The Rising Influence of Rising Affluence

[DewDiligence]

Multinationals Find New Markets in Indonesia

[Although not mentioned in this article, HNZ is especially prominent in Indonesia.]

http://online.wsj.com/article/SB10001424052702304793504576432090397556856.html

›AUGUST 4, 2011
By ERIC BELLMAN

JAKARTA, Indonesia—High food and commodity prices have hobbled poor consumers and triggered riots in emerging markets this year. But in commodity-driven economies like Indonesia, the rising prices are lifting millions of farmers and miners out of poverty—and creating opportunities for global companies.

Rubber tappers, cocoa pickers, coal miners and other rural laborers have in some cases seen their incomes more than triple in the past three years, making the workers wealthier than some city residents and putting them on the radar of such multinational consumer-goods makers as Honda Motor Co. and Unilever PLC.

Zulfan Effendi, a 36-year-old palm-oil farmer from the western island of Sumatra, says he used to struggle to make ends meet. But in two years, prices have doubled for palm oil, which is used in everything from chocolate to ethanol. That has let him add rooms to his house and fill them with luxuries he once couldn't afford, like a Samsung flat-screen TV. The money he spends on groceries has tripled.

"My life is much better," he says. "I used to just have a small plantation and big debt. But now the debt is gone, and I've been able to double the size of my fields."

The trend is causing companies to change how they price, produce and promote their products, reaching further outside of the companies' traditional strongholds.

Honda now bases its Indonesia sales projections in part on prices for products such as palm oil and cocoa. The Japanese company is pitching to miners and plantation workers by using promotional caravans that put on festivals in rural areas, complete with dancers, folk singers and the company's latest motorcycles and scooters.

Honda motorcycle sales in the first half were up more than 25% from a year earlier, says Johannes Loman, executive vice president of PT Astra Honda Motor, which sells Honda motorcycles and scooters in Indonesia. "Sales move with the prices of palm oil, cocoa, rubber and coal," he says. "The prices are higher than they were a year ago, so we are expecting growth will increase."

Brazil, Thailand, Malaysia and other lower- and middle-income countries also are seeing spending power rise in rural areas. Although commodity prices are off their peaks this year, they remain high.

Of course, many of Asia's poorest people are hurt by food inflation if they aren't involved in commodities-related businesses. The Asian Development Bank projects that 64 million people in Asia could be pushed below the poverty line as food prices take a bigger bite. In Indonesia, food and fuel subsidies have helped offset some of the pain.

But Indonesia's economy has been expanding at an average of close to 6% a year for the past four years, helped by soaring prices for its natural resources. That growth has spread beyond the urban centers of Java and Bali to far-flung spots across the 17,000-island archipelago, including the coal mines of Kalimantan, the palm-oil and rubber plantations of Sumatra and the clove, cocoa and coconut farms of Sulawesi.

In the 10 years to 2009, the size of Indonesia's middle class more than doubled to 93 million people, according to the Asian Development Bank. Nomura Research projected that Indonesia's middle class could expand to more than 150 million people in the next four years.

Anglo-Dutch consumer-goods maker Unilever says that while Java has accounted for the vast majority of the company's Indonesia sales for decades, the other islands soon will constitute about half.

"Rural areas are getting richer from plantations and natural resources," says Maurits Lalisang, president director of PT Unilever Indonesia. "The money is spreading."

Indonesia's second-largest supermarket chain, PT Matahari Putra Prima, plans to quintuple its number of stores, setting up on the eastern islands of Ambon and Irian Jaya. Sales have jumped at new stores in small cities as farm families arrived in trucks to buy TV sets, clothes and cellphones.

The company's army of sales assistants have to explain the differences in cosmetics and hair products to rural consumers used to the limited selection at mom-and-pop stores in villages.

"It is spreading all over the islands," says Carmelito Regalado, president of the company's food business. "Everyone is getting a piece of the growth."

Hoping for a foothold in the wider Indonesian market, big international retailers including French supermarket chain Groupe Casino and U.S.-based Wal-Mart Stores Inc. earlier this year were considering buying a stake in Matahari. Wal-Mart declined to comment for this article.

PT XL Axiata, Indonesia's third-largest mobile-phone company, says it has been surprised by the surge in subscribers when it opens cellular towers near plantations and mines.

Residents in such areas have "got more money than the lower-end subscriber in the city, and they spend four to five times more on calls," says Chief Executive Hasnul Suhaimi.

Bornardo Sitompul, 36, says he is happy he left a job working in an electronics factory to tend his family's farm on Sumatra. Surging prices for his fields' rubber and coffee beans have helped him fix his simple home and buy a TV set and a refrigerator. He awaits the delivery of his third motorcycle to his home, which is more than 300 miles from the closest big city.

"My life is much better as farmer," he says. "You used to rarely see any motorcycles in my village and now I am going to have three."‹