The new Indonesian

consumer

December 2012
Arief Budiman
Heang Chhor
Rohit Razdan
Ajay Sohoni
Contents
The new Indonesian consumer

Sidebar: About the report 2

An economy on the move 3

A rich diversity of Indonesian consumers 5

Well-off modern adults 5

Emerging well-off youths 6

Virtuous well-offs 6

Frugal middle class 7

Middle-aged optimists 7

Middle-aged conservatives 7

Pragmatic strivers 7

What and where are Indonesian consumers buying? 8

Product potential 8

Channel potential 9

The power of TV and family and friends 9

Coexistence of modern and fragmented trade 11

The growing importance of city clusters 12

Sidebar: Comparing Chinese and Indonesian consumers 13

From insights to capturing opportunities 14

Move local 14

Move fast 14

Sidebar: The rise of Unilever Indonesia 15

Move deep 16
2

The new Indonesian consumer

Indonesia is one of the worlds fastest-growing economies,

largely thanks to its robust and increasing domestic
consumption. Its population of 240 million people offers
vast potential to a wide variety of consumer companies.
The opportunity to serve Indonesian shoppers should only
increase in the coming years as millions of them move up the
income ladder: an additional 90 million Indonesians could
enter the consuming class, which could reach 135 million
by 2030 if the countrys GDP grows between 5 to 6 percent
a year, according to the McKinsey Global Institute (MGI).1
The growth in Indonesias consuming class is forecast to be
bigger than that in any other economy, apart from China and
India, and would generate more than $1 trillion in product
and service opportunities.
Every week brings more indications of foreign business
interest, reflecting the attractiveness of the Indonesian
economy. The Swedish housewares company Ikea said
recently it would enter Indonesia, and many of the worlds
leading automakers have announced plans to expand
there. Consumer-goods companies with a long history in
the country, such as Nestl and Unilever, have announced
expansions of their local manufacturing plants and
distribution operations.
To help local and multinational companies better understand
Indonesian consumers, McKinsey & Company in 2011 and
2012 conducted one of the most comprehensive consumer
surveys ever undertaken in the country. In The New
Indonesian consumer, McKinseys Consumer and Shopper
Insights team interviewed more than 5,000 consumers
covering 44 cities of all sizes across the archipelago. The
survey helped identify consumers preferences for specific
products, brands, and media and channels, as well as how
these differed by segment. We focused on five product
categories, based on expected growth and company interest:
automotive, consumer electronics, financial services, food
and beverage, and home and personal care. (See box, About
the report.)
The results of the survey reveal a rich diversity of consumers
across geography and socioeconomic status. In an
attitudinal segmentation, for example, we identified seven
distinct faces of Indonesian consumers. Our study also
found that brands exert an unusually powerful influence
on consumer decision making in Indonesia, far more than
what we have seen elsewhere in Asia, including China.
Unlike China and India at this stage of development, local
About the report
To prepare The New Indonesian consumer, we
interviewed 5,500 respondents in 44 cities covering
24 provinces. Our questionnaire spanned five sectors:
automotive, consumer electronics, financial services,
food and beverage, and home and personal care; it
also looked at 192 brands in 116 product categories. In
addition, we assembled more than 5,000 images of
Indonesian families and their home interiors to provide
a realistic picture of how consumers live. We have also
sponsored a panel of more than 1,500 consumers to
facilitate further research and testing of specific issues.
We believe the survey is distinctive because of its wide
coverage of categories, products, and brands; the
breadth of consumer attitudes we measured; and the
depth of data available for region-city tier combinations.
consumer companies in Indonesia are strong in most
categories, especially in food and beverage, with brands like
Indomie (noodles), Teh Botol Sosro (ready-to-drink tea), and
Silver Queen (chocolate) leading the way. While consumers
still overwhelmingly favor television and word-of-mouth as
sources of product information, digital media are becoming
increasingly important.
We also evaluated market opportunities through the lens
of city clusters across the country. Consumers in a cluster
combinations of adjacent citiestend to have specific tastes
and behaviors that make them easier for companies to
serve. Today, such clusters have formed around megacities
such as Jakarta and Surabaya, while others are on the way
in frontier cities such as Balikpapan, Batam, Makassar,
Medan, Palembang, and Semarang, where stronger
economic growth is on the horizon. We found, for example,
that consumers in Surabaya were far more brand oriented
than those in the Jakarta cluster.
The following report offers an overview of the Indonesian
macroeconomy, describes the seven broad consumer
segments, looks at product and channel trends, highlights
the growing importance of city clusters as a way to market to
Indonesians, and lays out perspectives on what companies
can do to capture the opportunities.

