Coffee Market in Indonesia

Coffee - Indonesia - Market Report

HEADLINES

Coffee registers 8% off-trade volume growth in 2010 to reach 91,000 tonnes

Leading manufacturers stimulate volume growth with heavy investments in marketing and new product developments

Average unit price of coffee remains relatively stable in 2010

Santos Jaya Abadi leads coffee in 2010 with a 17% retail volume share

Coffee is expected to register a CAGR of 7% in off-trade volume terms over the forecast period

TRENDS

Despite the developing health and wellness trend, urbanisation and the desire to cram more activities into the daily schedule spurred greater demand for coffee in 2010. The emergence of social media also assisted in boosting coffee sales as young consumers spend more time online outside of office and school hours. Leading manufacturers in coffee invested heavily in marketing and promotional activities in a very competitive environment, boosting consumer interest in and consumption of coffee. New product developments from established and new brands also intensified the competition in 2010.

Retail volume growth of coffee accelerated to 8% in 2010, a three percentage point increase from the previous year highlighting a significantly better performance for the year. The advertising war between leading players spurred higher consumption as Indonesians are heavily influenced by marketing and communication activities. A positive economic outlook also boosted greater consumption of coffee as businesses thrive and employees are overloaded with work.

Instant standard coffee led with 14% off-trade volume growth in 2010 from a smaller consumer base compared to fresh ground coffee. This is attributed to the increasing demand for convenience over the richer taste offered by fresh ground coffee amid growing urbanisation. In the review period, instant coffee products are positioned as emulating the rich taste offered by fresh ground coffee, which are more popular over instant variants. Better economic conditions and manufacturers’ efforts at marketing and promotions also spurred an excellent performance in 2010. New product developments of instant standard coffee also offer unique taste experiences such as the addition of ginseng, ginger, milk, chocolate, mocha flavours or substituting sugar with brown sugar.

The average unit price of coffee remained relatively stable in 2010. The advertising war between established brands made sure they retained their volume share which led to limited trading up to premium products, despite a positive economic outlook and improved purchasing power. Nevertheless, several leading brands developed new products with higher unit prices in response to growing demand for premium coffee from urban consumers.

Fresh ground coffee continued to be the most preferred type of coffee in 2010 accounting for 70% of off-trade volume sales. Despite a slightly declining volume share in the review period, many Indonesians continue to prefer fresh ground coffee due to the perception that instant coffee is unable to rival its strong rich taste and aroma. Differing consumer preferences in sweetness levels also impeded the demand for instant coffee as the different ethnic groups in Indonesia have very different preferences in this regard. Lower unit prices also ensured the ongoing popularity of fresh ground coffee which registered 5% off-trade volume growth in 2010.

Off-trade volume sales accounted for 68% of total volume sales in 2010, highlighting the high consumption of coffee at home and in the working environment. The availability of coffee is led by independent small grocers as a product which is consumed by consumers from all walks of life. Supermarkets/hypermarkets and other grocery retailers ranked second and third respectively, demonstrating a strong presence of coffee sales in both traditional and modern distribution channels. Despite a declining trend, rural households continued to account for a sizeable 45% of total households in Indonesia, which explains the high contribution of traditional retailers of total volume sales of coffee in the review period. The growing culture of socialising in cafés among young urbanites and the development of knowledge regarding the art of drinking quality coffee reflected on the volume share of fresh coffee beans. Sales of fresh coffee beans accelerated in the review period to reach 4% of total volume sales in 2010.

The presence of vending machines continued to be negligible in the review period with high availability of freshly brewed coffee at small scale foodservice operators such as cafés and warung throughout the country. With low labour costs, vending machines are not expected to emerge into prominence over the forecast period to match the presence in developed countries.

The performance of specialist coffee shops improved in 2010 once the negative effects of the global economic downturn had begun to dissipate. With low interest rates, investment intent improved and specialist coffee shops, which are funded by the franchise system, turned in a stronger performance compared to the previous year. Young urban dwellers increasingly socialise in cafés and culinary hotspots, ensuring a warm response from consumers for these types of venues.

In 2010, 3-in-1 coffee continued to dominate accounting for 47% of total value sales. A preference towards milk coffee is one of the key reasons for the demand for instant coffee as fresh milk is not widely available in Indonesian households. The review period witnessed better performances of both 4-in-1 and instant speciality Italian coffee thanks to new product developments and strong investments in marketing and promotions. The 4-in-1 coffee also increased in relevance due to new product launches with ginseng, ginger and brown sugar flavours, all of which were warmly received by Indonesians. The availability of instant speciality Italian coffee also increased with leading brands launching cappuccino, mochaccino and latte variants, some of which feature froth or foam to replicate the café experience.

