In 2012, the Indonesian government enforced a new rule to encourage all babies to be exclusively breast fed for the first six months of their lives to tackle health concerns. Despite these efforts, estimates suggest that only 40% of babies under six months are exclusively breast fed. 

Roux says that to prosper in the Indonesian infant formula sector, companies must be seen to be doing the right thing with regard to infant mortality. "Outstanding ethical behaviour is expected, from food safety to fair pricing policies. Brands need to constantly prove that they have at the heart of their business the nutritional wellbeing of babies," she suggests. "Companies need to be seen doing the right thing to help with sanitation issues. Those selling bottled water are in a strong position to provide consumers with safe products."

The Indonesian infant formula sector is likely to remain appetising for multinational players who want to capitalise on the high number of births and low breast feeding levels. However, low selling prices and tight regulation due to concerns over the infant formula industry's relationship to infant mortality are likely to dog the sector. 

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