Luxury tax hurts sales of nonalcoholic drinks

Sudibyo M. Wiradji, Contributor, Jakarta

Unlike most of Indonesia's food-related businesses, the beverage industry has been experiencing tough times over the last two years, partly as the result of country's worst ever economic crisis.

And the government's decision to impose a 10 percent luxury tax on prepared nonalcoholic drinks further added to the problems of the already battered beverage industry.

"Except for bottled water producers, most companies involved in the beverage business are suffering negative growth," according to a senior official of the Association of Indonesian Beverage Producers, or ASRIM.

The economic crisis, which has significantly reduced people's purchasing power, the high inflation rate and the imposition of the luxury tax are major factors for the decline in the beverage industry.

"The nonalcoholic ready-to-drink (NARTD) market is very price elastic. Changes in price will immediately affect sales, thus it is very important to be able to maintain our prices at affordable levels," PT Coca-Cola Indonesia's managing director Sanjay Guha said.

Currently, ASRIM has 22 members, all of which are engaged in the nonalcoholic ready-to-drink business. They include Teh Botol Sosro, Coca-Cola, Fanta, Sprite, Pepsi Cola and Aqua.

Products included in the NARTD market include bottled water and tea, soft drinks and juices.

ASRIM members see the imposition of the luxury tax on soft drinks as unrealistic, and have urged the government to revoke it in order to help revive the industry.

"Characteristically, nonalcoholic ready-to-drink products are nonessential, ordinary products intended for the general public, not a particular group of people. So these products cannot be included in the category of luxury items," said an executive at a major beverage producer who asked not to be named.

According to Sanjay, the beverage industry, which creates business opportunities for millions of small-scale businesses and street vendors, should be supported.

Despite the difficult situation, Coca-Cola, which control 20 percent of the nonalcoholic ready-to-drink market, remains a popular soft drink, especially with teenagers and young adults.

"Our business over the last 10 years has grown steadily and we have always taken a long-term view of this market," Sanjay said.

Unlike beverages in the NARTD category, the bottled water business is much more promising, in part because of the removal of a 10 percent luxury tax in January last year.

About 340 bottled water companies have registered with the Ministry of Industry and Trade, of which about 200 are already in operation.

PT Aqua Golden Mississippi president director Willy Sidharta said the revocation of the luxury tax on bottled water had helped the industry greatly, particularly in coping with the decline in people's purchasing power.

The health of the bottled water industry can be seen in the amount of money that has been poured into the industry recently. In the last three years, total investment in the industry is estimated at about Rp 3 trillion.

Industry sources said the sale volume of bottled water reached about five billion liters in 2001.

"In 2002, the sale volume is projected to reach 7.1 billion liters," a source at ASPADIN, the Association of Indonesian Bottled Water Producers, said.

Bottled water companies with long-established brands and good business strategies have been able to record solid sales growth despite the unfavorable economic situation.

PT Aqua Golden Mississippi Tbk., for example, reported over 50 percent growth in sales volume in 2001 to 2.36 billion liters, from 1.57 billion liters the previous year.

"This year, our targeted sales volume is between 2.9 and three billion liters," Willy said.

Last year Aqua invested about Rp 147 billion to expand its production facilities, an increase from the Rp 133 billion spent the previous year. The investment was used for capacity-expansion projects that are scheduled for completion in 2002, the company said in its 2001 annual report.

Another bottled water company, Equil, mostly sells its products to four and five-star hotels and fine dining establishments in the country's larger cities, such as Jakarta, Surabaya, Bandung and Medan. This company is also enjoying healthy growth despite the difficult economic situation.

Irawan Siswandi, an executive at Equil, said the company had increased production to 8,000 bottles per day from 5,000 the previous year in order to meet growing demand.

"Eighty percent of our products are for export consumption," he said.