EAC RESEARCH PAPER N° 12

MARKETING AND DISTRIBUTION FOR

MULTINATIONAL COMPANIES IN INDONESIA :

AN OVERVIEW

Marc CUNNINaHAM

1983

2

INTRODUCTION

Indonesia is the world's fifth most populous country with 150 million

inhabitants scattered across hundreds of islands in a 3000 mile long archi-

pelago. It is possessed of huge mineral, agricultural and energy resources,

and its G.D.P has grown remarkably steadily at 8% per annumm over the last 15

years, although the recent recession has hit hard. Since 1965 a high degree

of social and political stability has been maintained by an armed-forces

backed government whose industrial and economic policies have met, by and

large, with the approval of the World Bank, and the International business

community.

Indonesia's growth and stability make it, at first glance, a very attrac-

tive area for the foreign investor, and there is no doubt that for many

companies its potential has been realised and profitable operations estab-

lished. However, like any other market it has its special features and idio-

syncracies. This paper attempts to give a broad view of the market from the

point of view particularly of a marketing manager in a multinational company.

It draws on a number of important sources of published information, and a

series of interviews with managers of both foreign and Indonesian companies

based in Jakarta, for whose time and advice the author is most grateful; The

most valuable of the former type of source, was SRI's "The Indonesian

Consumer', (due to be updated in 1984) and the author is very grateful for

SRI's permission to use its very extensive data.

INDEX

SECTION

PAGE

Introduction

1. Legal and Regulatory Background 2

1.A. Investment Approval 2

1.B. Patents and Trade Marks 5

1.C. Indonesianisation 5

1.D. Distribution Restrictions 5

1.E. Special Restrictions 6

1.F. Advertising 7

2. The Consumer 7

2.A. Population Size and Dispersion 8

2.B. Socio-Cultural Factors 11

2.C. Economic Groupings 12

2.D. Consumption Patterns 18

2.E. Consumer Attitudes 23

3. Channels of Distribution 24

3.A. Importance of Penetration 24

3.B. Types of Outlet 26

3.C. Shopping Patterns 30

4. Company Distribution Networks 36

4.A. The Distributor Choice 36

4.B. Downstream from the Distributor 37

4.C. Merchandizing 42

4.D. Examples of Systems 43

4.E. Physical Distribution 49

5. Advertising and Promotion

5.A. Special Problems

5.8. Advertising

5.C. Promotion

6. Market Research

7. Pricing

8. Credit

0

1. THE LEGAL AND REGULATORY BACKGROUND

The Indonesian government recognises that the long-term development of

the country can be greatly assisted by foreign involvement and it therefore

makes available a wide range of incentives such as tax holidays and import

duty exemptions to companies whose plans fit in with national objectives.

for such companies the Foreign Capital Investment Law permits open currency

conversion, transfer of post-tax dividends, transfer of funds to pay external

costs of expatriate managers, and the export of capital arising from the sale

of shares to Indonesian nationals. There are no official price controls

except for the most basic of commodities (rice, sugar, salt) and tobacco,

though companies do come under pressure in inflationary periods. While there

are some restrictions on the employment of foreign nationals and it is

becoming harder to obtrain work permits for them, they are usually allowed in

where a real need can be demonstrated.

1.A. INVESTMENT APPROVAL

In many important respects therefore Indonesia's operating environment is

more open than those of many other developing countries. However, the

government has strong ideas on the type of investment which will assist the

country's development and it wants to see benefits accruing in both the long

and the short term. The main short-term objectives are to provide employment

for the rapidly expanding workforce and either to replace imported goods or

to improve the manufactured export figures. In the long term, the government

hopes that the transfer of technology and, eventually, of ownership, will

enable the country to build up a solid industrial base and become genuinely

competitive in world markets. The recent drop in oil prices has underlined

their concern that the proportion of GDP and government revenue provided by

oil-related activities, currently extremely high, be lowered.

The government has accordingly introduced a series of measures designed

to control not only the fields of activity permitted to investors, but also

the siting of their facilities, and the structure of their organisations.

both new and additional investment must have the approval of the BKPM, the

Investment Coordinating Board, which may declare a particular industry closed

to foreigners, open only in development areas (usually the outer islands) or

desirable in all areas.

TABLE 1

Recapitulation of Foreign Capital Investments approved bythe government/ according to sector from 1967 - 31st December 1982

Sector Total Projects Investment

in Million US$

Agriculture 58 297.4

Forestry 64 669.6

Fishery 28 159.2

Mining 10 1,339.4

Food Industry 45 301.8

Textile Industry 69 1,350.4

Wood Industry 23 227.9

Paper Industry 13 146.8

Chemical Industry 142 2,212.4

Non-metal mineral industry 34 621.3

Basic metal industry 24 1,865.4

Metal commodity industry 129 1,456.7

Other industries 21 50.8

Construction 69 148.1

Hotel Business 8 255.6

Real estate 4 43.0

Transportation 17 138.8

Trade Services 5 32.1

Other Services 48 460.6

Total 811 11,777.3

Source: Capital Investment Coordinating Committee

1.B. PATENTS AND TRADE MARKS

Indonesia is a signatory of the Hague Agreement of 1925 and a member of

the Convention on Patents, but there is very little real protecton from

product imitation, particularly if the offenders are either too small to pin

down or too highly-placed to be touched as is often the case. Trademarks are

protected for 10 years once registered and registrations are renewable.

However, brand forgery is commonplace and the culprits are difficult to

trace, and, given the tortuous nature of legal proceedings, almost impossible

to deter permanently. Successful, easily manufactured brands attract not

only forgers but also numbers of imitators with near identical names and

packaging.

1.C. INDONESIANISATION

The government wishes to bring about the eventual "Indonesianisation" of

all foreign enterprises in the country. All but a very few privileged

investors are therefore obliged to form joint-venture companies (P.M.As) with

local partners or shareholders holding a minimum of 20% of equity and with

the promise of a 51% holding within 10 years. Pressure is often applied to

ensure that these shareholders come from "economically weak" groups (i.e

Pribumis, or ethnic Indonesians rather than Chinese). When a company already

operating in Indonesia wishes to expand, permission is often granted only if

funds are raised through a new issue on the stock exchange.

Some new investors with exceptionally attractive projects have been

exempted from this obligation and many others have managed to negotiate

extensions of the 10 year period in return for a new investment, but several

foreign companies which came in the early '70s are currently transferring the

controlling shares to Indonesian partners.

1.D. DISTRIBUTION RESTRICTIONS

Another restriction on the foreign investor which is of tremendous

importance is Regulation 314/70 (1970) the "Regulation of the Fields of

Activity of Foreign Commercial and Service Enterprises and their Represen-

tative offices". This has; several clauses, but in essence it restricts all

import and export and all distribution of goods to be sold to the general

puLlic to licensed Indonesian companies. Indonesian citizens must own at

least 51% of the shares and hold a majority of directorships in these

companies, long-term residents being permitted to hold the remaining 49%.

This stipulation is intended to limit the involvement of Chinese businessmen

but it seems to have had little success in this regard since they are

currently estimated to control between 70% and 90% of the distribution

business.

The effect of this regulation is to force companies to sell to distri-

butors who in turn sell to wholesalers and retailers. For the manufacturers

it means, in general, an additional margin-taking layer which yields little

benefit, since the distributor rarely does more for his percentage than

collect orders. The different modes of distribution operation adopted by

foreign companies as a result of this legislation will be described in detail

below. It should be noted that it does not apply to companies importing or

producing goods for use in other companies' manufacturing processes.

1.E. SPECIAL RESTRICTIONS

There are also a few industry-specific restrictions designed usually to

protect local business. A good example of these is the prohibition of

foreign manufacture of KRETEK (clove-scented) cigarettes. This was

originally intended to protect the jobs of many thousands of Indonesians

employed to hand-roll kreteks. However, foreign-owned manufacturers of white

cigarettes have been dismayed by the recent loss of considerable market share

to machine-produced kreteks. Despite their protests the prohibition still

applies, the rationale now apparently being "Why should we let a foreign

company do what we can very well do ourselves?". The tobacco giant, BAT,

finds itself in an awkward position. It is committed to increasing the

percentage of its equity issued on the stock exchange from its current 30%,

but with major market share losses, stock prices do not warrant a new issue.

The regulation which protects Indonesian industry thus, at the same time,

hinders the Indonesianisation of a major foreign-owned manufacturer.

8

1.F. ADVERTISING

There are also restrictions on advertising which are of particular

importance to those in the fast-moving consumer goods market because they

make new launches more difficult and expensive and increase the overall cost

of communicating with the market. T.V advertising was banned in 1981 and the

proportion of advertising content in printed media is restricted as is the

total number of pages for each type of publication.

The demand for the limited amount of printed exposure is therefore very

high and rates per page have increased accordingly. While there is no

official censorship, a form of self-censorship is exercised by all publi-

cations and in a seller's market few of them are interested in exploring th.,

boundaries of the permitted. These issues are dealt with in greater depth

below.

A major source of frustration for any company trying to work its way

through the regulatory maze is the Indonesian bureaucracy which is large,

complex and usually extremely slow-moving if not downright inefficient. The

go-ahead for a project can take years to obtain, though of course, appli-

cations to invest are published rapidly as evidence of continued external

interest in Indonesia. In this context President Suharto's possibly apoc-

ryphal reply to a question put by the Mexican Ambassador is illuminating.

Asked whether Manana could be accurately translated into Bahasa Indonesia, he

is reputed to have replied "we have several words with similar meanings, but

nothing with the same sense of urgency".

2. THE CONSUMER

This section sets out some of the basic demographic and sociological

factors which make the Indonesian market what it is, and attempts to

describe the consumer in terms of his location, purchasing power, and buying

habits. Much of what follows is based on statistical information compiled by

the government's statistical office (BIRO PUSAT STATISTIK), the World Bank,

Susenas (National Socio-Economic Survey), SRI (a major market research

company) and other reliable sources. However, the opinions of many managers

and observers resident in Indonesia are also used extensively.

-9

2.A. THE POPULATION: SIZE AND DISPERSION

The population of Indonesia has been growing at around 2% per annum for

the last 20 years with a significant movement occuring from rural to urban

areas. While this shift has been far less important than in most other

developing countries, it appears to be accelerating.

TABLE 2

URBAN AND RURAL POPULATION GROWTH

1961 1971 1976

, .

1980..-

URBAN MILLIONS 14.7 20.8 23.3 32.8

URBAN % 14.8 17.4 17.9 22.4

RURAL MILLIONS 84.6 99.0 107 114

RURAL % 85.2 82.6 82.1 77.6

TOTAL MILLIONS 99.3 119.8 130.3 146.8

Source: Biro Pusat Statistik

The density of population and its distribution vary considerably from

area to area. The break-down can be seen in Table 3 below. it should be

borne in mind that Sumatra, Kalimantan and Irian Jaya are all between 3 and 4

times the size of Java, which has only 7% of total land area.

- 10

TABLE 3.

POPULATION DISTRIBUTION 1980: Millions

URBAN %.... RURAL %..... TOTAL PEOPLE PERS9 KM

JAVA 22.9 25.1 •8.3 74.9 91.2 691

SUMATRA 5.5 19.6 22.5 80.4 28.0 59

SULAWESI 1.7 • 8.7 84.1 10.4 55

KALIMANTAN 1.4 20.9 5.3 79.1 6.7 13

NUSA TENGGARA 0.6 10.9 4.9 89.1 5.5 ..