1 Arief Budiman, Richard Dobbs, Raoul Oberman, Morten Ross, and Fraser Thompson, The Archipelago Economy: Unleashing Indonesias
Potential, McKinsey Global Institute, September 2012. We define the consuming class as individuals with an annual net income of more than
$3,600 in 2005 in terms of purchasing-power parity.
The new Indonesian consumer
An economy on the move
In 2011, Indonesias GDP grew 6.5 percent, the fastest
rate since the Asian financial crisis of 199798, and it is
forecast to rise more than 6 percent in 2012. Indonesia is
now the worlds 16th-largest economy by GDP; by 2030, it
could reach 7th place. The Indonesian economy has proved
resilient: it withstood the global economic crisis of 2009,
rising 4.5 percent that year. Meanwhile, Moodys and Fitch
have restored Indonesias investment-grade rating. Foreign
direct investment grew 20 percent in 2011, to $19.3 billion,
reflecting the attractiveness of Indonesias economy.
Unlike other Asian economies, Indonesias growth is
and will likely remainprimarily driven by domestic
consumption, rather than manufacturing and exports.
Consumption contributed 61 percent of Indonesian GDP in
2010, a share expected to reach 65 percent by 2030. A few
factors will underpin Indonesian consumer spending in
the future:
Indonesia will become increasingly urban. More than 30
million people will move from rural to urban areas over
the next 20 years, with urbanization reaching 71 percent
in 2030, up from 53 percent today, MGI forecasts. Many of
the cities with rapid growth will be located outside Java.
3
Upward mobility will increase, and consumer behavior
will change. Our survey indicates that as their wealth
grows, consumers will shift some discretionary
spending toward leisure and investment vehicles
(Exhibit 1). This trend is already under way: we have
begun to see more people traveling for leisure to
neighboring countries such as Malaysia, Singapore,
and Thailand, staying in premium hotels, and spending
more on fine dining.
The consuming class could increase to 135 million by 2030
from 45 million in 2010. This jump of 90 million would be
the largest increase expected in any country apart from
China and India. The increase in the size of the consuming
class and the continuous upward mobility could raise
consumer spending by 7.7 percent a year, resulting in a $1.1
trillion business opportunity by 2030 (Exhibit 2).
In the next decade, Indonesians will make increasing
use of digital products and services. Today, there are an
estimated 220 million mobile-telephone subscribers.
Mobile penetration is 60 percent of the adult
population; in urban areas, penetration is estimated at
80 percent. The Internet is becoming mainstream in
Indonesia, growing at an annual rate of more than 20
percent, with 100 million users expected by 2016.
4

Exhibit 1 Discretionary spending shifts as households become wealthier.

Share of annual household expenditure,
%1

Savings and investment 8

21
Leisure 9
Education and health care 8
Housing and utilities, 14 53
telecommunications, 15
personal items 10
80
Transportation 7
12
Apparel 12
6 12
11 5
5
3
Food and beverage 41 5
28 8
18 3 0
1
7 0
Household income, 7,500 7,500 20,000 >70,000
$, 2005, purchasing- 20,000 70,000
power parity

Household income, 47 47127 127443 >443

million Indonesian
rupiah, 2011
1 Columns may not add up to 100%, because of rounding.
Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011; McKinsey Global Institute analysis

Exhibit 2 The rise of Indonesias consuming class presents a $1 trillion opportunity.

Annual expenditure, Compound annual growth rate,

$ billion, 2010 prices 201030, %
2011 2030

Savings and investment 85 565 10.5

Food and beverage 73 194 5.2

26 105 7.5
Leisure

Apparel 22 57 5.0

Education 14 42 6.0

Transportation 13 30 4.6

Housing and utilities 11 26 4.5

Telecommunications 8 19 4.7

6 16 5.3
Personal items

Health care 4 13 6.2

Total ~260 ~1,070 7.7

Source: Canback Global Income Distribution Database; Indonesias central bureau of statistics; McKinsey Consumer and Shopper Insights Indonesia study, 2011;
McKinsey Global Growth Model; McKinsey Global Institute analysis
The new Indonesian consumer
Still, the economy faces several big challenges.
Indonesia will need to raise productivity to meet the
countrys growth ambitions, while measures should be low-income consumersinfluenced by a combination of
considered to ensure that Indonesians with the lowest
incomes benefit from the rising economy. Meanwhile,
the challenge of soaring demand from the expanding
consumer class must be managed carefully. To achieve
these goals, Indonesia should ref lect on how to tackle
well-documented problems relating to excessive
bureaucracy and corruption, access to capital, and
infrastructure bottlenecks.
A rich diversity of Indonesian
consumers
In our survey, we asked consumers their views on success
and happiness, financial risk taking, leisure and
entertainment, national identity, and family values
(Exhibit 3). Overall, Indonesian consumers say they are
family oriented, financially conservative, self-aware, and
prudent and cautious, and they value real experience more
than the Internet. At the same time, there are segments
that value modernity, look for international brands and
new experiences, and are ready to spend more for higher-
end products and services.
Exhibit 3 Indonesian consumers demonstrate several characteristics when making decisions.
More than half of consumers
think being successful means having a happy family
Family expect their child to support them when they get old
orientation
consider childrens wishes when making purchases
think borrowing is risky and aim to live within their
Financial means
conservatism feel the need to save significant amounts of money
are concerned about having money for retirement
Prefer real like to evaluate many options before buying
experience to seek other peoples advice before buying products
Internet (but
evolving) stick to a brand when they like it
always check ingredients on packaged food
High level of
self- have more trust in companies that care about the
awareness environment
prefer Indonesian brands to foreign brands
visit multiple stores to get the best deal
Prudent and have a clear list of financial objectives
cautious
are satisfied with all they currently own
Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011
5
We found seven segmentsthree skewed toward affluent
consumers, two to middle-income consumers, and two to
economic status, age, and values (Exhibit 4).
Well-off modern adults
This group makes up 13 percent of the surveyed group. These
consumers are mostly professionals living in urban areas
who have between 5 and 15 years of work experience and have
high incomes. They are optimistic about their financial future
and believe that social status and wealth are important. They
are quick to adopt new trends and try new products. They are
active shoppers, frequently visit malls, and buy international
brandsin fact, for quite a few of them, shopping is almost
a hobby. Their openness to trends extends to preference for
healthier and safer products in food and beverages. They
like brands and will stick to the ones they prefer. They prefer
shopping in modern retail formats, be it convenience stores,
minimarkets, or hyper- and supermarkets.
There is, however, a fundamental difference between the well-
off-modern-adult segment of Indonesia and the affluent global
citizens in Western cities or in other big Asian cities. These
consumers emphasize respect for traditional values, saving
for retirement, and family, especially their children, in their
purchase decisions.
Less than a quarter of consumers
prefer to be alone during leisure hours
consider an aged center for when they get old
think they are too busy to enjoy time with family
are willing to take loans to purchase big-ticket items
are willing to invest in high-risk, high-return products
will spend more and save less with more insurance
think views shared on the Internet are trustworthy
use the Internet as their primary tool for research
actively share their views and product usage online
are willing to buy fake products if they satisfy needs
say they dont have time to do adequate research
would trust the advice of a salesperson
are likely to be first or second to try new things
would spend more on luxury to show their taste
are willing to pay more for the latest technology
6

