Luxury Society Knowledge Partner Euromonitor, takes an in-depth look at Indonesia’s wider economic potential for luxury.
Last week, Capgemini and RBC Wealth Management released the Asia-Pacific Wealth Report (APWR) 2015, crowning Emerging Asia, including Indonesia, as one the strongest expected regions for UHNWI wealth. Here, Fflur Roberts head of luxury goods at Euromonitor, takes an in-depth look at Indonesia’s wider economic potential for luxury.
With economic performance declining in some of BRIC countries, luxury goods brands and retailers have been increasingly looking for new growth angles and potential markets.
One of such markets is Indonesia, which forms part of the new MINT countries, and is showing favourable demographics, has a beneficial geographical location as well as interesting economic prospects for the luxury goods industry.
Valued at IDR 8.5 trillion (US$707 million fixed exchange rates) at the end of 2014, the luxury goods market in Indonesia ranked 29th out of the 32 countries covered by Euromonitor International’s luxury goods research and accounts for less than 1% of the global market. However, with constant value growth of 55% in the five years to 2014, Indonesia was the sixth fastest growing luxury goods market in the world behind South Korea and Malaysia.
“ The country has a youthful population and up until now has witnessed a burgeoning middle class ”
Indonesia is the world’s fourth most populous nation. Its economy thrived throughout most of the past decade thanks to its large domestic market and a boom in commodity prices as well as its abundant natural resources (the country accounts for a fifth of the world’s nickel supply and 10% of aluminium, and is also the world’s leading producer of palm oil).
The country also has a youthful population and up until now has witnessed a burgeoning middle class. Private consumption, which accounts for about 60% of GDP, was an important factor in sustaining growth while gains in employment and wages helped support consumer spending. Indeed, the government has set a target for Indonesia to become an advanced country by 2025, and the IMF predicted that it will be the world’s fifth largest economy by 2030.
At the same time, however, economic growth is restricted by sluggish foreign investment, weak exports, tighter credit limits, slow development of infrastructure and a huge informal sector. Although external demand slowed, Indonesia still saw strong growth in 2011-2012. The economy was driven by gains in private consumption, as well as a surge in both inflows of FDI and domestic investment. The pace slowed somewhat in 2013 and 2014 when government spending and fixed investment dropped and exports contracted.
Continued rising oil prices could be bad news for Indonesia as it relies heavily on oil imports. However, in our calculations, the impact of rising oil prices on net oil importers could be smaller than the benefits that oil exporters are set to gain thanks to companies and consumers in oil-importing countries responding to oil price rises by reducing consumption and improving energy efficiency where possible, thus limiting the adverse impact of price hikes.
The oil price plunge in 2014 provided an opportunity for the Indonesian governments to scrap fossil fuel subsidies – the market is therefore not expected to be as shocked by a price hike in the remainder of 2015. We expect that Indonesia’s annual real GDP growth will be down by 0.7 percentage point to 4.9% in 2016, should oil prices rise to US$75 per barrel in Q4 2015.
Unemployment was 5.8% in 2014 and is not expected to change in 2015. However an estimated 70% of workers hold jobs in the informal sector where wages and job security are low. Small businesses employ 97% of the work force but produce only 57% of value-added. Innovations and improvements in productivity in these firms offer great potential.
“ Affluent Indonesians are in the market for luxury goods and high-end restaurant experiences ”
According to Euromonitor internationals latest income and expenditure data the numerous commercial opportunities presented by rising consumer income and expenditure in Southeast Asia’s largest economy are clearly highlighted, this is particularly the case for the luxury goods industry.
However, at the same time the country’s market potential is affected by high income inequality which impedes the further expansion of the middle class.
Between 2009 and 2014, Indonesia’s real growth in household disposable income expanded by 5.5% per year on average to reach IDR99.1 million (US$8,353) by 2014. In the 2015-2030 period, it is set to decelerate slightly to 4.2% per year on average, reflecting slower expected expansion of the Indonesian economy.
In 2014, those aged 35-39 were the largest group amongst individuals with an annual gross income in excess of US$150,000 (i.e. the top income band), accounting for 19.2% of the total, closely followed by the age groups 30-34 that represented 19.0% of the highest-income earners.
“ Its large population and positive income growth prospects, makes it a highly attractive emerging market ”
The typical profile of individuals in these age groups corresponds to professionals that often enjoyed greater educational opportunities than previous generations and have managed to climb the career ladder in various branches of Indonesia’s emerging economy. Often having young families, these affluent Indonesians are in the market for products and services from cars and consumer electronics to luxury goods and high-end restaurant experiences.
By 2030, the age segments 35-39 and 30-34 will remain the largest groups amongst the top income earners, accounting for 16.0% and 15.4% of the total respectively. However, over the same review period income inequality is set to rise further and Indonesia will overall remain a low-cost market with relatively low capacity for luxury spending compared to some of its neighbouring countries such as Singapore.