BALI 0.4 16.0 2.1 84.0 2.5 96*

MALUKU 0.2 13.3 1.3 86.7 1.5 19

IRIANJAYA 0.2 18.2 0.9 81.8 1.1 3

TOTAL 32.9 22.4 114.0 77.6 146.9 -

BALI, NUSA TENGGARA, and E.TIMOR COMBINED

Source: Biro Pusat Statistik

The geographical dispersion of Indonesia's population has major impli-

cations for the distribution of goods. Java is traditionally the major

market but the growing prosperity of parts of the outer islands, and the

tremendous potential of Sumatra, in particular, will make it very unwise for

companies to neglect these areas if they wish to gain significant national

market share. The special distribution problems posed are dealt with below.

Unlike most other developing countries, the increasing urbanisation

appears to be occuring on a largely local basis. The three largest towns

Jakarta, Bandung and Surabaya, account for well under 10% of the country's

local population, and the largest thirty towns under 15%. These 30 towns

account for around 60% of the urban population, the remaining 40% being

dispersed amongst thousands of towns with fewer than 100,000 inhabitants.

Jakarta is, by any standards, a large town with around 7.5 million inhabi-

tants, but the next biggest, Surabaya, has less than 2 million. This urban

dispersion is of great significance when penetration strategies are formu-

lated.

Table 4 gives the break-down of population by age and shows a sizeable

bulge in the lower age-brackets. Nearly 30% of the population is below the

Indonesian legal working age - 10. How much this bulge will affect the

demand for goods will depend very much on whether the Indonesian economy

succeeds in absorbing and employing the new work-force. Prospects do not

look too good at present.

TABLE 4.

POPULATION BREAK-DOWN BY AGE 1980

MILLIONS 0,

0-9 42.4 28.9

10-19 32.9 22.4

20-29 24.3 16.6

30-39 16.7 11.4

40-49 13.6 9.3

50-59 8.8 6.0

60-69 4.9 3.3

70+ 3.1 2.1

TOTAL 146.7 100

Source: Biro Pusat Statistik

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2.B. SOCIO-CULTURAL FACTORS

There are at least 300 identifiable ethnic groups in Indonesia, each with

its own language, its own tastes and its own customs, and though the degree

of homogeneity is increasing with increased knowledge of the national

language, Bahasa Indonesia, and improved communications, marketing depart-

ments must still be aware of these differences. Because the consumer is, by

and large, very cautious in his buying habits, changes do not occur rapidly.

Each of the largest population centres, Java, Sumatra, and Sulawesi, has

three main ethnic groups, but the variety elsewhere is extraordinary.

2.8.1. RELIGION

Islam, Christianity, Confucianism, and Hinduism all have adherents of,

ranging degrees of commitment, and Animism still plays an important part in

the everyday lives of most of them. Islam is by far the most important, and

is effectively the state religion though there is complete freedom of

conscience in this area, and many important functionaries and ministers have

been Catholic. The Islamic emphasis is of importance to the business world

for several reasons. Firstly it affects consumption patterns - Lebaran, the

Moslem Christmas, is the principal season for the purchase of most luxuries

and many necessities such as clothes, and sales of many products go down

during the month of fasting. Secondly it affects the sales of such products

as alcohol which are either forbidden to believers or discouraged; the huge

sales of tonic are partly explained by the fact that they contain alcohol in

an acceptable disguise.

Thirdly it restricts the type of promotion which companies can employ:

consumerism is frowned on, and many harmless (to Western eyes) advertisements

have been condemned as leading to moral turpitude, and consequently with-

drawn.

The general belief in the effectiveness of folk medicine and animist

ritual accounts for the huge success of the "jamu" remedies which are

increasingly being commercialised and which are something of a thorn in the

flesh of the foreign pharmaceutical companies.

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2.B2. EDUCATION

The educational level of the population es a whole is not high though

improvements are being made in this respect, especially in the towns. A 1976

Biro Pusat Statistik Survey indicated that of urban heads of households, only

50% had finished elementary school, and 29% junior high school. The figures

for rural areas were 19% and 5%! The 1980 census classifies 14% of urban and

33% of rural population over 10 years of age as illiterate. These figures

are certainly lower than they would be if a western definition of literacy

were applied. Literacy levels vary widely by area with Jakarta listed as 91%

literate while the urban population of East Java is shown to be under 80%

literate. The Jakarta figure is certainly exagerated since there is a wide

discrepancy between the listed and the real population, the difference being

made up largely of illiterate and illicit immigrants. The implications of

these figures for advertising and promotional strategies are considerable,

though for many companies their effect is reduced by the fact that in urban

areas, the top 30% of the population (by educational achievement) consumes

twice as much per capita as the bottom 70% (SRI figures) and accounts for the

majority of non-staple sales.

2.C. ECONOMIC GROUPINGS

Different companies use different classifying systems to define the

Indonesian consumer, and these will vary according to their particular needs.

A company in the luxury end of the cosmetics business is likely to ignore all

but a million or so sophisticated, and wealthy potential customers. The most

intensely researched publicly available classification is that used by SRI

for its 1980 report "The Indonesian Consumer" (which is due to be up-dated

shortly).

It classifies consumers according to monthly household expenditure.

TABLE S

SRI CLASSIFICATION MONTHLY HOUSEHOLDEXPENDITURE

% URBAN POPULATION

CATEGORY A MORE THAN 75000 Rp 26

CATEGORY B 50 - 75,000 Rp 20

CATEGORY C 30 - 50,000 Rp 26

CATEGORY D 20 - 30,000 Rp 19

CATEGORY E 0 - 20,000 Rp 10

- 14-

The expenditure figures would now have to be increased to take account of

inflation, but the system serves as a reasonable basis for understanding

purchasing patterns. Despite regional preferences, the main factor in

purchasing decisions is simply the ability to pay.

Tables 11 and 13 give a reasonable idea of the penetration of various

types of goods in the different economic groups. Most urban As live in

Western-style homes, with electricity, and at least one servant and use a

wide range of packaged consumer goods. One third of Class Bs do not have

electricity, but most live in accommodation similar to that of Class As at a

lower level of comfort and expenditure. Class Cs generally live in much

smaller and more crowded accommodation. They can afford no luxuries, but

more than 50% have electricity and 40%+ have televisions. At this level,

many servants' jobs are done by children, especially the shopping. Class Ds

live in the most basic of "normal" housing, with incomes barely above the

subsistence level, while Class Es are usually in shanty towns and are

concerned simply with survival.

The rural population falls mainly into the D and E categories because it

has so little access to cash, though its lifestyle is likely to be more

comfortable and stable than that of urban Ds and Es because of the existence

of the alternative agricultural economy.

For most manufacturers of consumer goods, urban As are the principal

market with Bs in support and Cs providing the potential for the future.

However, the Indonesian national income will have to rise considerably (and

currently the relevant sectors are in decline) before the large population of

Cs can represent a reachable segment of the market.

For some companies, at the very top end of the market, the potential

clientele may be less than 1% of the total Indonesian population and many

companies in packaged consumer goods consider their real market to be no

greater than 20 million people, mostly concentrated in larger cities. While

many more may buy small quantities of products on an irregular basis, perhaps

for holidays or ceremonies, the hard-core of repeat purchases of anything

which is not a staple requirement is very small. Of course, some foreign

companies sell products which come into the category of essential require-

ments; toilet and washing soap, batteries, and analgesics are good examples.

However, most find that lower-priced substitutes or imitations produced by

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IrWrrnesian competitors have pushed them out of the mass low-income market.

Table 6 shows the % of families falling into each economic category in 6

major cities in 1980.

TABLE 6

% OF FAMILIES BY S.E.S CLASSIFICATION IN MAJOR CITIES

A B C D E

JAKARTA 27 22 27 17 6

SURABAYA 29 17 24 20 11

MEDAN 23 25 30 17 5

SEMARANG 21 15 17 21 25

GALEMBANG 21 20 26 23 10

UJUNG PADANG 17 13 20 20 29

NATIONAL 26 20 26 19 10

Source: SRI Data

Since the average household had five members, 75% of the urban population

was spending at a level below 15000 Rp per month per head ($15). This figure

would be even lower in rural areas.

A 1980 SRI study in Jakarta showed white collar workers as 25% of the

workforce. Of these, two thirds were spending less than 75000 Rp a month and

thus fell into category B or lower. 15% were even in category D. Things

have not improved since the government froze public wages.

The expenditure priorities of people in different areas are shown

clearly in Table 7 below which splits spending between food and non-food

categories. The absolute Rupiah amounts are now very much out of date but

they still give a good idea of wealth differences between areas.

AVERAGE MONTHLY HOUSEHOLD EXPENDITURE BY FOOD AND NON-tOOD IN URBANAND RURAL AREA BY REGION 1976 - IN RUPIAHS

(PERCENTAGE OF TOTAL IN BRACKETS)

VD LJq--4

COCC

URBAN RURAL URBAN AND RURAL

REGION

FOOD NON-FOOD TOTAL FOOD NON-FOOD TOTAL FOOD NON-FOOD TOTAL

Jakarta Raya 28,604.33 26,826.29 55,430.62 - - - 28,604.33 26,826.29 55,430.62(51.61) (48.4) (100.0) (51.6) (48.4) (100.0)

West Java 23,152.69 12,943.26 36,095.95 14,272.96 13,367.96 17,910.92 15,203.87 4,613.49 19,817.36(64.16) (35.9) (100.0) (79.7) (20.3) (100.0) (76.7) (23.3) (100.0)

Central Java 17,133.71 10,657.36 27,791.07 10,854.06 4,196.83 15,050.99 11,474.23 4,834.96 16,309.19(61.7) (38.4) (100.0) (72.1) (27.9) (100.0) (70.4) (29.7) (100.0)

Yogyakarta 21,900.57 17,781.93 39,682.50 9,375.54 4,692.46 14,068.00 11,270.85 6,673.18 17,044.03(55.2) (44.8) (100.0) (66.64) (33.4) (100.0) (62.4) (37.6) (100.0)

East Java 18,044.97 9,171.50 27,216.47 11,096.30 3,181.87 A,278.17 12,004.64 3,964.84 15,969.48(66.3) (33.7) (100.0) (77.7) (22.3) (100.0) (75.2) (24.8) (100.0)

JAVA-MADURA 22,492.66 16,270.29 38,762.95 11,967.28 3;683.21 15,659.49 13,670.17 5,710.63 19,380.80(58.03) (41.97) (100.0) (76.5) (23.5) (100.00) (70.5) (29.5) (100.0)

Sumatra 26,708.80 11,902.29 38,661.09 17,296.30 3,984.97 21,281.27 18,954.77 5,379.99 24,334.76(69.2) (30.8) (100.0) (81.3) (18.7) (100.0) (77.9) (22.1) (100.0)

Kalimantan 26,999.75 9,765.95 36,765.70 22,416.07 6,243.94 28,593.55 23,593.55 7,148.70 30,742.25(73.4) (26.6) (100.0) (78.2) (21.8) (100.0) (76.8) (23.3) (100.0)

Sulawesi 23,564.53 c,162.22 36,726.75 19,867.32 5,100.07 24,967.39 20,495.26 5,789.99 26,285.25(72.0) (29.0) (100.0) (79.6) (20.4) (100.0) (78.0) (22.0) (100.0)

Other Islands 24,011.77 9,706.79 33,718.56 18,402.16 4,528.41 22,930.57 18,850.00 4,941.82 23,791.82(71.2) (28.8) (100.0) (80.3) (19.8) (100.0) (79.2) (20.8) (100.0)

OUTER JAVA 25,936.84 10,754.15 36,690.99 18,617.22 4,575.17 23,192.39 19,850.59 5,616.34 25,466.93(70.7) (29.3) (100.0) (80.3) (19.7) (100.0) (78.0) (22.1) (100.0)

INDONESIA 23,664.16 14,394.04 38,058.20 14,155.34 3,975.88 18,131.22 15,710.26 5,679.50 21,389.76(62.2) (38.7) (100.0) (78.1) (21.9) (100.0) (73.5) (26.6) (100.0)

Source: SUSENAS V/National Socio Economic survey Round V, Jan.-April 1976.