Exhibit 4 Seven distinct attitudinal segments of Indonesian consumers emerged.

Attitudinal segmentation of Indonesian consumers, Pragmatic strivers

% of total consumers Low spend
1
Being rich equals success
Open to fake products
Middle-aged conservatives
2 Low spend
2 3 Very strong family orientation
>45 Conservative, but love shopping
Middle-aged optimists
3 Mostly middle class from lower-tier cities
1 4 Individualistic
Like small luxuries and are risk takers
6 Frugal middle class
Age

2545 4 Very strong family orientation

Nationalistic
5 Have clear financial goals
Virtuous well-offs
5 Contented, affluent class
Unwilling to pay a premium for better brands
7 Focus on needs rather than luxuries
<25
Well-off modern adults
6 Most affluent, mostly urban
Being rich equals success
Spend time on shopping
<2 million 2 million3 million >3 million Emerging well-off youths
Monthly expenditure, Indonesian rupiah 7 Most affluent, optimistic about future growth
Individualistic, take risks
High affinity toward the Internet and technology
Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011

Emerging well-off youths
This group makes up 14 percent of the surveyed group.
They are in many ways the younger version of the well-off
modern adults and similar in their optimism. They too think
that being successful means being rich, even more so than
the older well-off segment. These consumers are mostly
students or have just entered the workforce. They are far more
financially adventurous than the other affluent segments and
are willing to take risks in financial investments, to try new
products, and to take loans for big-ticket purchases. Their
optimistic view of the future drives their appetite for risk
taking and combines with a desire for more, as well as some
dissatisfaction with what they now havea trait we found
unique among all the other consumer segments.
At the forefront of technology consumption, they are not
just Internet users but also are active Internet content
contributors. They consider Internet searches their primary
tool for product-purchase decisions and actively share their
views in online forums and social media. They are likely to
respond positively to statements such as I am willing to pay
for products with the latest technology, being connected
to the Internet all the time is a must, and I cannot live
without the Internet. This segment is the driving force
behind Indonesias booming social-network penetration
and prevalence of smartphones.
Virtuous well-offs
They make up 14 percent of the surveyed group. This segment
spans all ages and is found mainly in Jakarta, Bandung, and
surrounding areas. This segment includes predominantly
professional workers with middle-high income and spending
levels. Despite the sizable income-expenditure levels, the
signature trait of this segment is that consumers are content
and live a mostly traditional life. They dont view success as
being rich or value having a high social status. Unswayed by
the hustle and bustle of the urban life surrounding them, they
only buy items they really need, dont like shopping in general,
and wont reward themselves through materialistic means.
In addition, they value their families more than any other
segment does. The consumers in this segment scored the
highest in family orientation on purchase decisions and will
always try to reach consensus before buying any item. They
are, however, most likely to make up their own minds about
the product and have far less faith in what they see on TV or
The new Indonesian consumer
hear from an in-store salesperson. The presence of this group
of people is counterintuitive, defying the logic that more
affluence would correlate to higher spending.
Frugal middle class
They make up 14 percent of the surveyed group. These
consumers are older and tend to live in midsize cities in
Java with populations of between 150,000 and 2 million
people. They told us that they are rather unsure, if not
pessimistic, about their future, at least in comparison with
other segments. This middle-class segment lives frugally
and is cautious about money management. In many ways,
this segment is stuck in the middle class with little hope
of breaking into the higher-income category. As a result,
consumers in this segment typically have a clear set of
financial objectives and are particularly concerned about
resources for retirement. They are willing to save so I can
support myself when I am old; as a result, they tightly control
their shopping and are not willing to be the first to try or to pay
a premium for better brands. However, they like to evaluate
many options before buying to get the best deals possible
and often ask for friends opinions on product quality.
These consumers are most likely to price hunt and have no
preference for a type of channel, as long as the price is right.
Middle-aged optimists
They make up 16 percent of the surveyed group. These
consumers are in their midthirties to forties. Despite being
middle income, they are the most risk seeking of all segments.
They told us they are willing to invest and are not afraid to
take loans to achieve their aims. They are natural spenders
not keen to save and would rather shop and spend for leisure
and entertainment. They are quite individualistic and have
less of a family inclination than the rest of the consumer
segments. There is a disconnect with reality in the optimistic
way they behave compared with their likely income growth,
2 In 2011, the deprived category comprised 13.6 million urban households of a total of 30.6 million, or 44 percent. By 2030, however, the deprived
category is forecast to fall to 6.4 million urban households of a total of 40.4 million, or 16 percent, according to McKinsey research.
7
illustrated, for example, by their high willingness to buy
small luxuries and the latest technology, as well as by their
susceptibility to peer pressure. One might think of this
segment as small town consumers trying to behave like
their richer countrymen in bigger cities.
Middle-aged conservatives
They make up 17 percent of the surveyed group. They are
