The fluctuation of international commodities prices, including food and fuel, has triggered big worries in the domestic food industry over whether the industry will able to survive and pass the turbulence.
As the commodities prices in the international market fluctuate, most producing countries are holding their crops to protect their domestic supply. This condition creates raw material shortages in the food industry and it raises the price of imported raw materials.
The challenges Indonesian manufacturers also have to face are high electricity and fuel prices, increasing labor costs, lack of infrastructure and cheaper finished products from China.
To increase the product's price is not a good option. The price hike will hit people's purchasing power, hence, the industry will be hit from two sides, by lower market demand and higher production costs.
Indonesia has a large population of 225 million consisting of relatively young people. The market opportunity for the food industry in Indonesia is still wide open as consumption of food in Indonesia is people's dominant expenditure. Central Statistics Agency (BPS) data shows people spend 54 percent of their income on food.
Based on BPS data, 17 percent of the Indonesian population is still living below the poverty line and the majority of the population belongs to the low-income bracket. This is the main reason people are primarily concerned with affordable prices.
According to the Indonesian Food and Beverage Producers Associations (GAPMI), Indonesia's food and beverage exports will grow from 10 to 15 percent in 2008. The food and beverages industry is still a good sector for both domestic players and importers. The prospect is not only for the manufacturers, but also for the suppliers of those manufacturers and distributors of the products. For the current condition, the staple food and its alternatives, including baby foods, are a favorable segment as the other complementary foods might have lower market demand.
With the population dominated by young people, trends in snacking and health consciousness will keep the demands on the market, hence the food processing industry will continue to grow.
Food processing suppliers are mostly importers as a majority of the raw materials are imported. This condition will allow banks to provide trade facilities for those, however, as the risk of currency and commodities fluctuation is certainly there.
A financing scheme with in-depth risk analysis and mitigation is required to facilitate cash or non-cash trade facilities (including bank guarantee), foreign currency and conventional cash loans.
It is important to reconsider products that already have very strong players in the current market. The strong players will definitely cause the other brands difficulties in entering and competing with the existing strong players that already have public images. Experience has shown at least one brand has tried and failed to compete with two strong instant noodle brands.
Medium-sized food processing companies are also a good opportunity in the market. Some medium brands with strong and unique marketing strategies are proven to create a new market segment.
Small-sized food processing companies might be prospects, especially those having local/regional reputations, such as a locally well-known bakery or traditional snack producer in a particular city, especially in tourist destination cities such as Yogyakarta.
As health awareness increases, the products which gain reputations as health-related products are becoming more popular. Low-fat and low-sugar products are preferred as well as sports drinks that are believed to be useful in preventing dehydration.
Smaller package size is also preferred due to convenience and price considerations. As most people's income is inconsistent and unsteady, people are forced to purchase food in small quantities.
It could be there is a lower demand on the food and beverages industry in Indonesia due to high inflation rates and lower purchasing power of the people. However, the large population and food as the people's basic need will keep the market opportunity open. It is smart strategies and the right choice of market niches that will guarantee the industry keeps growing. The writer is an assistant vice president of scenario planning & portfolio management at SME & Commercial Credit Risk, Bank Danamon Indonesia. These are his personal views. He can be reached at novri.hidayattullah@danamon.co.id
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