-17-

TW,le 8 shows the same split of expenditure by economic group.

TABLE 10

APPROXIMATE % OF AVERAGE MONTHLY HOUSEHOLDEXPENDITURE FOR FOOD AND NON-FOOD ITEMS

CATEGORY

A B C D E AVERAGE

JAVA FOOD 42 58 70 80 80 70

MADURA

NON-FOOD 58 42 30 25 20 30

OTHER FOOD 67 71 78 80 84 78

ISLANDS

NON-FOOD 33 29 22 20 16 22

INDONESIA FOOD 50 64 74 78 81 73

NON-FOOD 50 35 26 22 19 26

Source: SRI DATA

The very high proportion of spending which is devoted to food in all

but the richest segment of Javanese families gives a good idea of the very

small amounts of income available for expenditure on anything other than

necessities. Of the income spent in non-food areas an average of around

40% goes for housing, fuel, light and water. Until recently tax levels

have been very low at an average of 1% of total expenditure, but with the

radical drop in oil demand and prices, the government, which traditionally

has gained more than 85% of its revenue from this source, is being forced

to turn more to the consumer. The consequence will be higher taxes and

reduced spending power. In addition, the recession has hit many levels of

Indonesian society extremely hard and most are worse off in real terms than

they were two years ago. There has been a virtual freeze on civil service

salaries over the last two years, and this has been used as a lever by many

private sector employers. The wide-scale drop in disposable income has had

- 18-

serious implications for producers of products which could be described as

luxuries, and even the producers of necessities are finding that normallyloyal customers are turning to cheaper substitutes.

TABLE 9

% AVERAGE HOUSEHOLD EXPENDITURE BY ITEM AND S.E.S CLASSIFICATION: 1976

CATEGORY 1000s Rupiah

FOOD & NON-FOOD ITEMS

C=30-50 B=50-75 A=75 + NATIONALAVERAGE

A FOOD

CEREALS & CASSAVA 30% 20% 12% 33%

SEAFOOD 8% 7% 5 6

MEAT 4 6 6 3

EGGS AND MILK 1 3 4 2

VEGETABLES 4 5 4 6

FRUIT AND NUTS 5 6 5 5

WINES ETC - - 1 -TOBACCO ETC 5 4 3 5

PREPARED FOOD 4 4 5 4

MISCELLANEOUS FOOD 11 9 6 10

TOTAL FOOD 72% 64% 51% 74%

B HOUSING AND FUEL

LIGHT AND WATER 9% 12% 17% 10%

MISC. GOODS AND

SERVICES 7% 10 13 6

CLOTHING 5 5 6 4

DURABLE GOODS 3 6 8 3

TAX AND INSURANCE 1 1 2 1

PARTIES AND CEREMONIES 2 2 4 2

TOTAL NON-FOOD 27% 36% 50% 26%

Source: Susenas V

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TABLE 10

PRODUCT PENETRATION

Jakarta

-1311111.122-Total

3,750 100%

Sometimes use - analgesics 3,030 81sweetened condensed milk 2,444 65

powdered milk 941 25

health food drinks 393 10butter/margarine 1,660 44

toothpaste 3,555 95powder shampoo 2,245 60

liquid shampoo 1,255 33talcum powder 830 22toilet soap 3,528 94

hair cream 1,284 35

herbal medicine (jamus) 2,356 63

beer 494 13stout 173 5soft drinks 2,432 65

ice cream 835 22sugar confectionery 1,263 34chocolate 591 16

Sometimes buy - liquid insecticide 843 22aerosol insecticide 158 4liquid detergent 1,773 47powder detergent 889 24seasoning powder 1,600 43cooking oil 1,662 44

Have in the home - television 1,991 53

radio 2,599 69gas cooker 185 5refrigerator 644 17camera 489 13sewing machine 1,951 52electric iron 1,148 31motor cycle 786 21motor car 266 7air conditioner 42 1

Jakartafemales('000s)

Total 1,855 100%

Sometimes use - perfume 590 32lipstick 983 53body lotion 252 14face powder 1,284 69face cream 410 22

Source: SRI DATA

- 21 -

TABLE 11

NATIONAL PRODUCT USAGE BY S.E.S 1979(%)

A B C D E

Toilet soap 99 98 97 95 84

Analgesics 79 83 71 79 77

S.C. Milk 68 71 69 63 48

Soft Drinks 72 69 61 52 38

Ball Point Pens 72 72 63 47 32

Butter/margarine 72 55 52 41 29

Powdered Milk 27 30 31 18 12

Chewing gum 23 19 18 12 8

Stick Deoderant 18 16 16 12 9

Beer 19 21 16 13 9

Hair Spray 16 13 9 7 3

Sanitary Napkins 25 20 14 11 8

Source: SRI DATA

-

TABLE 12

MAJOR CONSUMER CORPORATIONS : SALES BY LOCATION 1980

JAVA 67%(JAKARTA 33%)

(Rest of Java 34%)

SUMATRA 17%

REST OF INDONESIA 16%

A. MILK PRODUCTS F. FILM PRODUCTS

Java 70% Jakarta (& Environs) 40-45%

Sumatra 15% West Java 11%Kalimantan 10% Surabaya 10%

Ujung Pandang 5% Rest of East Java & Bali 10%

Java Total 70%Semarang 6%

B. PHARMACEUTICAL Sulawesi 3-4%

Kalimantan 3-4%Jakarta (& Environs) 34% North Sumatra 10%

East Java 18%

Central Java 15%West Java 10% G. COSMETICS

North Sumatra 13%

South & West Sumatra 10% Jakarta 45%East Java 16%

West Java 15%

C. PHARMACEUTICAL Sumatra 10%Central Java 7%

Jakarta 21% Sulawesi 4%

Rest of Java 49% Kalimantan 3%

All Java 70% Java Total 76%

Sumatra 20%

Other 10%H. SOAPS, TOILET PREPS, FOODS

D. HOUSEHOLD CARE Java 60%Sumatra 15%

Jakarta 15% Kalimantan 7%

Surabaya 15% Sulawesi 5%

Bandung 7% Other 13%

Semarang 7%

Medan 7%Ujung Pandang 3% I. BODY CARE

Palembang 3%

Yogyakarta 3% Jakarta 35%Padang 3% Rest of Java 25%

Other 37% Java Total 60%

Sumatra 25%

Other 15%

E. HOUSEHOLD CARE

Jakarta 47% J. ALCOHOLIC BEVERAGE

Surabaya 18%Sumatra 15% Jakarta 30%

West Java 9% Medan 20%

Central Java 6% Ujung Pandang 12%

Other 5% Menado 12%

Other 26%

-23-

TABLE 13

1980: HOUSEHOLD POSSESSION BY S.E.S. (NATIONAL)

A B C D E

W W W W WA A 4 A A

Electricity 86 71 57 37 26

Radio*

59 68 52 50 37

Television B&W 86 85 59 25 11

Motorcycle 63 39 23 11 5

Electric Iron 69 53 30 13 7

Electric Fan 61 31 17 7 3

Camera 37 11 7 3 1

Private Car 29 8 3 2 -

. _

"Radio possession dropped significantly in 1980 because radio was redefinedin the questionnaire to include "radio only" and not "radio cassette".Probably 90% of households in 'A' and 60%+ in 'E' can receive radio trans-missions.

Source: SRI DATA

*

-24-

2.E. CONSUMER ATTITUDES

The Indonesian consumer is noted especially for his brand loyalty and

for his very keen awareness of value for money. The two characteristics

are linked; because he has so little money to spare, the Indonesian cannot

afford to make mistakes in choosing his brands. Once he has found a brand

of soap, or cooking oil, or toothpaste with which he is satisfied he is

very unlikely to make a change unless offered a much lower price or

conspicuously better performance. Entrenched brands are extremely hard to

shift therefore, and new launches need to be more than simple "me-too"

products if they are to make any headway. This tendency has become even

more evident since the T.V. advertising ban. The price sensitivity of

Jakarta housewives was tested by SRI and the results are shown in TABLE 14.

TABLE 14

PRICE SENSITIVITY

TOTAL A B C D E

I will go out of my way to find acheaper price.

71 60 65 75 80 91

I prefer to buy in a shop I likeeven though the price may be alittle more expensive

28 40 34 25 20 9

I buy brands I like even thoughtheir prices may be a little moreexpensive.

56 79 67 51 39 14

I always buy the cheapest brands 44 21 33 49 61 86

I can save a lot of money bytaking advantage of a special offer

82 76 85 82 87 81

Shopping around isn't worth theextra energy it takes

17 24 15 17 12 16

I am always very careful with mymoney

83 75 83 84 88 86

I sometimes think I could perhapsbe more careful in what I spend

17 25 17 15 12 14

Source: SRI DATA 1980

Established brands do not just sell because of their high awareness and

usage levels though. They have to offer genuine value for money. The

consumer seems generally to be aware of the trade-off he is making in

choosing a given combination of quality and price. A major increase in

quality without corresponding increase in price will tempt him away, as will

a decrease in price without a quality change. Brand-names and image do not

in themselves sell products, but success tends to be self-perpetuating. The

more successful a brand is seen to be, the more stockists will carry it, and

the more customers will eventually try it. But an "as advertised on the

radio" campaign at the point of sales carries little weight. The product has

to perform. While the relative poverty of most consumers ensures that this

is not a market for the most sophisticated of Western products, it is

certainly not an appropriate dumping ground for Western "has beens". It is

said to be easier to sell quality at a reasonable price than trash at a

rock-bottom one. Several prominent Western companies have found this out

rather too late.

It pays to cater for Indonesian tastes rather than simply to pass on

products as formulated for, say, the U.S.A. Soft drink companies were forced

to reformulate many of their products when Tehbotol, a bottled sweet

Indonesian tea appeared on the market and took a massive market share without

significant promotion or advertising expenditure. Unfortunately, there are

sometimes barriers to such adaptation as B.A.T. found when they were forced

by the government to withdraw their clove-flavoured cigarettes. Local cos-

metic companies are taking market share from Western giants on the basis of

specially developed product lines.

3. CHANNELS OF DISTRIBUTION

3.A. THE IMPORTANCE OF PENETRATION

All are agreed that one of the major determinants of sales volume is

penetration, and this is one of the major bones of contention between

manufacturers and distributors, described in Section 4 below. Unless the

goods are on sale, they cannot be bought; that much is obvious, but how to

get them into the outlets is less so.