most likely to be in their thirties and forties, and they live
mainly in the biggest cities. This segment is conservative
consumers in it avoid borrowing or making investments,
and they worry a lot about health and safety. They value
family above all. However, they have an affinity for shopping
and are very brand oriented. They responded favorably to
the statements, I would buy more famous branded products
if I had more money and companies that manufacture
products across multiple categories are more trustworthy.
Their financial situation is similar to the middle-aged
optimists, but they are much less positive in their world
view. They are among the least technologically savvy
consumers and are poorly informed about products and
brands. These consumers prefer shopping in wet markets
and mom-and-pop stores.
Pragmatic strivers
They make up 12 percent of the surveyed group. They
represent the lowest-earning segment other than the
deprived category, which we did not survey in this report.2
These consumers are typically older. They are easily swayed
but have little money to spend. They believe the definition of
success is being rich and having a high social status, and they
look up to luxury brands, which they would purchase if they
had more money. They own little, are likely to buy very little,
and as such are the least interesting segment with regard
to big-ticket items. These consumers prefer shopping in
traditional mom-and-pop stores.
8
What and where are Indonesian
consumers buying?
Taking profitable advantage of consumption-driven growth in
Indonesia will require companies to place calculated bets and
be discerning about which products, channels, cities, and forms
of media to invest in. Our analysis of consumer responses offers
some early ideas about what may happen in the marketplace.
Product potential
We asked ourselves two questions about product potential in
Indonesia: as cities grow larger and people earn more income,
which products are consumers more likely to buy? Based on
current product penetration and frequency of purchase, what
could companies do to encourage sales? Quite logically, our
survey suggests that product categories follow different growth
trajectories, depending on their current penetration and on
how suppliers will further boost demand, for instance, through
innovation or new-product launches (Exhibit 5). We see four
distinct product segments:
Big categories that have already reached high
penetration, such as instant noodles and ready-to-
drink teas, will require innovation or repositioning
to reach the next stage of market development. In
categories that are nearing their natural growth limits,
local brands are well established.
Exhibit 5 Combinations of purchase frequency and penetration create different imperatives
for growth in the food and beverage industry.
High
In the specialty aisle
100% fruit juice, milk, chewing gum
STRATEGY: Reposition category to
increase penetration by attracting
Purchase frequency
new users
On the back of the shelf
Quick-service restaurants, powdered milk,
isotonic drinks, ready-to-drink energy drinks,
powdered energy drinks, yogurt, oatmeal, beer
STRATEGY: Employ a variety of levers to
drive penetration and frequency
Low
Household penetration
Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011
Big categories with potential for further penetration,
such as 100 percent fruit juice and chewing gum, offer
attractive opportunities for new products, new brands,
and wider distribution.
M
idsize categories with high penetration, such as
sweetened condensed milk and carbonated soft drinks,
would benefit from cheaper prices and more promotion.
Small to midsize categories with lower penetration,
such as yogurt, infant foods, and quick-service
restaurants, are still developing and are likely to offer
compelling opportunities.
As in other emerging markets, upward mobility among
Indonesian consumers will invariably lead to changes
in purchase patterns and compelling growth in certain
categories: household equipment such as washing machines
will benefit from the rise of the core middle class, while the
upper-middle class will favor electronics and automobiles.
These changes will in turn modify perceptions and attitudes
toward media, price levels, brands, and channels. In the
automotive category, for example, high-income consumers
are ten times more likely to find information on the Internet
than low-income consumers. They are also three to four
times more likely to receive information from magazine ads,
salespeople, and in-store visits.
The difference in product penetration among Indonesian
regions is a good indicator of a categorys growth potential
On the shopping list
Instant noodles, biscuits and wafers, bottled water,
powdered coffee, snacks, ready-to-drink tea, ice
cream, chocolate, fruit-flavored juice, candy
STRATEGY: Redefine category through
innovation or repositioning to change
consumers frame of reference
Pantry fillers
Syrup, sweetened condensed milk
STRATEGY: Drive innovation and employ
pricing levers to improve purchase frequency
through new uses or new occasions
High
The new Indonesian consumer 9

Exhibit 6 Differences in product penetration across regions can indicate growth potential.
Food and beverage
Penetration rate1
% of respondents Consumer electronics
1.00
0.95
Products with penetration
0.90
>25% but delta between
0.85
most penetrated region
0.80 and average >1.5x
0.75 Sweetened condensed milk
0.70 Ice cream

0.65
Ready -to -drink (RTD) milk
0.60
Liquid body wash
0.55 Air freshener
Isotonic drink
0.50 Kerosene stove
Washing machine Facial tissue
0.45 Hand -washing liquid
Hair conditioner
0.40 All -purpose cleaner
powder energy drink
0.35 RTD energy drink
Blush On Laptop (incl. netbook)
0.30
0.25 Desktop computer
0.20
0.15
0.10
0.05
0
1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 7.4
Regional difference2
1 Percent of respondents who are using this product/own this product in household. Times
2 The maximum among penetration rates of 5 regions divided by the minimum of that region.

Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011; McKinsey Global Institute analysis

(Exhibit 6). For example, Java naturally tends to lead the
country in new-product introduction and uptake given its
relative wealth, infrastructure establishment, and media
exposure. Home and personal-care products such as
liquid body wash and air fresheners have achieved average
penetration of more than 25 percent nationwide, but the most
penetrated region is more than 1.5 times more penetrated
than the rest of the country. As smaller cities develop, the
availability of products will increase and drive growth by
satisfying latent demand for these emerging categories.
country. But almost all brands seemed to struggle to convert
consumers from purchase to loyalty.
The power of TV and family and friends
Our survey found that television and word-of-mouth remain
the most prominent way of receiving product information
in virtually all categories. For the food, beverage, home, and
personal-care categories, about two-thirds of consumers said
they had received credible information from TV; for consumer
electronics, this number was about 50 percent (Exhibit 8).

Channel potential Other media are emerging in specific segments of the

Indonesian consumers are aware of brands and largely loyal
to themmore than 90 percent of consumers know which
brand (or few brands) they would buy before they visit a store
(Exhibit 7). This is far more than what we observe in other
countries, even China. (See sidebar, Comparing Chinese and
Indonesian consumers.)
In almost every category we surveyed, we found that one or
two brands stood out as winners. In most cases, the owner
of the brand was either an established Indonesian company
or a multinational with a decades-long presence in the
market, especially for higher-income consumers. These
are sponsorships and product placements in the food-and-
beverage category and sales introduction and advisory sessions
in automotive.
Today, theres little evidence of formal e-commerce activities,
yet this might change as the Indonesian consumer evolves and
companies more aggressively promote themselves through
the digital channel. Indonesians already spend more time
on mobile social media than people in other Asian countries,
McKinsey research shows. And there are anecdotal indications
10

Exhibit 7 Indonesian consumers place strong faith in brands.

Respondents who said they strongly agree or agree with each statement, %

Well-known brands are of better quality

42 47
32 31
27

Brands
Taiwan France United States China Indonesia

Expensive products are of better quality

36
32
21
17
9
Price
Taiwan France United States China Indonesia

Source: McKinsey Chinese consumer studies, 2011; McKinsey Consumer and Shopper Insights Indonesia study, 2011

CONSUMER ELECTRONICS
Exhibit 8 Indonesian consumers get most product information from a few types of media.

Respondents who received product information in the previous 2 months, %

Indonesia China United States

TV ads 85 91 80

Recommendations from 53 71 50
family or friends

Newspaper ads 20 37 43

In-store ads
19 36 50
and displays

Sales introduction 17 55 36
and advice

Internet 5 28 73

Road shows 3 26 16

Ads on bus/ 1 23 19
subway/taxi

Number of 2.25 4.18 4.14

media reached

Source: McKinsey Chinese consumer studies, 2011; McKinsey Consumer and Shopper Insights Indonesia study, 2011
The new Indonesian consumer 11

that postings on Internet forums are spurring some purchases.
Consumers subsequently settle their purchases through
regular payment approaches such as bank transfers or cash
on delivery. Indonesia is a community-influenced society,
and family and friends recommendations are important, as
suggested by high numbers of Facebook and Twitter users and
the use of the BlackBerry messenger service. We estimate that
Internet users will grow from about 50 million today to about
80 million by 2013, at which time 30 percent of the population
will be connected to the Internet.
Coexistence of modern and
fragmented trade
Sales-and-distribution channel structure in Indonesia
remains fragmented. Retail sales through traditional
channels, including mom-and-pop and wet markets,
account for an estimated 70 percent of the market, but
modern trades share continues to increase and industry
observers suggest that it could reach 50 percent by 2015. In
particular, the minimarket format has grown significantly
over the last few years and now accounts for almost 50
percent of modern retail.
Our survey suggests that channel importance differs by
consumer segments and product categories. For example, more
than 80 percent of urban shoppers prefer to purchase home
and personal-care products in modern channels. For general
food and beverage, however, the traditional channel remains
important, with only about half of consumers preferring
modern retail. Within food channels, minimarkets continue
to gain popularity, with more than 50 percent of consumers
preferring to purchase ready-to-drink juice and chocolate
there. In certain categories, such as cell phones, channel loyalty
is already nearly as high as brand loyalty, with 36 percent of
consumers preferring to always buy from a specific channel
such as a digital mall or an appliance chain store, compared
with 42 percent preferring to always buy from a specific brand.
Minimarkets are gaining share in Indonesia because of their
convenienceespecially important in bigger cities where
traffic congestion and lack of public transportation make
in-city traveling difficult (Exhibit 9).

Exhibit 9 Use of modern tradeespecially minimarketsis already high.

