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Why Western retailers are scrambling to get a foothold in Indonesia

Consumer spending makes up more than half the Indonesian economy, making it an attractive new market for Western companies like L'Oreal whose traditional customers are in recession-mired countries.

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For now, the majority sit at the bottom of the middle class band, defined by the World Bank as those who spend between $2 and $20 a day. Multinationals that already have a foothold in Indonesia have long targeted this market.

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They include Anglo-Dutch multinational Unilever, which sells individual sachets of shampoo for less than $1, and Swiss-based Nestle, which is expanding production of individually wrapped chocolate wafers and snacks that are cheap and easy to transport.

But companies just starting to look toward Indonesia see potential among the middle class that is driving sales of cars, mobile phones, cosmetics, and housewares.

Ace Hardware and Procter & Gamble

Chicago-based home appliance retailer Ace Hardware recently announced plans to spend around $20 million this year to open more outlets in Indonesia, while Procter & Gamble, a consumer goods company headquartered in Ohio, is building a factory in West Java to produce baby diapers for Indonesia’s nearly 20 million infants.

“That is certainly a message: that a company like P&G understands what opportunities there are in the consumer sector here,” says Dennis Heffernan, an independent consultant and governor with the American Chamber of Commerce in Jakarta. “They not only want to market their goods, but they also want to make their goods here." 

Multinationals, particularly textile and footwear companies, have long taken advantage of cheap manufacturing costs to produce goods here for export. But now more companies are producing goods to sell within the country.

Heffernan says the amount of attention US companies are devoting to the retail and consumer sector has “ramped up radically” in the past two years. The US Commercial Service has been leading trade missions here to seek opportunities for small- and medium-sized businesses.

“A lot of multinationals have been running to China and India in the past, but now it’s becoming clear that Indonesia is a good place to invest and do business,” he says.

Major European retailers are also scrambling to get a foothold. Swedish retailer Ikea, for instance, plans to open its first Indonesian outlet in 2014, while cosmetics company L’Oreal is set to open its new factory, its largest in the world, in the coming months.

Market research firm Roy Morgan, which monitors the consumer market, says consumer confidence is at a record high. But some investors remain reluctant about putting money into a country still plagued by a lack of infrastructure, high costs of doing business, and unclear regulations governing investment.

Chatib Basri, the head of Indonesia’s Investment Coordinating Board summed up the interest last week. “Indonesia is no paradise for investors,” he says, noting a gross lack of infrastructure and high costs of doing business. But, “where else do they go? You can’t miss Indonesia simply because of its size.”

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