Geographical considerations are important when considering penetration.

The islands are hard to reach and their populations are not only largely poor

and therefore low consumers, but also scattered over very large areas. Java

has around 60% of the local population, but even though it has a population

-26-

density of 621 people per square km, versus Sumatra's 50, and Irean Jaya's 2,

that population is evenly spread and urban concentrations are much less

important than in most other countries, developed or otherwise. This means

that a very large part of the poulation is hard to reach with direct sales

and merchandising efforts and manufacturers must rely largely on "pull"

through the pasars in the towns to get their product into the countryside.

An Indonesian manufacturer of batteries seems to have decided that his

best way of attacking an established international rival was to sell in areas

considered uneconomic by the latter, and then build from this base with a

price-oriented strategy. This meant pushing van-salesmen, promotional units,

and advertising campaigns deep into the countryside to create the "pull"

effect which would move the goods through the pasar once the blitz was over.

This strategy combined with a low price has paid off handsomely with market

leadership and it was possible at least partly because the local manufacturer

achieved a level of penetration which a foreigner using a distributor found

prohibitively expensive.

Manufacturers have to decide what level of penetration is desirable for

their product, and whether they can afford it. P.T Dunlop have restricted

their penetration to the outlets which serve the very small clientele wealthy

enough to buy Dunlopillo products, and many other successful producers of

"luxury" items can name virtually all the outlets carrying their goods.

Other companies which ideally would like their product to be stocked right

down to street vendor level, are obliged by limited resources to work mainly

through wholesalers and the pasar system in the hope that advertising spend

and product quality will be sufficient to pull their products into the mass

market. However, a retailer will usually prefer a product delivered direct

to one which he has to collect from a wholesaler, even if the prices are the

same, because he is usually alone in his premises and spends as little time

as possible on buying expeditions. The exceptions are the few products with

names of such importance that he cannot afford not to stock them.

Section 3.B below describes retail outlets in Indonesia. Only the

fastest selling, relatively cheap products find their way into all of them,

but the further down the line you can push your product, the greater will be

your sales. Despite the recent arrival upon the scene of Western-style

supermarkets, traditional retail trading pette-ens have changed very little

over the last 30 years and will probably not change very significantly over

-27-

the next ten years at least. A very large proportion of the purchases ma&

by families of almost all income levels are made in and around the pasar or

market on a daily basis.

3.B. TYPES OF OUTLET

3.B.1. The Hawker or tray-boy:

In remote rural areas the hawker may take a wide variety of goods to

consumers with limited financial resources and little access to traditional

markets. He performs a role similar to that of the tinker in Europe in the

19th century and earlier. He may carry medicines, both traditional and

branded, cigarettes, batteries, toiletries and small hardware items, but few

foodstuffs. He gets his supplies from the nearest pasar and is a good

indicator of rural requirements since he cannot afford to carry stock which

does not sell quickly.

In towns the hawkers sell largely foodstuffs and cigarettes either on the

street or going from door to door in most classes of residential areas. They

obtain their goods, sometimes on one day's credit, or on sale or return

basis, from the small stores or market traders. In some cases they are

actually employed by these. They carry very little stock not only because of

their physical limitations but also because they do not have the cash to buy

in quantity. They therefore buy on disadvantageous terms and sell often at a

higher than normal price on the basis of convenience. Margins are extremely

slim and calculated not in % terms but in Rupiah per item.

Soft-drink vendors probably fit best into this category. They will carry

3 or 4 types of soft drink and make anywhere from 90-140 Rps per bottle. The

high margin indicates that this is a luxury item with relatively low sales

volume. Many such vendors work on sale or return, or commission basis, but

the largest of them, those with the best sales areas will receive deliveries

direct from the manuafacturer.

3.B.2. KAKI LIMAS

These are street traders with a regular pitch but without a permanent

installation. They are essentially stationery hawkers but their volumes are

generally higher and they will receive better terms from their suppliers,

small "wholesale" businesses. They sell almost every conceivable item that

is small and cheap and they awe found wherever there is a passing trade.

-28-

3.6.3. WARUNGS

Semi-permanent structures on most street corners with between 6 and 10 ft

of selling space and usually with a wide variety of stock: toothpaste, toilet

soap, batteries, cigarettes, noodles, analgesics, mosquito coils and so on.

The largest of these may be listed by manufacturers and distributors and

receive regular visits from van-salesmen. They cannot afford to carry enough

stock to buy exclusively from this source so they will buy the same goods

from local wholesalers. However, they welcome direct sales because as

one-man operations they can spare little time for purchasing expeditions.

Manufacturers will accept the high cost of selling direct to such outlets

because in this way they can achieve considerable penetration and further

sales pull for their wholesalers. The terms received by warungs depend, as

always, upon the volume of their business, but many receive one or two days

credit (they purchase stock several times a week). Typical margins for such

outlets are 25 Rupiah (2.5 C US) for any purchases between 200 and 800 Rp.

Many make much of their profit from sales of kretek cigarettes in single

sticks which yield a margin of around 20 Rp a cigarette!

3.8.4. THE MARKET STALL

The markets, or pasars, are licensed by government and contain a large

number of regular traders selling, between them, the whole range of consumer

goods, and hawkers with a very small range of items. Many of the stall-

holders are also, in a small way, wholesalers selling to kaki limas, vendors,

and other stall holders. They will buy some goods direct from distributors

and hold suitable stocks for resale within the trade, and some from whole-,

salers. The source depends upon the volume of off-take. The prices within

the pasar are usually very similar to those of the small shops outside, and

the range of dry goods is also very similar though there is a strong emphasis

on fresh food. It is the fresh food which brings the customers into the

pasars often on a daily basis. But once there, they have little incentive to

shop elsewhere for other goods since prices vary very little or not at all.

Merchandisers and salesmen will visit many of the market stalls and for

credit purposes these are treated very similarly to small shops. They are

established outlets. There is a strong Chinese presence in the markets,

mostly at the wholesaling end where their superior acces to credit is a major

asset.

3.8.5. The TOKO

This is a small shop or permanent kiosk usually with 100-150 square feet

of selling space and a tiny store-room. The majority of tokos in major towns

are Chinese owned and run and most of them wholesale at least one range of

goods. For instance a toko owner may sell soft-drinks to local vendors for

15 or 20 Rp less than he sells to the general public; he will often make only

5 or 10 Rps on a wholesale transaction and he is happy with such a margin if

the volume is sizeable. He will take normal margins (still very low) on the

other goods in his range. Credit at this level varies very much from product

to product, ranging for cash sales only for fast moving, low value items, to

several months for high value luxury items.

Because of the very large variety of items usually held, and the small

quantities of each, products tend to be crammed willy nilly onto shelves from

the floor to the ceiling. Display space is very limited and the customer is

obliged to know exactly which item he needs or to ask the shopkeeper for

advice. In the circumstances, no such shopkeeper can afford to stock more

than one or two brands of any but the fastest-selling products and shelf-

-space is at a premium. The shopkeeper naturally wants to stock only brands

with a proven success record and while an advertising campaign may get the

product onto the shelf, unless there is genuine customer pull it will very

soon be off again.

Toko owners will typically receive weekly calls from merchandisers and

salesmen who compete for shelf-space, and the display of point-of-sales

advertising material. The battle is fiercest in this sector of the retail

trade.

3.B.6. TOKO P AND D

This shop approaches the small supermarket in size and range of goods but

uses largely traditional sales methods. It will have a cashier and salesmen

who may not be the owners family members. The arrangement of goods is still

fairly haphazard but larger stocks will be held, and a larger go-down (store-

room) at the back will be the base for a sizeable wholesale operation. This

much larger-scale operation will generally be maintained by higher margins

obtained not from higher prices (it is still in direct competition with the

pasar) but from better credit terms and volume discounts from the

distributor. The fight between salesmen for space and exposure is still

fierce but there is room for more brands in each product area.

3.B.7. SUPERMARKETS

These are defined as shops with self-service and checkout. Many of them

are not much larger than a European corner shop with the same facilities

though there are now several chains with large supermarkets of around 5000

square feet - 20000 square feet mainly in Jakarta. There are said to be 80

or 90 in the whole of Indonesia and expansion since the first supermarkets

were opened 10 years or so ago has not been rapid. They offer lower prices

on many items and significant scale economies on large pack sizes which are

generally not available elsewhere, but their clientele has thus far been

limited largely to expatriates and to families in the higher income brackets

which continue to do much of their shopping in the pasars, with only

occasional visits to the supermarkets. Though one chain has an integrated

operation producing or importing much of what it sells, most supermarkets

make their money in the traditional way - with long credit periods and large

discounts. They still represent a very small proportion of mainstream

consumer goods market, but they are prestige accounts and successful brands,

or would-be successful ones, compete for shelf-space on this basis. Many

manufacturers have large-account merchandisers or salesmen and in-store

promotions are frequently used. This sector is growing slowly but it is a

very long way from achieving the prominence it has in the West.

3.B.8. THE APOTHIK

Is a licensed pharmacy selling all kinds of medicines and prescription or

'G' list drugs. It is run on very much the same lines as a Western pharmacy,

and receives most of its goods direct from the manufacturer or distributor.

It is a prestige account.

3.B.9. TOKO OBAT

A drug-store licenced only for 'W' list medicines (non-prescription

controlled drugs) but actually selling most ethical drugs without

prescription. It will also sell a wide range of cosmetics and health aids.

It gets its ethical drugs under the counter from apothiks or distributors.

It may act as a wholesaler selling low value, high volume items such as

analgesics to tokos and kaki limas.

3.B.10. HARDWARE SHOPS

These are not usually much bigger than general tokos but specialise in

general hardware, tools, paint and building materials. Their sales are

usually made to the public but often via an intermediary such as a craftsman,

or handymand. Most of their products carry extremely long credit periods

(-up to 4 months officially and 6 months in practice) and fairly high

margins, but are slow-moving.

It is impossible to calculate the proportion of sales in each product

area which is taken by each of the different types of retail outlet.

Companies do, of course, keep sales records and they know therefore where

their products go initially. However, since so many outlets act as both

wholesaler and retailer, a product may pass through 3 or 4 hands between the

distributor and the final consumer, minute margins often being taken at each

stage. Common sense indicates that more 40 gram sachets of washing powder

will be sold by tokos and kaki limas than by supermarkets and that the

reverse will be true for 2 Kg bags of the same product. Similarly, that

expensive items will not usually get too far down the chain. However, kaki

limas and warungs in expensive residential areas will sell expensive imported

(smuggled) cigarettes and beauty products.

In 1982, a major cigarette manufacturer's outlet census identified some

350,000 outlets nationwide. Vendors would probably take this figure up to

600,000. They expect to reach 70,000 odd of these and they or their distri-

butors would have records for these. The Jamu (traditional medicine) com-

panies and kretek manufacturers are famous for the depth of their penetration

and it is probable that their customer lists are even more extensive, but

since they see this aspect of their business as their major competitive

advantage they are not prepared to release information on the subject.

3.C. SHOPPING PATTERNS

Some idea of the likely importance of the different sectors can be

gathered from data collected by SRI on the frequency of shopping in the

different kinds of outlet in Jakarta grouped by household expenditure levels;

- 32 -

See TABLE 15. It is clear that all types of households make frequent

purchases from hawkers, markets and small shops. The very high level of

everyday visits to markets is probably the result of the need for fresh food,

but it is certain that many other purchases are made at the same time. By

contrast supermarkets are only rarely visited by even the richest section of

society.