Respondents who purchase products from modern channel1 most often,
%2

Total Tier 1 Tier 2 Tier 3 Tier 4

Food and
55 64 55 40 46
beverage

Personal-care
71 80 83 61 67
products

12 6 Other
6 17
5 3
13 2 Beauty store
14
Wet market
Minimarkets are popular across 39 27
21
expenditure groups for personal-care Hyper-/supermarket
products Minimarket

41 48 46

SES A SES B SES C

Monthly expenditure group3

1 All channels except mom-and-pop stores and wet markets.

2 Tiers are based on GDP cutoff points in Indonesian rupiah, or IDR (Tier 1: >IDR 60 billion; Tier 2: IDR 15 billionIDR 60 billion; Tier 3: IDR 6 billionIDR 15 billion; Tier
4: <IDR 6 billion).
3 SES A monthly expenditure: >IDR 3 million; SES B monthly expenditure: IDR 2 millionIDR 3 million; SES C monthly expenditure: <IDR 2 million.
Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011
12

Product loyalty remains important, but channel loyalty is also
growing. The modern channel in particular offers consumers
a more compelling shopping experience and an attractive
value proposition on products, brands, and relative prices
(Exhibit 10).
The growing importance of
city clusters
Indonesias most striking feature is its geodiversity, with
consumers spread across 17,500 islands in more than
500 cities and five main regions. Consumer needs and
preferences vary considerably by location, adding greatly to
the challenges companies face in Indonesia.
Our experience in China suggests that city clusters take
shape as the biggest cities become even larger, more
developed, and increasingly well connected to adjacent
lower-tier cities. City clusters offer a powerful way for
companies to view and serve consumer needs because they
provide a more granular city-by-city route to market.
Indonesias economy is highly concentrated in Java and
Sumatra; the two islands made up more than 80 percent of
the countrys GDP in 2010. There appear to be two clear city
clusters in Java, one around Jakarta and another around
Surabaya, according to our city-level GDP and consumption
forecasts. Another central Java cluster is likely to develop
around Semarang, including cities such as Pekalongan
and Surakarta. Three clusters are likely to develop on
Sumatraa north cluster around Medan, a central cluster
around PekanbaruBatam, and a south cluster around
Palembang. The eastern part of Indonesia could see the
emergence of a Makassar cluster in southern Sulawesi and a
Balikpapan cluster in eastern Kalimantan (Exhibit 11).
City clusters in the same region are quite different from
one another. In Java, for example, we find that consumers
in the Surabaya cluster are driven predominantly by brand
and image, while those in the Jakarta cluster are driven
mainly by their own (and their personal networks) practical
judgment and experience. Surabaya consumers split their
shopping basket far more between modern and traditional
retail. Among products, for instance, Surabaya consumers
more strongly favor global categories such as chocolate;
for media preference, Surabaya consumers are two times
more likely to take the advice of friends and family when
purchasing a product, suggesting they are still less familiar
with many categories than are Jakarta consumers.

Exhibit 10 With the increase in modern retailers, channel loyalty is becoming important. CELL-PHONE EXAMPLE

Total = 653 respondents

7 4 1

35 95 105 Retail loyalists

High
(5%) (15%) (16%) = 36%

8 5 2
Loyalty to
Middle 48 105 114
channel
(7%) (16%) (17%)

9 6 3
Brand loyalists
Low 35 58 58
= 42%
(5%) (9%) (9%)

Low Middle High

Loyalty to OEM1 brand

The size of channel loyalists is approaching that of OEM1 brand loyalists,
indicating that retail channels are no longer just the outlets of productsthey are
as influential as OEM1 brands

1 Original equipment manufacturer.

Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011
The new Indonesian consumer 13

Exhibit 11 We expect Indonesia to develop from two distinct city clusters today to eight in the future.

X 2030E GDP,
$ billion, 2010 prices

City cluster

~40
Medan
~30
Batam
Balikpapan
~20 ~40
Palembang
~40
Central
Java Makassar
Jakarta- ~20
Bandung

~630 Surabaya
~210

In the longer term, consumer-goods companies must expand marketing efforts

and infrastructure planning across Indonesia

Source: McKinsey Consumer and Shopper Insights Indonesia study, 2011

Comparing Chinese and Indonesian consumers

As part of our study, we compared the behavior of Chinese and Indonesian consumers. Data for the Chinese consumer come
from McKinsey Insights China, a multiyear research effort employing a methodology similar to the one we used in Indonesia.

We found that the Indonesian consumer is far more brand conscious than his or her Chinese counterpart. Indeed,
favorable consumer attitudes toward brands, the relatively low bargaining power of retailers, and limited competition
from discounters and private labels make Indonesia a haven for strong brands, much more so than in China. Specifically,
Indonesian consumers are unique in a number of ways:

They are less price sensitive across categories and less likely to store hop to find the best price.

They are more likely to equate well-known brands and expensive brands with better quality and more likely to trust
large, well-established national and multinational brands with large product portfolios.

They are far more likely to know exactly which brand or set of brands they will select before they enter a store and less
likely to switch from a brand they use and like.

They are influenced by far fewer types of media when making their purchase decisions.

