Chinese FMCG firms’ key challenges in Indonesia

We write this report to respond to investors’ concerns about Chinese FMCG companies competing in Indonesia. To our knowledge, Chinese FMCG brands have been present in Indonesia since long, so this is not a new phenomenon; but, indeed, of late there are growing concerns that more Chinese brands may enter Indonesia, likely as they seek to escape the economic slowdown in China, we think. That said, based on past experience, the presence of Chinese FMCG firms in Indonesia is often unsustainable — they tend to enter and exit the market frequently. Even some of the world’s largest dairy players, such as Yili (600887 CH, Not rated) and Mengniu (2319 HK, Not rated) have failed to penetrate the Indonesia dairy market, despite having established giant factories in West Java. Based on our interviews with Indonesia FMCG players, we identify five major weaknesses of Chinese FMCG firms in Indonesia, namely:

• 1    Cultural issues – Chinese FMCG firms tend to set extremely strict key performance indicators (KPI), especially for the sales division. In some cases, the penalty can be a direct salary cut once the employee misses sales targets, which we believe is not a suitable approach for Indonesian workers. As a result, a low retention issue and an abundance of complaints hinder the progress of such companies.
• 2.      A lack of branding capability – Most Chinese FMCG companies rely heavily on a cheaper pricing strategy and rarely invest in advertising or brand building, thereby making their products less sticky to consumers.
• 3.      Distribution barriers – While Chinese FMCG firms may have deep pockets, it will take a while to establish proper distribution networks in an archipelago country.
• 4.      Everything from China – Many Chinese FMCG firms heavily import raw materials from China; hence, a lack of supplier diversification may result in supply issues, not to mention uncertainty around import regulations can be a structural risk if they cannot compromise.

• 5.    Questionable quality – Chinese FMCG firms mostly focus on offering low prices, and are very likely to sacrifice quality. For instance, some Chinese bread brands, with unusually long shelf lives, were found guilty in 2024 due to the usage of dangerous preservatives.   

Chinese FMCG firms’ playbook in Indonesia

Chinese FMCG firms’ strategy most likely would be cheaper pricing and prioritizing volume growth, which is only suitable in FMCG categories which have thick GPMs and a weak presence in general trade (GT). For instance, a Chinese player like Aice (ice cream products, unlisted), established in 2014, successfully took over the market leader position from incumbents (Unilever [UNVR IJ, Reduce] and Campina [CAMP IJ, Not rated]); Aice’s selling price points can be half of incumbents’; it also has a stronger presence in GT due to a lower deposit requirement for freezers in-store. We note that the ice cream industry’s GPM is quite high, hovering at 50-60%.

Chinese breads, such as Aoka brand (unlisted) also grew strongly in the past seven years, almost reaching the size of Sariroti (ROTI IJ, Buy) sales. However, the company’s sales plunged due to the issue of preservatives content last year. Aoka’s selling price is 100-200% cheaper than ROTI (50-55% GPM), and it only focuses on GT and the online channel.

Cosmetics products with GPM levels of 50-70%, double-digit industry growth, and a very low barrier to entry are also a lucrative category for Chinese products. For example, Skintific brand (unlisted) which clocked triple-digit growth in the past three years, is focused on its TikTok presence and GT penetration through a third party. Based on our observation, most Chinese brands have struggled to compete against FMCG categories which have a low margin level and strong GT presence, unless it is a commoditized good.

Companies that are immune to Chinese FMCGs

So far, we are not concerned about Chinese FMCG firms entering the Indonesia FMCG market, as their existence historically has been largely unsustainable. Our covered Indonesia consumer stocks with vast GT distribution networks, strong brands, and competitive pricing, such as: 1) Mayora Indah (MYOR IJ, Buy, TP: IDR4,300); 2) Indofood CBP (ICBP IJ, Buy, TP: IDR18,700); 3) Mulia Boga Raya (KEJU IJ, Neutral, TP: IDR650); 4) Sariguna Primatirta (CLEO IJ, Buy, TP: IDR1,780); 5) Ultrajaya (ULTJ IJ, Buy, TP: IDR2,250); and 6) Cimory (CMRY IJ, Buy, TP: IDR6,700), appear more immune against the threat from Chinese players competing in Indonesia.

In our view, MYOR has very strong competitive advantages, such as competitive pricing (low GPM), global quality branding (45% export market), and top-three largest distribution networks with ~1mn stores coverage. Similar to MYOR, ICBP also covers ~1mn stores with an extremely strong dominating position in instant noodles (>70% market share). KEJU has a very competitive pricing strategy, equipped with a strong distribution channel of 350K GT coverage, not to mention a long-term B2B relationship in the food service industry. CLEO has the fastest and most efficient distribution network in the packaged water industry with >30 factories, resulting in a high GPM level, which is difficult for competitors to replicate. ULTJ is still the market leader in the UHT milk market, equipped with strong local raw material sourcing, very strong brand equity, and widespread distribution network. Lastly, CMRY has been proven in defeating Mengniu yogurt brand in Indonesia, given its strong marketing strategy.

Fig. 1: Indonesia FMCG firms’ GPM (2023-2024 average)

Fig. 2: China FMCG firms’ GPM (2023)

Fig. 3: Indo vs China FMCG firms A&P-to-sales ratio (2023 median)

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Sandy Ham (sandy.ham@verdhana.id)

Jody Wijaya (jody.wijaya@verdhana.id)

Samuel Christian (samuel.christian@verdhana.id)