The richer families shop more frequently in almost all the sectors.

Because they have more money to spend and their visits are less likely to be

determined by the proximity of the pay-day, at least when shopping for food

and food-related items. However, there is a highly cyclical purchasing

pattern for all sales of non-food household goods. This is shown clearly by

Tables 16 and 17 below. Because outlets are always cash-tight and cannot

afford to hold unecessary stocks, there is always a rush on distributors at

the very end of each month, which is repeated all the way down the chain.

It is worth noting that the person who pays for goods and will consume

them is not always the one who goes shopping for them. Indeed, in families

of the socio-economic groups which are of most interest to packaged consumer

goods companies this is as often as not the case. Most such families,

certainly those in SRI groups A and B, employ servants and much of the

shopping for routine daily necessities is done by these. Children who take

on many responsibilities in the household from a very tender age, also do

much of the shopping in the poorer families though mainly for minor items

such as cigarettes. This is one of the factors which contributes to the

brand-loyalty of Indonesian consumers and the extreme difficulty of launching

new brands. Those shopping for items commissioned by others are not

susceptible to the influence of point-of-sale material and promotions or the

advice of the shopkeeper. A product has to be of exceptional quality or

extremely skilfully advertised if a housewife is to change her customary

ordering patterns.

-33-

TABLE 15

FREQUENCY OF SHOPPING AT SPECIFIED OUTLETS - JAKARTA

(PERCENTAGE)

HOUSEHOLD EXPENDITURE IN (Rp'000)

,

TOTAL A

OVER 75

B

50-75

C

30-50

D

20-30

.

E

20 &

LESSBase: All households.

FREQUENCY OF SHOPPING

HAWKER:Twice a day * - 1 - - -Every day 13 21 13 11 10 9

4-6 times a week 11 6 12 17 10 5

1-3 times a week 14 14 18 14 10 21

2-3 times a month 5 2 5 5 10 5

Less often 19 12 14 23 26 16

Uncertain 8 7 5 8 11 16

Never 29 39 31 23 23 26

MARKET:

Twice a day * 1 - 1 - -Every day 36 49 39 29 28 354-6 times a week 14 8 8 17 23 9

1-3 times a week 21 13 25 27 21 14

2-3 times a month 10 11 9 10 11 14Less often 11 8 9 12 13 16

Uncertain 3 5 4 1 3 -Never 4 5 3 3 3 14

DRUG STORE/KIOSK:Twice a day - - - - - -Everyday - - - - - -4-6 times a week 1 1 2 - - -1-3 times a week * - - 1 - -2-3 times a month 3 7 5 1 1 -Less often 34 37 32 42 29 16

Uncertain 31 29 36 33 30 21

Never 30 26 25 23 39 60

DISPENSARY:Twice a day - - - - - -Every day * 1 - - - -4-6 times a week 1 1 3 - - -1-3 times a week 1 - 3 1 1 -2-3 times a month 6 12 7 3 2 5

Less often 49 51 49 55 42 26

Uncertain 33 31 36 33 36 26

Never 10 3 3 7 19 4

TABLE 15 (Continued)

FREQUENCY OF SHOPPING AT SPECIFIEDOUTLETS - JAKARTA

(PERCENTAGE)

HOUSEHOLD EXPEND. IN (RP'000)

TOTAL AOVER 75

B50-75

C30-50

,D

20-30E

20 &Base: All households LESS

SMALL SHOP:Twice a day * - 1 1 - -Every day 25 16 24 27 34 22

4-6 times a week 24 18 21 25 28 351-3 times a week 23 22 25 25 22 212-3 times a month 5 6 3 6 7 -Less often 10 16 14 10 3 5Uncertain 6 10 9 3 2 9Never 6 12 3 3 3 9

SUPERMARKET:Twice a day - - - - - -Every day 2 2 - - - -4-6 times a week * 2 - - - -1-3 times a week * - 2 - - -2-3 times a month 3 13 1 - - -Less often 19 17 24 23 14 5Uncertain 9 19 13 5 1 -Never 68 48 60 71 86 95

Source: SRI Marketing Index 1980

TABLE 16

FREQUENCY OF SHOPPING FOR NON-FOOD

HOUSEHOLD GOODS - JAKARTA(PERCENTAGE)

HOUSEHOLD EXPEND. IN (Rp '000),

TOTAL A B C D E20 &

Base: All households. OVER 75 50-75 30-50 20-30 LESS

Sample: 510 117 109 144 117 23

FREQUENCY OF SHOPPING

(FOR NON-FOOD HOUSEHOLD

GOODS)-

Everyday/almost every

day

10 3 16 11 .10 5

Every week 16 18 17 15 15 14

3 times a month 12 9 9 15 13 9

Twice a month 17 16 16 12 28 14

Once a month 33 52 34 29 22 21

Less often 12 3 9 16 11 40

Source: SRI Marketing Index 1980.

TABLE 17

MAIN TIME OF MONTH FOR NON-FOOD SHOPPINGJAKARTA

(PERCENTAGE)

HOUSEHOLD EXPEND. IN (Rp '000)

TOTAL A B C D EBase: All Households. OVER 75 50-75 30-50 20-30 20 &

LESS

TIME OF SHOPPING

1st week of every month 44 61 50 49 22 9

2nd week 2 3 3 2 1 -

3rd week - - - ..• •••• -

4th Last week 4 8 5 2 - 5

Uncertain 49 29 41 46 74 86

Source: SRI Marketing Index 1980.

4. COMPANY DISTRIBUTION NETWORKS

4.A. THE DISTRIBUTOR CHOICE

As has been explained in Section 1.D. above, foreign Companies are

obliged to sell through Indonesian distributors. Very few are satisfied with

this situation though most recognize the validity of the government's argu-

ments in favour of it. The disadvantages of the system are considerable.

Many companies see distributors as absorbing profits but yielding little

added value, thus providing a cost advantage to Indonesian competitors. The

traditional distributor considers that his job is to take orders and deliver

the goods in return for a substantial percentage of the sales price. He

leaves all active selling, promotion and advertising to the manufacturers.

He is not particularly interested in Market share or_penetration, since it is

in his interest to sell only in areas where his order-taking, stockholding

and delivery costs are as low as possible. This means that he will generally

try to deliver as large as possible a proportion of his throughput to the

wholesale trade. It is not at all unusual for 70-80% business to be done

this way, and if he can get the proportion as low as 50%, the manufacturer is

very happy. The distribution trade is largely Chinese dominated, and this is

the way business has always been done in their circles. They are extremely

reluctant to change their selling habits because this is how they maximize

their profits.

The manufacturer, on the other hand, wants to get the deepest and

broadest penetration possible, and, because he does not carry the costs of

this, he doesn't care how expensive it is to achieve. The interests of the

partners are therefore directly opposed in this area, and few manufacturers

believe that their distributors are doing as good a job as they would them-

selves do, if they were permitted to sell their own product to retailers and

wholesalers. In the end, a compromise has to be reached and this is the most

important reason why the relationship between manufacturer and distributor,

and the amount of leverage the former has over the latter are crucial ele-

ments in the success or failure of foreign companies in Indonesia.

The choice of distributors, the numbers employed and the terms of their

employment, are therefore critical to new arrivals and mistakes can be very

expensive. The foreign company can appoint a sole national distributor, and

this may be wise if the product fits well with the latter's portfolio and

-38-

does not overload him thus diluting his salesmen's energies. It also has the

advantage of getting the product onto the market quickly. However, the sole

distributorship has several disadvantages: it gives the distributor a lot of

power since to change systems, while not impossible, is extremely disruptive.

This power may manifest itself in slow payments and poor penetration,

particularly in such costly areas as the outer islands. Several companies

made their manufacturing partners their sole distributors, with disastrous

results, since it was in the partners' interests to ensure that as muchprofit as possible accrued at the distributors', rather than the manufac-

turing, level. With the arrival of 51% Indonesian equity, the manufacturing

companies became cost centres, and the foreign partners lost all revenue.

At the other extreme, Unilever, probably the only company with the volume

and muscle to run such a network effectively, has several hundred

distributors who, for anyone else, would be wholesalers one step futher down

the chain. Such a system is extremely complicated and costly to run, and

implies major credit risks, but it gives the manufacturer tremendous power

and much increased control over sales activities.

In between the two extremes, many companies employ a small number of

distributors, each usually having exclusive rights to a geographical area.

Because all eggs are not in one basket, the manufacturer can exercise a

degree of influence over its distributors, especially if, as is sometimes the

case, they carry the manufacturer's products in exclusivity. A small

management team can keep in touch with events and control the system

reasonably effectively.

4.B. DOWNSTREAM FROM THE DISTRIBUTOR

Section 3.B. describes the types of outlet which carry consumer products,

and gives some idea of the relationships between them. In theory, a product

could pass through at least 5 hands between the factory and the end-user, as

TABLE 18 shows.

I MANUFACTURER

100%

DISTRIBUTOR

25% 70%

55%

SMALL RETAILERS

15%

VVENDORS

% PRODUCT FLOWINGTHROUGH EACH CATEGORY. DISTRIBUTORS

WHOLESALERS

LARGE RETAILERS

WARUNGS AND STALLS

VENDORS

END-SELLERS LARGE RETAILER

WARUNG

VENDOR

5%

V30%

LARGE

RETAILERS

5%

SMALL RETAILERS

5%

VENDORS

100%

70%

55%

50%

16%

35%

49%

16%

-39-

TABLE 18

FICTIONAL COMPANY'S DISTRIBUTION PATTERN

LARGE RETAILERS WHOLESALERS

In practice it is unlikely to go through more than four, since small

retailers will generally get their product from wholesalers, and vendors

from larger retailers or, sometimes, wholesalers. At its shortest the

chain is two intermediaries long. Lengthy chains are made possible by the

willingness of all concerned to take extremely small margins on sales

within the trade. A small wholesaler making a major sale to a retailer may

take as little as 1% on the deal, because he is interested in turning his

stock over, and, often, guaranteeing his quarterly or annual volume bonus.

The length of the chain is one of the major reasons why manufacturers

find it so hard to control prices and product promotions, and to assess who

actually is handling the product. The distributor knows who has taken

delivery of the product but he neither knows,. nor (usually) cares from whom

the end-user will buy it.

Tables 19 and 20 show the distribution chains claimed by Unilever and

the pharmaceutical industry as a whole. The data is not very recent but it

is reasonably accurate. However, the assumption that Unilever's chain

stops with the first retailer down from the distributor is erroneous. Many

small shop-keepers say that for the small quantities they buy they get a

better deal from the local large store or "wholesaler" than they can from

the official distributor. Unilever's "sole agents" operate in areas where

sales volumes do not justify distribution depots.

UNILEVER DISTRIBUTION CHANNELS 1978(Sales: Rp 60 Billion/1977 constant'prices)

FACTORY

DISTRIBUTORS

1.3%

RE-

TAILER

DIRECT

CUSTOMERS2,8%

DISTRIBUTORS

.93.8%

DISTRIBUTORS DISTRIBUTORS

CRE-AILER

RE-TAILER

TOTAL INDONESIAN SALES:.