They are more optimistic about their financial well-being for the next 12 months but a lot less optimistic over a five-
year horizon.
14
From insights to capturing
opportunities
The results of our survey point to several imperatives for
global and local consumer companies seeking to enter
or expand their business in Indonesia. Entrants and
incumbents stand to learn from several companies that
have already demonstrated how to win in this market. (See
sidebar, The rise of Unilever Indonesia.)
Move local
To gain exposure, connect with, and appeal to Indonesian
consumers, companiesespecially multinationals new to
the marketshould move local.
Localize value propositions. While this is an obvious must
in all emerging markets, many companies in Indonesia fail
to execute their plans to adapt to local needs and occasions.
But some companies have shown the way. KFC, for example,
has demonstrated early success in Indonesia by including
rice and soup in its restaurant menus. It coupled such product
tailoring with innovative marketing instruments, such as
radio campaigns that earned the company Indonesias highest
marks among quick-service restaurants. Companies must
also stay closely attuned to distribution channels to better
understandand facilitatehow their products or services
are sold. For instance, Bodrex, in the over-the-counter
medicine category, has developed a two-strip approach that
allows retailers to split packages into single smaller units,
making it easier for customers to afford.
Build a combination of global and local brand portfolios.
As we have mentioned, brand is overwhelmingly important
to Indonesians. Our survey found that although about 60
percent of the consumers prefer to buy local brands, most
are unable to say whether a brand is local or foreign. Many
consumers in our survey, for example, said they thought Kit
Kat, a leading global chocolate brand owned by Nestl, was
local. But not everything needs to be fully Indonesian. For
some categories, world-class image is important, and the
challenge is how to position a brand in a way that resonates
with local consumers. For instance, Hondas Indonesian
3 The Times Higher Education Supplement, 2011; QS World University Rankings, Quacquarelli Symonds, 2011.
4 Indonesia Skills Report: Trends in Skills Demand, Gaps, and Supply in Indonesia, World Bank, 2010.
motorcycle subsidiary has effectively used the Bahasa
Indonesian words satu hati, or one heart, in its local
advertising campaign. Yamahas Indonesian motorcycle
unit takes a similar approach, with its semakin di depan,
or always in the front, campaign. Messaging should also
be tailored to local values. Collective success, for example, is
far more important to Indonesians than individual success
according to our survey and others. In response, a number
of consumer companies are employing several Indonesian
brand ambassadors instead of a single public figure to
convey the idea of collective success.
Attract local talent. This is a clear but difficult-to-execute
goal. Fulfilling long-term growth ambitions will require
companies to attract, develop, and retain a steady supply
of local talent. Several consumer companies told us that
getting the right people was their number-one priority.
Despite its 240 million people, Indonesia does not have
a sufficient supply of talent. Indonesias universities lag
behind their counterparts in Malaysia, Singapore, and
Thailand in global university league tables.3 A World Bank
study found that about 30 percent of employers mentioned
the low quality of local training as the largest factor behind a
perceived skills shortage. 4
Move fast
To enter and shape the rapidly evolving Indonesian market,
companies will also need to move fast.
Explore collaboration and partnerships. At first glance,
acquisition of local companies may seem to be the fastest
way to achieve scale in distribution and gain an established
brand position. But there are obstacles. Perhaps the biggest
is that many successful local companies are family owned
and quite committed to their business. There are exceptions,
such as the purchase of the Buavita fruit-drink brand
by Unilever from Ultrajaya in 2008. But the scarcity of
acquisition targets has made partnerships and collaboration
a path worth exploring for both multinationals and local
players. Global companies can offer manufacturing and
product-development capabilities in exchange for access to
the distribution networks of local enterprises.
The new Indonesian consumer 15

The rise of Unilever Indonesia

Unilever is an interesting example of how a consumer-products multinational can build a thriving business in Indonesia. In
2010, Unilever Indonesias sales in food, home care, and personal care exceeded 1.6 billion. The company had gross margins
of 52 percent, earnings before interest and taxes of 23 percent, and 4,800 employees.
To be sure, Unilevers success is the result of a decades-long commitment to the country. Companies may see its approach
as unrealistic in todays business environment. Still, we think Unilevers experience offers relevant lessons for companies
wishing to do business in the country.
Unilever opened its first factory in Indonesia (to make soap) in 1933. Over the years, it patiently expanded into one product
subcategory after another: for example, it entered tea in 1990, soy sauce in 2000, mosquito coils in 2003, and snacks in 2005.
Using outside sources, we studied Unilevers experience in Indonesia and identified six key success factors1:
A balanced product portfolio. The company has a mix of brands that inspire consumers, brands that everybody grew
up with, and brands that stand for family. It also offers a full spectrum of price points, with a focus on low-priced products
to target mass consumers and higher-priced goods for trading up. Unilever entered the market in the 1930s with selected
international brands, and by the 1990s, it had broadened its offer to include a wide range of price points and local brands.
A streamlined route-to-market approach. All hypermarkets are managed directly as key accounts. Theres a
single layer of more than 400 distributors for fragmented trade. Product and service offerings are clearly differentiated
by channel and outlet type.
Deep penetration. Unilever has a 53 percent average market in the categories it serves, with its products available in 82
percent of the country. Penetration has been aided by the development of a bicycle-assisted vendor network and a focus on
making freezers available for rural and hard-to-reach areas.
Strong marketing. We observed a creative above-the-line approach, sometimes involving the use of movies, and
practical below-the-line execution, such as pervasive consumer touch points consistently reinforcing the brand
and retailer incentives.
A
combined local and global supply chain. Unilever has a high-quality, low-cost supply chain, with factories
present throughout the country. However, Unilever Indonesia may source products from any Unilever factory in the world
that meets its price and quality requirements. The company has an extensive warehouse network, serving both dispersed
key accounts and distributors.
Ability to attract local talent. Unilever operates a highly local organization, with a largely Indonesian management
team, and has invested great effort in becoming the local employer of choice.

