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July 3, 2012

Indonesia’s Rising Middle Class to Transform the Country’s Consumer Market

IStock_000014261434MediumAnalyst Insight by An Hodgson, Income and Expenditure Manager 

Indonesia – the world's fourth most populous nation – is experiencing a rapid expansion in the middle class, which has helped to transform the country's consumer market. Businesses in a wide range of industries can expect to capitalise on both the strong purchasing power and the high labour skills of the middle class. However, income inequality is set to rise, potentially causing social and political discontent and threatening the business environment. 

Number of Households with Annual Disposable Income over US$10,000 (Constant) and Household Disposable Income Real Growth in Indonesia: 2006-2020

Million households; Annual % change


















Source: Euromonitor International from national statisticsNote: Data for 2012-2020 are forecasts; Household annual disposable income data are in constant values.

  • With a total population of 235 million as of 2011, Indonesia is the fourth most populous country in the world after China, India, and the USA. During 2006-2011, the Indonesian population grew by 5.9%;

  • In 2011, per household annual disposable income stood at Rp60.6 million (US$6,901), representing an average growth rate of 5.0% per year in real terms during 2006-2011. Consumer expenditure is also growing fast, at an average rate of 4.7% per year in real terms during 2006-2011 to reach Rp57.7 million (US$6,569) per household;

  • Underpinning the rise in consumer expenditure is the rise of the middle class. In 2006, there were 6.6 million households with an annual disposable income of over US$10,000 (in constant terms), but by 2011 this number had risen to 13.7 million households.

Implications

Rising middle class in Indonesia has helped to transform the country's consumer market, with major implications for consumer goods companies:

  • Companies in a range of industries including tourism, education, healthcare and entertainment can expect greater business opportunities, as middle-class Indonesians are spending increasingly on discretionary goods. Although the bulk of consumer spending in Indonesia is still on essentials (i.e. food, non-alcoholic beverages and housing), the proportion of discretionary spending in total consumer expenditure has been gradually rising, from 49.1% in 2006 to 54.2% in 2011;

  • Indonesia has a relatively young demographic profile with 60.8% of the population aged below 35 years as of 2011. People aged 30-34 had the highest average gross income in Indonesia, at Rp38.7 million (US$4,199) in 2011, compared to the national average gross income of Rp31.5 million (US$3,422). High earners in this age group will likely buy their first cars as well as having a strong demand for luxury goods;

  • Like many other Asian countries, the middle class in Indonesia is characterised not only by their purchasing power, but also their generally higher levels of skills and education. Many members of the Indonesian middle class are educated at universities in the West. As a result, multi-national consumer goods companies entering the Indonesian market can capitalise on both the rising wealth and the high skills of the middle-class labour pool.

However, as Indonesia's middle class expands, the gaps between rich and poor are widening:

  • In 2006, the richest 10% of households (decile 10 households) possessed 24.6% of total annual disposable income. By 2011, their share had risen to 27.9%. During the same period, the poorest 100% of households (decile 1) saw their share of total annual disposable income diminishing from 2.5% to 2.1%;

Share of Total Household Annual Disposable Income by Decile: 2006-2020
% of annual disposable income



















Source: Euromonitor International from national statisticsNote: Data for 2020 are forecasts.

  • Between 2006 and 2011, Indonesia's Gini coefficient rose from 33.0% to 37.7%, reflecting greater income inequality. A zero Gini coefficient represents perfect income equality and a score of 100% indicates absolute income inequality;

  • The widening wealth gap can undermine the business opportunities presented by the emerging middle class in that it can cause social and political discontent, threatening the business environment and economic growth in Indonesia.

Prospects

The number of middle class households is set to increase substantially in the future:

  • Euromonitor International forecasts that by 2020, the number of households with an annual disposable income over US$10,000 (in constant terms) will reach 31.1 million, up from 13.7 million households in 2011. However, income inequality will likely rise, as decile 10 households are forecast to possess 29.3% of total annual disposable income by 2020 whilst decile 1 households will see their share in total disposable income fall further to 2.0%;

  • Over the period of 2012-2020, consumer expenditure per household will likely grow by 39.2% in real terms whilst per household disposable income will increase by 40.5% in real terms;

  • Thanks to strong domestic demand driven by the expansion of the middle class, the Indonesian economy is largely insulated from external shocks of the global economic downturn. Euromonitor International forecasts Indonesia's real GDP growth rate at 6.1% year-on-year in 2012, above the expected real growth rates of some other emerging market economies such as Vietnam (5.6%), Russia (2.8%) and Brazil (2.7%).


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