Via Sole Agents 14.5%Via Distributors 81.8%

Direct Customers 3.2%

Via Employees 0,5%

VIA*EMPLOYEES:

0.1%

DIRECT RE- RE- RE-CUSTOMERS TAILER TAILER TAILER

0.4%

TABLE 19

SOLE AGENTS

5.7%

SOLE AGENTS9.6%

VIA*

EMPLOYEES

0.4%

10: DEPOTS

85.9%

* For example, door to door sales and promotional use.

Source Unilever.

5%

HOSPITALS & CLINICS(Public & Private)($18-19 million)

OTHER OUTLETS($18-19 million)

•

44% 44%

HOSPITALS & CLINICS1Pablic Private)A$140-4 . nlllion)

APOTIK S*($145-150 mil)

TOKO OBATS* & PEDDLERS($145-150 mill ion)

• 0 C:T..

- 42 -

Table 20

PHARMACEUTICAL INDUSTRY DISTRIBUTION

(FY 1979/80 - SALES US$ 370-380 MILLION)

DISTRIBUTOR/WHOLESALER4330440 million)

FACTORY

END USER 1 L END USER92%

END USER D USE OTHER OUTLETS •••••■•■•••••••■••••■••■■■•••••*00.1.1=0...

END USER

* See SeCtion . 7.4 for outlet definitions.

Pharmaceutical Industry; Data Impact. - ck,c)

- 43 -

4.C. MERCHANDIZING

Because the distributors limit their activities in general to taking

orders and arranging delivery of goods, (sometimes doing both at the same

time with van salesmen), it is adviseable for the foreign company to employ

a "merchandizing" team which is, in effect, a kind of parallel sales-force.

This will work extremely closely with the distributor and though merchan-

dizers cannot legally sell, they will often carry the distributor's order

pad, and place orders when they come across low stocks. Indeed some are

effectively van-salesmen carrying stock but placing "orders" through the

distributor.

Their call patterns will usually be coordinated with the distributor's

salesmens' routes to ensure that the largest possible number of clients

receive calls. Their main jobs are to push their products, win shelf

space, place point-of-sale advertising material, both inside and outside

the store, and lastly to provide intelligence on the activities of

competitors, customers, consumers, and their salesmen colleagues.

The merchandizing force is intended to provide both "push" and "pull"

in the market-place. Most important is the "push" aspect because

penetration of the retail outlets is critical to the success of any

product, especially if it is a newly launched one. However "pull" is

generated by point of sale material and promotional activities. One

popular method is the "propaganda" team which takes film-shows and sample

products to outlying areas in order to increase product awareness and

"pull" through the pasars. Merchandizers may well conduct door-to-door

campaigns on behalf of products (these have to be licensed and are taxed)

and get involved in local sponsorship arrangements and competitions.

Since advertising is limited in its effectiveness (see Section 5 below)

the activities of merchandizers are considered by many companies to be the

most important element of their marketing strategy and they employ as many

as they can afford. Obviously the large companies with broad product

ranges, and substantial financial resources, have a major advantage in this

respect. As far as I know, no companies have yet joined forces to share

the costs of a merchandizing team, but such a cooperation might be advis-

able for companies with similar outlets but non-competitive products. The

merchanising system is used, with some variations, throughout the consumer

goods industry.

- 44-

4.D. EXAMPLES OF SYSTEMS

The distribution and merchandizing arrangements of foreign firms vary

tremendously as can be seen from Table 21.

The following examples show not only this diversity, but also how a

company's needs may determine the system it chooses. Each company profiled

is reasonably sure that its system does in fact satisfy most of its needs,

though none is convinced that it could not be improved.

4.D.1. UNILEVER

Huge share of many markets gives the company tremendous financial

muscle. Its network of distributors is so large that it can operate with a

flexibility denied to smaller companies. Its merchandizing force is small

relative to its sales volume for this reason and a great deal of resource

is devoted to market research, test markets, and advertising where its

spend is Indonesia's largest by a factor of 4. It has 13 distribution

depots and and several hundred distributors.

4.D.2. BAYER

Bayer uses a sole distributor with 27 branches, most of which are on

Java. It employs 70 detailers (with supervisors) to push the ethical drugs

which represent 30% of its 15 billion Rp. turnover. However, it employs no

merchandizers to push the remaining 70% of its products, several of which

are market leaders, relying instead on a good relationship with the

distributor to get point-of-sale material displayed. The advertising spend

is heavy. This arrangement is probably only effective for companies with

extremely well established brands.

4.D.3. JOHNSON AND JOHNSON

J and J. sells its consumer products (mainly baby care and pharma-

ceutical) through a sole distributor (P.T. Tempo) which handles many other

well known product ranges as well as its own manufactured products. The

distributor has 19 branches of which only 6 are in Java, so good geog-

raphical spread is assured, and it holds substantial stocks. It sells

-45-

Table 21

SALES FORCE & MARKETING SUPPORT STAFF OFLEADING CONSUMER GOODS COMPANIES (1980/81)

1. UnileverAnnual sales : Rp 60 + billionSoaps, Foods, Toilet PreparationsStaff;

1 Sales Manager - foods & detergents3 Product Managers - foods, soaps, toilet paper12 Area Managers - foods & detergents12 Field Reps - toilet preps12 Depot Managers25 Field Staff - foods & detergents

Research Division:37 Full-time137 Part-time

2. Apparel CompanyAnnual sales : Rp 15 billionStaff : 17 Retail Department

6 Depot Managers7 Distributor Relations17 Merchandising6 Advertising60 Warehousing

100 Field Support

4. Body Care Products Annual Sales : Rp 6+ billionStaff:

1 National Sales Manager2 Area Sales Managers8 District Representatives19 Field Staff

6. PharmaceuticalAnnual Sales : Rp 6.5+ billionStaff:

1 Marketing Manager2 Area Supervisors

114 Field Support

8. Pharmaceutical Annual Sales : Rp 6+ billionStaff:

1 Marketing Manager7 Regional Supervisors

43 Detailers

3. PharmaceuticalAnnual Sales : Rp 3.5+ billionStaff :

1 Marketing Manager1 Sales Manager9 Area Managers32 Detailers19 Sales Promotion

5. Pharmaceutical Annual Sales : Rp 3.5+ billionStaff:

1 Marketing Manager11 Marketing Staff7 District Supervisors50 Representatives

7. Household Products Annual Sales : Rp 3+ billionStaff: 1 Marketing Manager

7 Product Managers5 Regional Sales Managers16 Merchandisers

9. Pharmaceutical Annual Sales : Rp 1.4 billionStaff: 1 Marketing Manager

2 Product Supervisors1 Sales Administrator1 Nat'l Field Supervisor1 OCT Product Manager1 OCT Area Supervisor

26 Detailers

- 46 -

10. Cosmetics & Household Care Products Annual Sales : Rp 4.5 billionStaff:

1 Marketing Manager30 Field Staff8 Promotion Staff

11. Condiments & Confections Annual Sales : Rp 1.0 billionStaff: 1 Marketing Manager

1 Promotion/AdvertisingManager

14 Sales Support Staff

SOURCE: SRI DATA

market, advertise, and merchandize on behalf of local entrepreneurs with

shops exclusively dedicated to their products and often established with

credit supplied by them. Coca Cola's is a low-risk strategy but Bata and

Singer take fairly large risks in trading breadth of penetration forexclusivity.

4.D.7. BAT-AN "IN-DEPTH" EXAMPLE

In 1982 BAT had post-excise tax revenues of 53 billion Rp., and spent

6,5 Billion Rp. on selling and distribution (12%). It has 36 distributors,

16 in Sumatra (65% of sales), 6 in Java (27%), and 14 elsewhere (8%). In

every area, BAT. conducts an annual outlet census covering all except

vendors, and distingishing between wholesalers and retailers, the latter in

turn being classified as key accounts, tokos, or kaki limas 350,000 were

identified in 1981/82. Numbers of salesmen and merchandizers are agreed

with distributors and routes are assigned which will remain largely

unchanged throughout the year. In 1982 this resulted in a national list of

70,000 outlets visited regularly by salesmen and 27,000 by van-salesmen.

Roughly 65% of national sales are through wholesalers, though the

proportion falls to 50% in highly concentrated areas like Jakarta.

In Jakarta, the 1981/82 census turned up 22000 outlets, of which 10000

receive regular visits from merchandizers. There are two key account

merchandizers working by appointment, and around 10 general merchandizers

working with assistants and able to make deliveries of stock. The latter

are either on a 6 weeks cycle, making 35 calls per day, or a 3 weeks cycle

making 30 calls a day on larger outlets. By contrast, the distributor's

sales teams (driver, salesman, assistant) visit only 2,600 outlets but on a

weekly basis making 40-60 calls per day. These outlets also receive

merchandizer calls. The 7500 small outlets receiving occasional batches of

stock from the merchandizers, will buy the rest of their products from

wholesalers since their volume does not justify a distributor's sales call,

or direct delivery of product from depot.

The distributor classification of outlets is shown below.

TYPE OUTLET N° OUTLET VISITED

Wholesaler / Retailer 600Retailer / Wholesaler 620.Retailer (Toko) 1110Hawker (Kaki Lima) 52P+D (Large Toko) 114Hotels + Restaurants 38Supermarkets 38

TOTAL 2605

Relations between the merchandizing team and the distributor salesforce

are fairly delicate. Both sides feel that their business would be helped by

closer cooperation, but communication in Jakarta is fairly difficult and

neither side has time for regular meetings. Hence, both follow their

appointed schedules and rarely coordinate actions. For the distributor's

salesman who receives 25% of his income from commission, any business placed

via the merchandizer is business lost to him (even though it is officially

handled by his employer). There is, therefore, a fairly strong incentive to

ensure that his outlets remain permanently in stock.

The main source of tension between BAT and its distributor is the

inevitable argument over penetration. BAT wants expanded coverage and a

larger sales force, and the distributor wants to keep coverage to a minimum

in order to maintain profits. BAT wants the distributor to merchandize (put

up point of sales material etc.) in areas which are not reached by merchan-

dizers, while the distributor feels that this is a waste of his resouces. In

the end, the companies have to reach a compromise, and their ability to do

this is demonstrated by the longevity of most distributor arrangements. How-

ever, recent losses of market share to kretek cigarettes have eroded the

profitability of the distributor networks and re-negotiation of terms is

constantly requested of B.A.T. Currently, B.A.T. pays its distributors a

quarterly bonus based on a combination of volume of sales and average penet-

ration (presence of product in stores checked).

- 50 -

4.E. PHYSICAL DISTRIBUTION

Indonesia's transport infrastructure is constantly improving, though

companies still have to devote a great deal of time and attention to an

activity which would be largely routine in the West. Java's road system, for

instance, has been enlarged by some 35% in the last 10 years and many areas

are much more accessible than they were. However, vehicle numbers have gone

up by around 300% in the same period, so the roads are a great deal more

congested than they were. The relatively even spread of population compounds

problems.

The trans-Sumatra highway should be completed shortly but nothing like a

true road network exists on the island and the same is true for most other

islands, Bali excepted.

A rail network exists in Java but it is very little used by industry

because it is slow and unreliable and because there are serious damage and

theft problems associated with the increase in handling which use of this

method requires.

Many ports are congested and movements of goods between the islands are

subjected to major delays from administrative and logistical reasons.

Shippers have to allow anywhere from 30 to 60 days for deliveries to the

islands fom Java and, therefore, to maintain stock cover three to four times

as great as those on Java. The implications for working capital are obvious.

