Local products face fierce competition from foreign brands

Rudijanto, Contributor, Jakarta

"Say it with flowers" is a saying that inspires people to express their feelings through a romantic floral gesture to those they love most. But "Say it with discounts" is probably the most effective way for processed food producers to win the hearts of Indonesian consumers.

Severely battered by prolonged economic turmoil, Indonesian consumers have developed a deep sensitivity to prices. Even though their purchasing power has been greatly weakened, they still do not want to reduce their consumption levels.

This strong desire to consume has been supporting the growth of the Indonesian economy as foreign investors continue to shun the country.

With over 200 million mouths to feed, Indonesia is certainly a huge market for the processed food industry, ranging from instant noodles, and canned meat, fish and fruit, to bottled sauces and beverages. While the purchase of luxury goods can wait for better times, the consumption of food products cannot wait. This fact has supported the growth of the processed food industry even amid the current economic difficulties.

The executive director of the Indonesian Food and Beverage Industry Association (GAPMMI), Thomas Darmawan, has revealed to the press that total sales of processed food will increase from Rp 185 trillion (about US$21.75 billion) last year to Rp 200 trillion in 2003. The approaching Moslem holiday of Idul Fitri, as well as Christmas and the New Year, will certainly boost the domestic consumption of processed foods.

However, the Indonesian market is a unique one. Without sufficient knowledge of all the characteristics of this market, producers and newcomers to the industry may simply end up producing good products, but for the wrong market.

"Price-oriented products have the biggest market share since the public tend to buy low-priced products, especially for routine consumption, such as canned fish," says Alexander S. Mulya, Senior Business Analyst, Head of Brands & Communications at MARKPLUS, a marketing & strategy consultant.

Thomas admits that reduced purchasing power has changed consumption patterns. Instead of reducing consumption, he says that people are tending to purchase cheaper products. "If previously they ate noodles in hotels, now they tend to eat in ordinary restaurants," says Thomas.

In this price-sensitive market, products sold at discount prices or lower prices than those of similar products tend to attract consumers. This sensitivity to price will continue as long as the economic outlook is still uncertain.

The religious issue is another factor that strongly characterizes the market. Being a predominantly Muslim country, Indonesia has a particular preoccupation in ensuring that food products are halal, or permissible to Muslims. Under Islamic law, certain foods, especially those with pork, are forbidden to Muslims.

Neglecting this issue will lead to disaster. Most Indonesians still remember a case that involved popular seasoning product Ajinomoto two years ago. Finding that Ajinomoto contained pork enzymes, the Indonesian Council of Ulemas (MUI) declared that the product was forbidden to Moslems.

The impact of the declaration was disastrous for Ajinomoto, and all its products had to be withdrawn from the market.

"To assure consumers that our products are halal, the best thing to do is to obtain a certificate from the MUI as its declarations are widely accepted. The MUI also has test laboratories and a good reputation," says Alexander.

With the number of better informed consumers increasing, particularly in the cities, producers can no longer neglect health issues in the industry. Consumers will shun products that contain any substances that are detrimental to health.

Last year, the Indonesian Consumers Institute (YLKI) published a study that showed that some food products contained genetically modified material.

Indonesian producers have various advantages in the local market due to their knowledge of consumers' tastes and concerns. However, most of them have started to worry about increasing imports of processed food products.

Data from GAPMMI reveals that processed food imports, both legal and illegal, will reach US$1.5 billion, or Rp 12.95 trillion this year. This figure constitutes an increase over last year's total imports of $800 million, if illegal imports are included.

Facing growing imports, many Indonesian processed food producers are looking for government help. Most of the producers complain about high production costs in Indonesia.

Thomas believes that the domestic processed food industry will be unable to compete with imported products due to these high production costs. Aside from taxes paid to the central government, producers now have to set aside money to pay the various levies imposed on them by local governments. This is an unfortunate side effect of local autonomy.

The recent increases in fuel prices and electricity charges have also had a major impact on production costs.

Many processed food producers expect the government to support them in their fight against imported products in the local market. Processed food producers feel that the government has given more attention on agricultural products than processed food products.

"Certainly, farmers need protection but we have to remember that agriculture cannot be separated from the processed food industry," said Thomas in a local newspaper.

Thomas added that although many European countries and the U.S. keep on pressuring Indonesia to reduce import duties, these countries are still protecting their own industries. Aside from taxes, these countries also apply other non-tariff barriers to protect their markets from imported products.

A concrete example of such protective practices is the fact that Indonesian exporters have to pay not only the 8.5 percent import duty when they export candy products to Europe but also a US$0.5 sugar tax. This is because some European countries still impose a sugar tax.

Indonesia's processed food exports are expected to reach US$1.2 billion in 2003. Last year, the country's exports reached US$1.1 billion. In spite of the increase projected for this year, Thomas believes that the export prospects will darken in the coming years due to the strict regulation of imported goods in developed countries.

With various taxes and levies in the home as well as the export markets, one may wonder if Indonesian processed food producers will still be able to offer competitive prices in the long run for both domestic as well as overseas customers. How long will they be able to adhere to the "Say it with discounts" strategy?