Rabobank Highlights Opportunities for Bakery in Indonesia, Catering to Middle Class Expansion

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24 Jun 2016 --- Despite its huge potential, Indonesia is not an easy market to capture when it comes to the bakery business. The short shelf life of bakery products, the country’s vast archipelago, poor logistics and a lack of skilled bakers have all hampered the category’s desire for growth. Rabobank has identified the key challenges and opportunities for the bakery business in Indonesia.

As a largely rice-eating country, it is interesting to note that Indonesia is currently the second-largest wheat importer in the world, with 7.5 million tonnes imported in 2014/15. The consumption of wheat-based products such as noodles and bread has risen significantly in the past ten years, while per capita rice consumption has tended to stagnate, signifying a shift in what Indonesians eat as their staple food.
 
Between 2010 and 2015, baked goods grew at 11.7% CAGR in value and 5.5% in volume, as more companies expanded their capacity and opened new markets in smaller cities (see Figure 1). Artisanal bakeries contribute to almost half of Indonesia’s total bakery market value, followed by industrial bakeries (33%) and private label (18%).
 
According to BCG, the population of the middle and affluent classes (MAC) in Indonesia will reach 141 million in 2020, while 8 million to 9 million are predicted to enter the middle class each year. The growing middle class and a changing lifestyle pose a big opportunity for bakery companies, as these consumers have strong buying power, while they embrace modern, western lifestyles. But major hurdles must be overcome in order to successfully tap into this market potential.
 
Huge geographical spread, short shelf life
Short shelf life is a classic problem for the bakery business and an even bigger problem for a country with a geographical profile as unique as Indonesia. Transporting goods from Java to other islands could take three days or more via a combination of land and sea transport, while the shelf life of industrial bakery is only around five days. In order to have a nationwide presence, industrial bakery players need to invest in multiple factories across the archipelago. Poor infrastructure and expensive logistics aggravate the problem. Bandung Fe Institute reported that logistics costs are very high in Indonesia, at 24.64% of the GDP. This is far above those in Malaysia (13%), Japan (10.6%) and Singapore (8%).
 
Changing channels in the industrial bakery category
The lifestyle shift of Indonesian consumers is reflected in the type of channels that they use to buy industrial bakery products. In five years, the minimarket contribution to the industrial bakery category has grown significantly, at the expense of supermarkets and independent grocers. Minimarket giants such as Alfamart and Indomaret have more than 20,000 stores across the country, making them the most important channel for the growth of the industrial bakery business.
 
Lack of skilled bakers
Scarcity of bakers has become a major problem for artisanal bakeries. The market for talent is quite tough, and many bakers are more attracted to work in more prestigious hotels than in bakeries. This condition has hampered outlet expansions, especially in smaller cities.
 
The growth is out there: expanding to second- and third-tier cities
Smaller cities means less competition, but more eager and excited consumers. Consumers in commodity-rich areas such as Kalimantan, Sulawesi or Sumatra have strong buying power, but they have limited options when it comes to spending their money.
 
Industrial bakeries: longer shelf life
To overcome geographical barriers, industrial bakeries need to look into developing products with a longer shelf life. In other markets, there are bakery products that could last to more than 90 days, thanks to innovation in product and packaging.
 
Artisanal bakeries: going frozen
For artisanal bakeries, frozen dough offers the solution for the lack of skilled bakers. Investments in a frozen dough facility in Indonesia could reach USD 10m, depending on the location, with production capacity around 100,000 frozen breads/day. But, thanks to frozen dough’s long shelf life, a large bakery chain could benefit from a frozen dough business model to serve their outlets across Indonesia.
 
Hotels, restaurants and cafés in popular travel destinations such as Jakarta, Bandung, Surabaya and Bali are also important channels for frozen dough, as most of them do not have the facility to develop bakery products from scratch.
 
The growth of the middle class in Indonesia offers an interesting opportunity for bakery producers, although it is hampered by some significant challenges. But opportunities are arising from these challenges. Technologies such as frozen dough, long shelf life products and Modified Atmosphere Packaging (MAP) are not yet popular in Indonesia, yet these technologies might answer the challenges currently faced by the country’s bakery producers.

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