Stock-outs are a common problem. Many companies set up what amount to export

departments to handle shipping arrangements.

One extremely important decision for all companies in Indonesia is

whether to handle primary distribution in-house, or whether to sell

effectively ex-factory and leave transport to the distributor. There are

arguments for and against each system and companies operate a number of

variations on them.

One major argument for letting the distributors handle the whole thing is

that making transport arrangements is time-consuming and frustrating. The

other is that a sole distributor based near the production point probably

handles other product lines and has a transport and warehousing network

already set up. Unless the manufacturer's volume is large enough to justify

the establishment of a similar network, he will probably be able to make

considerable savings by allowing his products to be consolidated with the

distributors. However, in this case, he will end up paying for the level of

stock the distributor feels is necessary.

This leads us to the biggest argument for handling transport and ware-

housing in-house - maintenance of control. Availability of stock is

absolutely critical in the light for penetration and shelf-space. Foreign

companies are already handicapped in this fight by their inability to employ

and deploy a sales force. The distributor will try to keep stock levels to a

bare minimum and, because he does not usually depend on one company's product

for his entire livelihood, he does not have the same horror of stock-outs.

Manufacturers are usually more accurate in their predictions of sales trends,

partly because they control the marketing tools and partly because they are

simply more interested.

Companies operate with anywhere from 3 to 15 depots, all based in major

cities or provincial capitals. However, considerable volume is required to

justify such networks and many companies content themselves with maintaining

control of the primary movement and trying to influence the quantities of

stock held by regionally located distributors.

5. ADVERTISING AND PROMOTION

5.A. SPECIAL PROBLEMS

The cultural and economic diversity of the Indonesian population poses

severe problems for the manager hoping to launch or support a product with

the classical unified campaign. Not only do the major ethnic and religious

groups have different tastes and preoccupations, they also have different

languages. Bahasa Indonesian is the first spoken language of only a few

million Indonesians. Though there are some 350 different dialects curently

in use, most consumers come from the larger ethnic groups and the number of

important languages is therefore much lower. For instance, in Java, the

major market, the Javanese (50 million), Sundanese (22 million), and Madurese

(around 7 million) account for 90% of the population. Sumatra is rather less

homogeneous and each of the outer islands is the home of one or more major

languages. Each ethnic group has to be approached individually; For

instance, the Acehnese of Northern Sumatra are well-known for their strict

adherence to Islamic laws which are much less seriously regarded by the

Javanese or Sundanese who are also predominantly Moslem. Radio advertising,

which is of great importance in outlying areas in particular, may have to be

translated into the local language unless it is supporting a prestige product

aimed at a very small group of wealthier consumers.

Fortunately, those Indonesians who are literate, are literate in Bahasa

Indonesian, so the translation problem is not serious for print media. The

general literacy level is creeping up and the figures for major cities are

now quite encouraging. See Table 22 below.

TABLE 24

LITERACY IN BAHASA INDONESIA (%)

Medan 92%

Bandung 89

Palembang 87

Padang 86

Jakarta 83

Yogyakarta 82

Surabaya 81

Ujung Pandang 78

Solo 77

Semarang 71

t.

Source: SRI DATA 1979

These figures should be taken with a pinch of salt, however. The

definition of literacy is very loose and requires only that a few simple

phrases be understood. It does not mean that all "literate" people are

actually capable of, or willing to read more than simple instructions,

headlines, or the simplest of copy on outdoor advertising. While estimates

of children attending no more than 1 or 2 years of primary school range as

high as 50% for rural areas, the urban populations, and more particularly

the higher socio-economic groups, are largely literate now.

The sheer size of Indonesia makes it very difficult for the advertiser to

control his channels. As will be explained below, he does not necessarily

get what he pays for but he has no really effective way of checking on this.

One major tool of marketing departments in most countries is not avail-

able in Indonesia. In April 1981, the government banned all advertising on

television. At the time, television was considered the most cost-effective

way of reaching consumers, and of supporting new product launches in

particular. A major consumer goods company which had to roll out a national

launch without the T.V. support which had been expected, got less than 40% of

the sales indicated by its test-market - an unprecedented shortfall. The two

daily half-hour advertising slots were generally considered to have high

entertainment value and, unlike their western counterparts, Indonesian

consumers did not switch off when they came on. This, popularity may have

been the cause of the ban. Though a full official explanation has not been

forthcoming, the ban is said to have resulted from the President's perception

that advertising promotes a decadent materialism which runs counter to the

rather spartan principles of PANCASILA, the country's official philosophy.

The powers that be frown on any advertising which can be said to arouse

desires or needs which the vast majority of the population will never be able

to satisfy. T.V. advertising, because it reached 'such large numbers, was

very open to such charges. The idea of "creating" a need is anathema. These

principles are also behind the legal restrictions on the amount of adver-

tising copy which can be carried by the print media (described below). While

there is no formal censorship of advertising, editors will not accept any-

thing which they think might offend a ruling elite which operates something

of a double standard in matters of morality. Advertising which arouses

adverse comment is rapidly withdrawn in general.

- 54 -

Before the ban on television advertising, around 70% of total expenditure

went "above the line" (t.v., print, radio, cinema, outdoor advertising) with

below-the-line activities (promotions, sponsorships, competition, point-of-

sales material) taking the remaining 30%. Many experts now calculate 40%

above the line and 60% below. This may seem strange since the figures in

Table 23 below, show total advertising expenditure rising rapidly despite the

T.V. ban.

TABLE 23

ADVERTISING EXPENDITURE INDONESIA

Media 1980 % 1981 % 1982 % (Rp. Billions)

Television 36.0 35 5.9 (3 months)5 - -

Newspaper 21.6 21 54.7 46 61.4 45

Magazine 20.6 20 23.8 20 30.6 23

Radio 10.3 10 20.2 17 23.6 17

Cinema 2.2 2 3.6 3 4.8 4

Other 12.3 12 10.7 9 14.4 11

TOTAL 103.0 118.9 134.84

Source : P.T. Relata Publica

This, apparant paradox is explained by two changes precipitated by the

T.V. ban. Firstly, the flow of funds out of T.V. led to major increases in

the rates of other media and in their costs per contact. Secondly, many

companies found that they were not now reaching their customers and stepped

up their promotional activities to try to fill the perceived gap. In con-

sequence, total spend increased considerably.

However, proportions above and below the line vary very widely between

companies and, indeed, between product lines within companies. A prestige

line may well be weighted 70/30 above/below, one destined for lower socio-

economic groups 20/80, and the company's standard brand 50/50.

-55-

Pharmaceutical companies, which spend up to 20% of their turnover on

advertising and promotion, seem to favour advertising with a 70/30 split.

Major consumer goods companies, spending 10-15% of turnover, are around

60/40. A number of companies spending 5% +, concentrate on promotion with

a split of 30/70.

The evidence points to a link between the size of the overall budget

and the areas in which it will be spent. Advertising is a major expense

and its benefits are often hard to quantify. Therefore, it is extensively

used by those with sizeable budgets, or with products of a prestigious

nature which are not suitable for major "below-the-line" campaigns.

The difficulty of reaching a large part of the market at all is under-

lined by the research data shown in Table 24. The majority of all economic

groups seems indifferent to most forms of promotion though it is fairly

evenly divided on the desirability of a free gift. More than two thirds of

all consumers claim to be unaffected by advertising, though the wealthiest

group seems to be more susceptible.

-56-

TABLE 24

SHOPPING ATTITUDES - JAKARTA (PERCENTAGES)

HOUSEHOLD EXPEN. IN (Rp '000)

TOTAL AOVER

B C D E20 &

75 50-D75 30-50 20-30LESS

ADVERTISING:I prefer to buy products that areadvertised 34 46 32 35 26 14

It doesn't matter to me if a pro-duct is advertised or not 66 54 67 64 74 86

I like to read the ads in news-papers and magazines 27 55 32 13 16 •

I seldom read ads 73 45 68 87 84 95

I sometimes buy products becauseI see them advertised 39 67 42 35 16 16

I never buy things because I seethem advertised 61 33 58 64 84 81

PROMOTIONS:I like products that give awayfree gifts. 32 28 28 30 39 35I don't mind if there is a giftor not 68 72 72 69 60 65

I never take part in gift pro-motions.

60 60 57 55 64 79

I sometimes take part in giftpromotions.

40 40 43 44 36 21

I like to buy goods at promotionprices 28 47 26 20 24 16

I never bother with promotions 71 52 73 79 76 81

I prefer a cheaper product thanone that gives a free gift 58 75 59 54 46 49

I find free gifts very attractive 42 25 39 46 53 51

Source: SRI DATA

-57-

Table 25 below shows a rough estimate of the expenditure breakdown for

several companies and gives a good idea of the variety of expenditure mixes

in different sectors of industry.

TABLE 25

ADVERTISING AND PROMOTIONAL EXPENDITURE

Type Product.

Expenditure as Newspaper Magazine Outdoor Radio Cinema Point Promotion% of Turnover of

sale

Pharmaceutical 18 30 30 15 10 10 5

Baby Care andPharma 5 - 21 3 7 - 30 39

Decoration Products 4 5 20 - - 15 60

Cigarettes ? 30 5 10 10 5 40

Source: Company Interviews

S.B. ADVERTISING

Determining the optimal advertising mix is more of a problem in

Indonesia than in more developed countries because, although there are

estimates of costs per contact, little research has been done into the

effectiveness of the various media for different types of products. Com-

panies tend, therefore, to stick with a standard mix. There is a general

feeling that many advertising agencies in Indonesia act more as media-

buyers than as creative power-houses. However, several major international

agencies are in partnership with local companies, amongst them Lintas,

McCann Erickson, J. Walter Thomson, Ogilvy Mather and Ted Bates, and a

great deal of the advertising material of multinationals originates in

overseas branches of these agencies. This may, or may not, be well adapted

to the Indonesian Market but it is often better than what is produced

locally. Having said that, it is important to note that the expatriate

marketing Manager's idea of a suitable advertising theme, may well be too

sophisticated for en Indonesian mass market whose principle concerns are

reliability and cost-effectiveness.

A great deal of advertising is aimed not at the consumer but at the

wholesalers and dealers whose cooperation is essential in the fight for

penetration. However, companies are aware that unless there is significant

"pull" from the consumer, their products will not be stocked for long, and

however impressive the advertising, the Indonesian consumer will in the end

buy the product which suits him best. Advertising does not then have the

pre-eminent role which it has assumed in T.V. dominated western markets.

5.8.1. NEWSPAPERS

The largest beneficiaries of the TV. advertising ban were the news-

papers whose share of total expenditure more than doubled in 1981. There

are several nationally distributed newspapers of which the largest,

Kompass, has a circulation of 360.000, but a readership of around 1.3

million. Most newspapers are read by at least 3 people. The nationals are

published in Jakarta and the greater part of their circulation is in the

metropolitan area. Each major town has its own regional newspapers with

readerships varying from 20,000 to 400,000 and many of them cater for

separate religions, or ethnic groups.

Newspaper advertising is expensive, at least partly because the papers

are restricted to 12 pages of which only 30% may be dedicated to adver-

tising. Because total readership is low, they are of limited use in a

"pull" type marketing strategy and so companies generally use them for

prestige advertising or to reach the wholesalers and shopkeepers.