The presence of coffee pods remained minimal in the review period serving a niche market of upper income consumers, and upscale restaurants and hotels that offer coffee pod machines in their luxury suites. The small capacity of the coffee machines and the high price of pods make them unsuitable for cafés which specialise in serving coffee. Coffee pods are generally used in some upscale Japanese restaurants which do not focus in serving coffee as a main beverage but which nevertheless want to be able to offer high quality coffee as required.

COMPETITIVE LANDSCAPE

Santos Jaya Abadi retained its lead in coffee with a 17% off-trade volume share in 2010. ABC and Kapal Api brands developed a strong reputation in Indonesia in fresh ground coffee, the preferred choice for loyal coffee drinkers over instant variants. Good Day also rose to prominence in instant coffee in the review period as a product suitable to be served cold, targeting young urbanites such as teenagers and young adults. As the leading manufacturer in coffee in the review period, the company engaged in an advertising war with other manufacturers such as Nestlé and Mayora Indah and thereby stimulated coffee consumption.

Nestlé registered the highest off-trade volume share gain in 2010. The company relaunched Nescafé with a new blending technology to produce coffee with a richer taste and aroma, which is in line with local consumer preference for coffee. Furthermore, the company also launched new product developments in instant speciality Italian coffee targeting upper income consumers with a slightly higher unit price.

Domestic brands dominated coffee in the review period with the exception of Nestlé, which ranked second in terms of retail volume share in 2010. The majority of Indonesian coffee drinkers still belong to middle and lower income segments, which sustained the popularity of domestic brands of coffee offered at reasonable prices. Consumer preference for fresh ground coffee with sediments and a rich aroma and taste also limited the popularity of instant coffee, where international brands thrive.

Key new launches in coffee include Nescafé cappuccino and mochaccino instant coffee which is instant speciality Italian coffee and features foam to replicate the experience of drinking coffee at cafés. The whole Nescafé line-up was relaunched in early 2010 to feature products manufactured with new blending technology to provide a richer aroma and taste. ABC Brownies is another new product featuring chocolate, caramel and milk-flavoured instant coffee from a leading brand. Anget Sari is a new entrant to coffee with ginger flavoured instant coffee from the manufacturer of popular powder concentrate Pop Ice, Forisa Nusapersada.

A key advertising campaign was for Torabika Susu Full Cream which is a relaunch of its milk coffee variant sponsoring late night television programme Provocative Proactive on Metro TV. This programme features celebrity host Pandji Pragiwaksono discussing political and hot current issues with a critical mindset within a relaxed setting of a discussion group in a coffee shop. The show garnered a lot of interest, especially among its target audience of young adults who are interested in politics and are highly critical of the government in the country. Due to the popularity of the programme, the timeslot was moved to before midnight. Incidentally, the title of the programme is also used for Pandji’s latest album as he ventures into a music career. Kopiko and other brands of coffee sponsored the hourly Headline News programme on Metro TV.

With regard to packaging, there were no major innovations within coffee in the review period. Single serve packaging became increasingly popular for convenience and also affordability as lower-income demographics continued to buy coffee one package at a time. Certain brands of coffee feature sophisticated packaging design positioned as a gift set. Premium brands of coffee also feature unique designs such as metal can packaging for Illy which resembles a metal can beverage packaging used in carbonates, but only larger and with a lid.

Most coffee products fall into the standard and economy segments, with availability in both modern and traditional retailers. Premium coffee products are generally limited in terms of availability to upscale supermarkets, although in the review period availability improved to reach more outlets such as chained hypermarkets. Some coffee products only focus on distribution on certain key cities such as Ayam Merak and Kopi Singa. Private label coffee remained limited in popularity due to a minimal price difference compared to established brands and the high brand attachment in coffee as a product which relies heavily on taste quality.

PROSPECTS

Coffee is expected to register robust volume growth over the forecast period due to a strong investment in marketing and communications as well as new product developments from leading manufacturers and new entrants. Despite the growing health and wellness trend, coffee benefits from increasingly urban lifestyles and demand to include more activities in daily schedules. This trend stems from a positive economic outlook where businesses are expected to thrive as well as the emergence of social media as young consumers are increasingly spending time online outside work/school hours.

