Drinks groups lose some fizz in Indonesia

With a fast-growing middle class and half its population of 250m under 30 years of age, Indonesia has become a crucial emerging market for the world's leading soft drink makers.

But a surge in competition and a slowdown in the economy are taking their toll on market leaders from Coca-Cola, the world's biggest beverage company, to Danone, the French group that dominates Indonesia's bottled water market.

Profit margins are being squeezed in a fierce battle for market share involving a diverse group of rivals including AJE, a Peruvian cola producer with ambitious Asian expansion plans, Japan's Asahi and Suntory and local consumer goods powerhouses such as Indofood, Wings and Sosro.

At the same time, Indonesia's economy is growing at the slowest pace for five years, consumers are contending with a large increase in the price of subsidised fuel and production costs are rising sharply because of higher wages and a depreciating currency that makes imported packaging and ingredients more expensive.

"There's an increasing level of competitive intensity and with the soft drink production capacity doubling in the next five to eight years, this will be a tough place to be," says Nader Elkhweet, a partner at management consultancy Bain & Company in Jakarta.

Euromonitor International, a market researcher, predicts that average annual sales growth for Indonesia's $6.5bn soft drink market will slow to around 6 per cent in the next five years, from 12 per cent in the previous five years.

The cost and competition challenges facing the soft drink makers illustrate the wider issues for consumer goods companies in Indonesia.

Long-healthy profit margins are under pressure at companies ranging from Astra International, which produces and distributes Toyota cars in Indonesia, to the local subsidiary of Unilever, the shampoo-to-ice cream group.

Coke, which is struggling in many increasingly health conscious developed nations, has singled out Indonesia as a key contributor to chief executive Muhtar Kent's plan to double revenues, known as "Vision 2020".

But Coca-Cola Amatil, the Australia-listed company that bottles Coke in Indonesia, has been badly hit by rising costs and competition from cut-price rival AJE. The Peruvian company, which sells its Big Cola for around 25 per cent less than Coke, has grabbed more than a third of the $1bn carbonated drinks market just four years since entering Indonesia.

In Indonesia CCA saw its operating margin, based on earnings before interest and tax, fall to just 1.2 per cent in the first half of this year, from 7.3 per cent a year earlier. In response CCA has turned to Coke for a $500m equity injection into the Indonesian business.

"Indonesia is a tremendously important market for The Coca-Cola Company and they regularly refer to it in same breath as China and India," says Alison Watkins, CCA managing director.

Danone, which dominates the soft drink market in Indonesia through its sprawling Danone Aqua water business, is also pumping in hundreds of millions of dollars over the next few years to build new bottling plants as it tries to fend off competition, according to Jakarta-based executive Charlie Cappetti.

Indonesia is vital for Danone, contributing 6 per cent of €21.3bn global sales last year at a time when other markets were underperforming. The company generates more sales from its Aqua brand water in Indonesia than it does globally from its better-known Evian.

Coke, Nestle and many small local players offer their own bottled water but the big threat is Indofood, the conglomerate controlled by the powerful Salim family, which has teamed with Asahi and acquired the second most popular Indonesian water brand, called Club.

Elvira Tjandrawinata, the head of research for Nomura in Indonesia, warns that another fuel price increase, which is expected this year, could further dent purchasing power.

"There is a lot more competition but people are maybe only buying snacks and drinks once a day instead of twice a day now," she says.

Ms Tjandrawinata predicts that revenue growth for consumer goods companies, which was averaging around 20 per cent in the last couple of years, will slow to 10 per cent over the next three years, with earnings growth slowing from 20-30 per cent to 10-15 per cent.

But John Kurtz, head of Asia-Pacific for management consultancy AT Kearney, says that despite slower growth and pressure on profits, global companies will continue to invest in Indonesia to tap into rising consumption over coming decades.

"While competition has heated up, there is still a lot of long-term growth potential and the strong brands are still making money," he says. 

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