Creating Needs
Ardhian Novianto | August 28, 2011

Unilever is the acknowledged leader in the country’s fast-moving consumer goods market. Riding the current wave of economic growth and staying atop of inflation, it is aware that the core of modern consumer business activity is to create new needs within its market.

Unilever has been a part of Indonesia since the Dutch colonial era. As a presence in the country for so long, it has entrenched many of its brands as household names across Indonesia.

Now, with the economy moving ahead at a fast clip, Unilever believes it can ride with the country’s growth to create further value for stakeholders by expanding its already formidable presence in the market.

For Franklin Gomez, chief financial officer at PT Unilever Indonesia Tbk., the outlook is “abundant optimism.”  A stable political environment and steadily building economic growth are the key ingredients for a successful industry, he’s convinced.

With Indonesia’s population expected to reach 240 million this year, Gomez believes the country is on track to become a strategic link in Unilever’s global operations as a production base for both domestic consumption and export. It helps that Indonesia is rich in natural resources that provide the raw materials for many consumer products, such as palm oil and petrochemicals.

“Another advantage for Indonesia is competitive labor costs.  With these advantages, clearly we have potential,” he says.
Up until recently, exports represented only 4% of total production.  To boost production capacity, adds Sancoyo Antarikso, Unilever’s corporate secretary and GM for external relations, the company is investing 200-250 million euro in new plant at the Jababeka Industrial Estate in Cikarang, West Java, and at the Rungkut Industrial Estate in the East Java capital of Surabaya.

These new factories are expected to be completed in 2012 and will meet growth in domestic demand over the next three to five years with capacity for exports as well.

“In terms of prospects, there is no doubt that this country has potential,” says Gomez. “Overall wealth creation is growing well and there is a stable political environment that’s conducive for the consumer business. From the macro perspective, the prospective upside is even greater.”

Market size and good bank liquidity mean that Indonesian industry is to a large degree insulated from the negative influence of external factors.  “If we look at the consumer business which we are involved in, in some categories there is a lot of room for growth.  If you compare Indonesian consumption with patterns in other countries like Thailand or Vietnam, we can expect a phenomenal boom,” Gomez adds.

However good the prospects may be, business does not grow by itself. It needs tactics, strategy and planning. Given Indonesia’s current place in the global growth spotlight, it becomes relatively easy to penetrate each product category.  A true business operator, however, demands more than just an increase in product performance. A true businessman has to create the market itself, create the need of consumers. 

“To get consumers to consume more is to change their habits. It means that constant innovation must go with overall income development. It is a much tougher job,” states Gomez. Whether for lower, middle or upper class markets, innovation is a must.

Unilever has no time for class snobbery. “It is wrong to say that the lower income earners have different aspirations to you. They also want a BlackBerry like you and to use the same shampoo brands the upper class uses. It is all about giving people what they want, giving them what we think they should want,” says Gomez without even a trace of cynicism.

Driving consumer demand

According to Unilever’s view, the work of the consumer industry is to create something new that consumers will want. There are three aspects to the philosophy: there are more users, users want to use more, and users get more benefit from the product. 

Gomez presents the example of the metrosexual – a man who is both metropolitan and heterosexual, who appreciates style. “As a metrosexual, a person will first use a facial. Then he moves up to a moisturizer. Then he goes to day cream and night cream, then he moves to anti-aging lotions. Here, our innovation is to take the consumer from basic skin care, through basic cleansing, to basic anti-aging. This is what the metrosexual comes to need. That is what we do.”

Unilever has proved over the past few years that it has its market penetration recipe right. At the same time that economic growth has picked up and with the rise of the middle class, inflation still came in last year at 6.96%.

Despite this long-standing Indonesian problem, in 2010 the company recorded sales of Rp19.7 trillion, up 7.9% on the previous year. This year, management expects sales will grow 10%-15% to between Rp21.67 and Rp22.65 trillion. “The rise of the middle class is creating new market opportunities, while at the same time the level of sophistication of the market is also getting higher,” says Sancoyo.

Still, Gomez admits, inflation remains a concern for the company. If inflation squeezes wallets, that means the purchasing power of the consumer is falling. “It is both risk and opportunity for us.”

At Mandiri Sekuritas, analyst Yohan Setio says it isn’t all plain sailing for companies like Unilever. This year the consumer industry will be challenged by rising prices for raw materials such as crude palm oil and flour.  Still, he believes, Unilever will enjoy good profit growth. In general, the fast-moving consumer goods market can be expected to hit management targets and achieve growth this year of 10-15%.

With higher prices for inputs including CPO and plastics for packaging, companies in the sector are carefully pushing the cost to the consumer higher. Unilever started raising the price of its soap products back in April, with an effective rise of 10% up until now.
To reduce the risk that some consumers, squeezed by inflationary pressures, may drop their purchases of the company’s products, Unilever utilizes smaller packaging, including sachets, to continue to make it possible for lower-income consumer to purchase the products they’ve come to want.

“You don’t have to spend a lot of money, you still can continue to use the product,” says Gomez. “We are definitely impacted by inflation, but with innovation and creativity, it can be managed. That why we stress innovation. If you think about Apple, the best company in the US, its success lies in the power of innovation.”

Magnum force

Unilever’s power of innovation has been evident in another market niche of late. The long-popular Magnum ice cream has undergone a metamorphosis to become an entire range of flavors from the original plain vanilla and chocolate treat-on-a-stick. Now consumers can also choose ‘gourmet’ flavors like vanilla bean or chocolate dipped in thick Belgian chocolate.

From its introduction, Magnum was always a premium ice cream. It remains the most expensive product in its category. It is a strong sales item, recently boosted by the novel marketing approach behind its own café at Jakarta’s classy Grand Indonesia. “There are long queues,” enthuses Gomez.

The CFO admits that the task of driving sales at this time is helped considerably by the plentiful supply of wealthy Indonesians who don’t have to worry about inflation and are just very happy spending their money.

As a result of such indulgence, sales at Unilever Indonesia’s food and ice cream division rose 15% to Rp5 trillion in 2010, well above the 6% growth in the household and personal care segments, which produced 2010 revenue of Rp14.7 trillion.

Consumers, not competitors

Established by AH van Ophuijsen on 5 December 1933, the company is today the market leader in almost all product categories where it has a presence. It misses pole position only in the detergent category, where Wings is the market leader.

Everywhere else, in soap, shampoo, ice cream, seasoning and many more product lines, Unilever wears the crown as market leader.  In most categories, it faces different competitors. In detergents it is Wings, in face care Proctor & Gamble, in ice cream Campina. 
In soap, Unilever controls an impressive 74% of the market. That market share is divided between Unilever brands Lux with 39.6%, Lifebuoy with 31.57% and Dove with 2.88%.

Its closest competitor is PT Kao Indonesia with the Biore brand, taking 10.23% of the market, followed by PT Mandom Indonesia with the Gatsby brand with 2.86%. Then come Wings Group with Nuvo at 2.44%, PT Cussons Indonesia with the Cussons brand with 2.86%, and the remainder shared between minor players.

The Indonesian consumer market is highly fragmented, with many strong local competitors, especially in food. Here, brand is an essential key to sales success, with many producers building their brands over decades. 
“We have many well-recognized brands in the market,” says Gomez. Unilever, he stresses, does not compete with other companies, but competes to win the approval of the consumer. “Yes, competition is a fact of life, and we are here to win consumers.”   GA

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