But its large population (the 4th largest globally, behind China, India and the USA), combined with positive income growth prospects, still makes it a highly attractive emerging market. Luxury goods brands and retailers can expect to succeed if they are aware of the rising level of income inequality and the need for multiple business strategies tailoring to suit different income groups in Indonesia.
Indeed the rise in income inequality has resulted in a contraction of the middle class which up until now had experience an impressive grwoth trajectory. As a percentage of the country’s total number of households, Indonesia’s middle class represented 27.0% in 2014, down from 30.3% in 2009.
Luxury brands and retailers need to be aware in the short term of the worsening distribution of income, which results in striking variations in household consumption patterns. Rising income inequality in Indonesia highlights the need for multiple business strategies tailoring to suit different income groups in this emerging market.
High and rising income inequality will increasingly polarise the Indonesian luxury goods market into a relatively small high-end luxury segment and a large budget market. Nevertheless, luxury brands and companies can still seize the opportunities that Indonesia’s large population has to offer if they adopt multiple business strategies to cater for different market segments.
“ Shopping malls are developing strongly in response to economic growth and rising purchasing power ”
Shopping malls are developing strongly in response to economic growth and rising purchasing power, especially within the top income band. These offer consumers the exciting concept of one-stop shopping, usually in a safe, air conditioned environment.
Many upscale shopping malls were opened in various cities in Indonesia in the last five years – for example, Lippo Mal Karawaci, which owned 27 shopping malls nationwide by 2012, planned to build 13 new shopping malls in Indonesia’s big cities, including Jakarta, Bali, Medan, Surabaya and Semarang, by the end of 2015 with investment worth US$450 million.
Big sales events are also attracting Indonesian shoppers to these luxury malls as well as international shoppers looking for luxury goods at more affordable prices. For example since 2013, the Ministry of Tourism and Creative Economy has held the Jakarta Great Sale Festival, an event in which takes place every year in the months of June and July across some 74 shopping centres in Jakarta offering savvy shoppers with discounts of up to 70%.
“ Luxury goods shoppers, who are normally female, prefer physical locations & enjoy visiting luxury stores ”
Despite rapid internet penetration in Indonesia and a growing number of internet retailers, store-based retailing channels continued to dominate distribution within the luxury goods industry. Although some urban consumers have started to make small online purchases in categories such as non-luxury clothing and footwear, beauty and personal care and some personal accessories, they still have low confidence when purchasing luxury goods through online retailers.
Although internet retailing will continue its growth albeit from a very low base in the short to medium term, store-based retailing will remain the major distribution channel for luxury goods in Indonesia. This is mainly due to the nature of luxury goods where consumers do not feel comfortable shopping online.
Lotte Shopping Avenue, Indonesia
Furthermore, luxury goods shoppers, who are normally female, also prefer physical locations and enjoy visiting luxury stores as part of the shopping experience.
Online luxury goods retailers such as Reebonz amongst others will need to improve the customer’s online shopping experience as well as security and general consumer confidence in order to gain a stronger distribution share.
Indonesia’s luxury goods market is predicted to post improved sales growth in the next five years. Indonesians overall have become more optimistic about the prospects for the country’s economy in particular after the election of the new president, Joko Widodo, at the end of last year. Household incomes are expected to increase leading to higher purchasing power. Growth of luxury goods will also be supported by the opening of more luxury shopping malls as well as aggressive marketing activities by international players.
The negative impact of rising fuel prices is however expected to have lasting effects, at least over the next two years. Due to the expected rise in transportation costs as well as the impact of negative exchange rates against the US dollar, many international luxury goods brands will continue to see rising prices. Nonetheless, since the consumer base for luxury goods is not as price sensitive as other lower income groups, the market is still expected to register a constant value CAGR of 10% over the next five years.
“ The country’s middle class will expand, which will drive demand and luxury spending in the country ”
Despite concerns over its recent contraction Indonesia still has the world’s fourth largest middle class behind the USA at 25.3 million, India at 74 million, and China at 112 million.
Besides its large size, what makes the country’s middle class so full of potential for the future of the luxury goods markets is the fact that middle class purchasing power in Indonesia is set to rise strongly, which will give Indonesian middle class households considerably more room for discretionary spending and a reason to be optimistic about the future.
Euromonitor International forecasts that Indonesia’s median disposable income will reach US$11,300 (in constant 2014 prices) per household, up from US$6,300 per household in 2014. Meanwhile, the country’s middle class will expand to around 20 million households by 2030, which will create an important consumer base to drive demand and luxury spending in the country.
Luxury goods businesses targeting the Indonesian middle class consumer can expect greater opportunities in the medium to long term.
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