1 Sources included company Web sites, interviews, and news articles.

16
Invest in high-potential regions. Middleweight cities will
drive economic growth over the next decade or two, and some
of the fastest growing will be outside Java, according to recent
MGI research. For incumbents, this will mean looking for the
next high-potential cities or regions to penetrate, including
investing in or developing new distribution networks. For
new entrants, this approach might offer an alternative to
attacking the metropolitan areas to which many companies
have gravitated, giving them a chance to establish their
brands and gain an edge on the incumbents. But there are
challenges associated with operating in areas outside Java or
Sumatra. Logistics costs, for example, are often many times
more expensive. Having a local partner can help entrants deal
with this complication.
Move deep
Unlocking the full potential of Indonesias growth requires
companies to develop granular execution plans and move deep.
Go granular. Capturing value in fragmented emerging
markets requires operating at the right level of depth and
granularity, and Indonesia is no exception. Planning at
a country or even province level is not nearly enough;
companies must drill down to the city, district, or an even
more specific cell. For example, Bandung and Sidoarjo have
similar GDP per capita and proximity to a metropolitan
areaJakarta in the case of Bandung and Surabaya in the
case of Sidoarjo. But the retail landscapes of the two cities
are vastly different, with Bandung having much more
developed modern retail formats. One of the most successful
consumer-telecommunications companies maintained
its distribution edge by analyzing its market position at
a district-by-district level, and then devised microlevel
strategies and customer interactions. Similar approaches
are being pursued by leading companies in consumer
electronics and fast-moving consumer goods.
Improve access to consumers. While modern retail has
already made strong inroads, the fragmented mom-and-
pop store trade will likely continue to be an important
channel. Companies must determine how to manage
such a complex channel network in a cost-effective
manner. One large consumer-goods company not only
sells products through the modern channel but also
has offered training in cash management to stores in
the fragmented-trade channel to help them modernize.
Technology will increasingly play a role in maintaining
loyalty and customer relationships. While the use of
the Internet in purchase decisions is still in its infancy,
we have seen Web-based campaigns for personal-care
brands such as Axe and Kotex successfully deepening the
engagement with consumers.
Invest in new channels. Indonesian consumers still follow
traditional media and purchasing behavior, but we believe
that companies can change the game by investing in new
physical and digital channels. E-commerce transactions
appear to be low, but there are suggestions that interest
in the technology is rising. A leading consumer bank, for
instance, has seen an increase of more than 300 percent in
transactions linked to e-commerce over the last year.
Dig into occasions and experiences. Given the fast-changing
behavior of Indonesian consumers, companies should
continue to strive to move from owning a product or services
to owning entire occasions. For example, 7-Eleven in
Indonesia has turned its convenience stores into gathering
spots for young people by providing tables, live bands, and
Internet connectivity. The company has succeeded in creating
a format where it owns a share of the occasion for young
people getting together, socializing, and consuming.
Indonesia promises high growth in a wide range of categories,
but consumer preferences and needs are evolving quickly.
Companies must invest in gaining a granular understanding
of this diverse and rich market if they are to take full
advantage of the opportunities there. In particular, that
means understanding consumer segments, what and
where Indonesian consumers are buying, and the growing
importance of city clusters in maximizing the market
opportunity. To get the job done, companies should move
local, fast, and deep. McKinseys Consumer and Shopper
Insights Indonesia study offers companies a window into this
fast-growing but complicated and challenging environment.
 Acknowledgments
Many experts and practitioners offered invaluable guidance in the preparation of this report. The authors would
like to acknowledge the contributions of Raghavan Srinivasan, president director, and Mahesh Agarwal, technical
adviser, of TNS Indonesia; David W. Atmadja, Hendrata Atmadja, and Hendrik Polisa, directors of Mayora; Vinay
Dixit, vice president of strategy for Electrolux Major Appliances Asia-Pacific; Lawrence Law of Mitra Adiperkasa;
Pudjianto, chairman of APRINDO; Christian van Schoote; Hadi Wenas, managing director of Zalora Indonesia; and
the McKinsey Insights China team. The authors also wish to thank the participants in the McKinsey CMO Roundtable
of August 2012, including Arshad Chaudry, president director of Nestl Indonesia; Dharma Djojonegoro of Ancora
Indonesia; Budi Gunadi Sadikin, director of Bank Mandiri; Stefanus Indrayana, general manager of Indofood;
Mesvara Kanjaya, director of Hypermart; Yudi Komarudin, director of Hero Group; Stephen Listyo, director of BII;
Poerwoko, director of Sinar Mas Group; Basuki Trikora, vice president of Pertamina; Wim Maris, senior vice president
of Delhaize; and Edward Ying, director of Telkomsel.

Arief Budiman is a partner in McKinseys Jakarta office and Heang Chhor is a senior partner in the Singapore office, where
Rohit Razdan is a partner and Ajay Sohoni is a consultant.

Contact for distribution: Penny Burtt

Phone: +65 6586 4973
E-mail: Penny_Burtt@McKinsey.com
December 2012
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