Coffee is expected to register a 7% CAGR in off-trade volume terms over the forecast period. Constant value sales are also likely to improve thanks to expectations of a good consumer response to manufacturers’ investment in product developments and branding activities. Availability of coffee is expected to improve with rapid expansion of modern retailers and manufacturer attempts to improve distribution through foodservice retail such as Kedai Kopi Torabika. This is a franchise system that aims to provide freshly brewed coffee in shopping malls, public transport interchanges and rest areas of major highways. Cafés and coffee shops are also likely to flourish over the forecast period owing to improved consumer spending power and the growing urban and mobile lifestyles.

Despite the growing café culture among young urbanites, off-trade volume sales of coffee are still expected to outperform those via the on-trade, which will register a CAGR of 4% over the forecast period. This will stem from a large majority of consumers who will remain outside the scope of the café culture. The ongoing strength of the off-trade will also be attributed to good consumer response to manufacturers’ attempts to stimulate demand with attractive advertisements and new innovations. New product launches also include instant coffee products Nescafé cappuccino and mochaccino which feature foam to recreate the café experience.

Forecast period threats to growth will include the developing health and wellness trend and the negative perception of caffeine addiction in coffee which will lead many women and young consumers to shun coffee altogether. New product developments and communication strategies to put forward the milk coffee products has addressed this threat to some extent as the mild taste of milk coffee is more suitable for this consumer group. Energy drinks in both RTD and powder concentrate formats, sports drinks and vitamin supplements, which may provide a stamina boost and stimulate wakefulness, will also pose a threat to coffee which is perceived as less healthy.

Instant standard coffee will be the fastest growing category with an expected CAGR of 11% in off-trade volume terms over the forecast period. A majority of coffee enthusiasts in Indonesia will continue to prefer fresh ground coffee with certain characteristics such as the presence of sediment, and a richer flavour and aroma. Despite that, instant standard coffee products have made strides to emulate fresh ground coffee with product developments resembling those characteristics such as instant coffee with sediments and new technologies to produce instant coffee with a stronger aroma and flavour. Coupled with the increasing popularity of milk coffee driven by the younger audience and new product developments with new and unique tastes, instant standard coffee is expected to turn out a category-leading performance over the forecast period.

The average unit price of coffee should increase moderately over the forecast period in line with consumer spending power, which will gain strength as well as the improved availability of premium coffee. Trading up to premium products by middle and upper income consumers is anticipated, while some middle to lower income consumers are expected to sustain their preference towards single-serve packaging due to the lower out-of-pocket expense, despite a slightly higher unit price. The growing café culture is also expected to boost consumer interest towards speciality coffee. The average unit price of instant coffee is expected to increase more sharply compared to fresh ground coffee due to the nature of the target audience comprised of young urbanites looking for convenience and sophistication.

New products Nescafé cappuccino and mochaccino are expected to perform well in response to growing demand for sophisticated products, despite serving a niche segment due to the higher retail price compared to standard products. The relaunch of the Nescafé line-up with new blending technology to improve the aroma, taste and flavour of coffee is expected to be warmly received as it is in line with local consumer preference for coffee. ABC Brownies is also likely to perform well in response to growing consumer demand for sophistication. Anget Sari will benefit from substantial investments in a marketing campaign especially as Indonesian consumers will remain very susceptible to and easily influenced by advertising strategies.

Leading manufacturers of coffee with a strong appetite to invest in marketing campaigns such as Santos Jaya Abadi, Nestlé and Mayora Indah are expected to continue driving coffee with similar strategies over the forecast period. With a strong consumer preference for fresh ground coffee and its characteristics, manufacturers will provide innovations within fresh ground coffee and design instant coffee products to resemble the former. New flavours are nevertheless still expected to be an avenue of exploration to entice new consumers and compete with rival brands.

The most popular format of coffee over the forecast period will continue to be 3-in-1 instant coffee with milk and sugar additives. The 4-in-1 and 5-in-1 coffee products will benefit from increased availability due to explorative attempts by leading manufacturers and new entrants to anchor brand differentiation within an increasingly competitive environment. Popular flavours will include ginger, ginseng, mocha and chocolate in line with the niche and imported product developments of note during the review period.

Coffee pods and machines will continue to serve a niche consumer base and will remain beyond the financial reach of the average Indonesian consumer. Upscale restaurants and hotels will continue to be the key audience of such products as will affluent end users. As such, very few brand owners of coffee will work with manufacturers of these consumer appliances over the forecast period due to the limited consumer base.