Table 26 shows major newspapers, readerships, costs per page and costs

per contact. Penetration estimates are shown in Table 27, and Table 28

shows readership by economic groups in Jakarta.

-59-

TABLE 26

Note: N = Nationwide

R = Regional

DM = Daily Morning

DE = Dail Evening

Source: RT RELATA PUBLICA

PRESS ANALYSIS

1983

Media Characteristics Circ(TOM)

Readership Cos0000

.--11T)('000)

Jakarta:

Kompas N / DM 360 1,295 3,250 2,510

Sinar Harapan N / DE 200 682 2,600 3,812

Merkeda N / DM - 110 311 1,500 4,823

Harian Indonesia N / DM - 50 52 2,000 38,461Chinese

Ind. Observer N /DM - 15 18 1,250 69,000English

Ind. Times N / DM - 40 31 900 29,000English

Suara Karya N / DM - 128 143 1,500 10,489GovernmentPress

Pos Kota R / DM - 115 996 1,750 1,757Jakarta &surroundingespecially CADclass

Bandung:

Pikiran Rakyat R / DM 75 266 1,750 6,578

Semarang:

Suara Merkeda R / DM 120 244 1,650 6,762

Yogyakarta:

Kedaulatan Rakyat R / DM 40 98 400 4,081

Surabaya:

Surabaya Post R / DM 75 388 1,500 3,865

-60-

Medan:

Analisa R / DM 75 130 1,000 7,692

Waspada R / DM 60 166 1,000 6,024

Ujung Pandang:

Pedoman Rakyat R / DM 20 133 500 3,759

1

3750 3835 1324 . 1349 675 688 599 610 . 407 415 397•403

`• -tDmPARION---; «— % tTRATION NEWPAPERREADERSI4IPS..

-(YESTERDAY::*DERs)

WASPADA (Medan')SINAR,INDONESIA BARtisOiedani,PEDOMAN RAKYAY (Ujung Pandang) 26 33

Sourcereaders re

: S R I Data,

* "penetrationone paper" and

defined ascounted-twice,

readership

thusper

theadult in the

percentage maycities surveyed.

be slightly high.There are aders who read more

than

-62-

TABLE 28

YESTERDAY READERS OF NEWSPAPERS BY S.E.S

JAKARTA 1980.

(%)

HOUSEHOLD EXPENDITURE IN ('000)

TOTAL Al A2 B C D EOVER 20

150 75-150 50-75 30-50 20-30 AND LESS

Base: All Adults 3,827 184 866 853 1,051 660 214

1. POS KOTA 25 21 29 30 25 18 11

2. KOMPAS 22 43 40 22 16 7 8

3. SINAR HARAPAN 14 33 27 14 8 5 -

4. BERITA BUANA 5 18 8 5 2 1 1

5. MERDEKA 4 7 7 6 3 1 1

6. PELITA 2 3 5 2 1 1 -

7. SUARA KARYA 2 9 4 2 1 * -, .

Source: SRI Data Media Index Survey 1980.

5.B.2. MAGAZINES

The space restrictions on magazine advertising are less severe than those

for newspapers, but costs are still high. All magazines of significance are

nationally distributed, which can be a big advantage for the harrassed

advertising manager. In addition, advertising can easily be targeted for a

specific audience. The women's magazines are popular for this reason.

However, no magazine has a readership of even 1 million and the socio-economic

groups reached are very much at the top end. Table 31 shows major magazines,

readerships and costs, and Table 32 gives penetration estimates.

The print-media are almost exclusively circulated in major urban areas.

One third of all magazine and newspaper sales are in the Jakarta area, and most

of the rest are concentrated in such cities as Bandung, Semarang, Surabaya,

Ujung Pandang, and Medan. Its effectiveness, as an advertising medium, is

further reduced by the literacy problem. All in all, it is not the way to

reach the mass of the Indonesian population, and it is relatively inflexible

since space must be bought a long way in advance.

5.8.3. RADIO

Radio is the medium which reaches by far the largest audience. There are

more than 20 million radio sets, most of which are inevitably, given the open-

plan nature of most housing, listened to by a whole family. Radio reaches the

most remote areas of the country and, because stations often transmit in the

dominant local language, it is genuinely accessible to all and is relatively

flexible. However, the use of radio for advertising poses certain problems.

The government-owned network, RRI, has the highest listening figures but

there an over 60e private radio stations in Indonesia, most of them operating

extremely weak medium wave transmitters with an effective range of less than 20

kms. There are 40 stations in Jakarta, 20 in Bandung and similar numbers in

all the major cities. The very large number of stations means that achieving

nationwide coverage poses a major organisational and linguistic problem, and

keeping track of your time purchases is impossibly complicated. Many users of

radio are convinced that they pay for many more slots than are actually

transmitted.

-64-

Table 29

MAGAZINE ANALYSIS

1983

Media Characteristic* Published Circ.: Readership Cost CPM

('000) ('000) :Rp.'000) (Rp)

Tempo News Magazine Weekly 98 370 2,700 7,297

Intisari Feature Magazine Monthly 145 755 2,500 3,311

Femina Women's Magazine Weekly 130 884 2,450 2,771

Kartini Women's Magazine Fortnightly 187 790 3,000 3,797

Eksekutif Magazine for Monthly 22 38 1,000 26,315

Executives

Mobil Motor Automotive Fortnightly 25 73 600 8,219

Magazine

Gadis Teenager's

magazine

Fortnightly 75 792 1,575 1,988

Hai Teenager's

magazine

Weekly 50 94 700 7,446

Bobo Children's Weekly 160 346 1,150 3,323

Magazine

All magazines are circulated nationwide.

Source: PT RELATA PUBLICA

- 65 -

Table 30

1980 LEADING JOURNALS (YESTERDAY READERS)

('000)

TOTAL JAKARTA SURABAYA MEDAN SEMARANG PALEM-

BANG

UJUNG

PANDANG

7300 (%) 3835 (%) 1349 (%) 688 (%) 610 (%) 415 (%) 403 (%)

(WEEKLYPAST WEEK

READERS)

KOMPAS MINGGU 625 9 516 14 27 2 10 2 31 5 40 10 23 6

SINAR HARAPAN

MINGGU 494 7 428 11 21 2 5 1 11 2 14 3 15 4

TEMPO 311 4 200 5 43 3 24 4 16 3 12 3 16 4

BUANA MINGGU 287 4 233 6 24 2 2- 4 1 21 5 3 1

BOBO 258 4 125 3 32 2 44 6 20 3 24 6 13 3

(FORTNIGHTLY -2 WEEKS READ-

ERS)

FEMINA 739 10 418 11 144 11 57 8 40 7 37 9 43 11

KARTINI 666 9 408 11 132 10 29 4 44 7 27 7 26 7

GADIS 661 9 397 10 118 9 33 5 35 6 40 10 38 9

(MONTHLY -PAST MONTH

READERS)

INTISARI 594 9 361 9 113 8 33 5 29 5 36 9 22 5

Source: SRI Data.

- 66 -

However, Indonesian radio time tends to be so cheap that it is not worth most

companies while to look too closely at this aspect of the service.

Rates for the major stations in several cities are shown in Table 31

below. Radio tends to be more popular with the lower economic groupe but a

certain amount of targetting can be achieved by concentrating on stations

with the desired listener profile. Some research has been carried out in

this area.

- 67 -

TABLE 31

RADIO ANALYSIS

1983

Station Listeners Cost/30' CPM"NTT)("000) (Rp)

Jakarta:

El Shinta 103 4,000 0.038

Prambors 55 1,820 0.033

Bandun•.

Mara 39 1,500 0.038

Garuda 56 1,050 0.018

Semarang:

Radiks 26 750 0.028

Gajah Made 6 750 0.125

Yogyakarta:

Reco Buntung 37 2,000 0.054

Arma-11 11 .4,000 0.363

Surabaya:

Merdeka 81 2,000 0.024

Suzanna 72 1,200 0.016

Medan:

C. Buana 36 525 0.014

Alnora 24 750 0.031

Ujung Pandang:

Gandaria 23 1,20n 0.052

Telstar 21 600 0.028

Source: PT RELATA PUBLICA

-68 -

5.B.4. CINEMA

A number of companies still use cinema advertising but it has fallen out

of favour with most for several reasons. It is expensive, costing between 5

and 40 Rp per contact (depending on the prestige of the theatre) in addition

to the cost of the film production. It requires considerable organization

for relatively low viewing figures. Lastly, companies are generally very

doubtful about the reliability of promises of showing frequencies. However,

around 10% of urban adults still go to the cinema each week and it does now

present the only remaining opportunity for filmed advertisements.

5.8.5. OUTDOOR ADVERTISING

Billboards are the main form of outside advertising, but companies can

either rent space on pedestrian bridges and bus-stops, or build them in

return for free use of the space for a fixed period. Buses and special

promotional vehicles are also used.

This is the least flexible form of advertising. Contracts ar usually for

between two and five years' use of a space, payable in advance. It is hard

to get accurate information on typical rates since these vary tremendously

from site to site and city to city. A prime 6 x 8 poster site in the centre

of Jakarta may go for 50 million Rp for 3 years and an overpass on one of the

express-ways for between 100 and 250 million Rp. per side for 3 years. It is

hard to estimate how many of those who pass look at them.

Because there is no registration system and no coordinating body or major

site-owner, you have first to find out who owns which site (not easy) and

then negotiate each contract individually. This system may be acceptable for

the largest and most prestigious contracts, but it is extremely

time-consuming when it is applied to the 1/2 million Rp sites on a

nation-wide basis as well.

Contracts are payable in advance and companies have no guarantee that

their poster, or indeed its site, will still be standing even one year into

the contract. There are numerous stories of companies finding their posters

covered by those of a competitor on the rare occasions on which they have the

time to conduct an audit. One company discovered through such an audit that

only 14 of 20 contracted bus-shelters actually existed!

-69-

Despite the drawbacks of the method, few companies in the consumer

products area feel able to neglect outdoor advertising, and poster campaigns

form a major part of advertising agencies' work.

5.C. PROMOTION

Marketing departments in Indonesia have great difficulty in reaching the

consumer and creating "pull" for their products. We have seen that since the

ban on T.V., advertising effectiveness has greatly diminished and coverage is

patchy at best. A great deal of time, ingenuity and money have therefore

been devoted to the promotional area.

The principal tool for most companies is the merchandizing force which,

while unable to make actual sales, ensures that retailers and wholesalers

carry stock, promotes new brands and special offers, places point of sale

material and acts as a source of valuable marketing intelligence. The

merchandizers are covered separately in the section on Distribution Systems.

5.C.1. POINT-OF-SALE MATERIAL

This is generally considered to be extremely important since it may be

the only real chance a company gets to influence the purchaser. At its

simplest level it consists of advertising calendars, leaflet distributors,

cardboard display stands, and at its most expensive level, whole shop

frontages may be decorated with advertising material surrounding the

shop-name. Depending on the complexity of the sign, a sponsoring company

will pay part or the whole cost, or even sometimes a premium. A major

tobacco company has some 1700 of these. Companies will also provide

tailor-made cabinets for their products which are often very expensive to

install, but which guarantee a certain amount of valuable shelf-space,

provided that merchandizers ensure they stay filled. There is fierce

competition between companies for point-of-sale display space in the more

desirable outlets and the more frequent the merchandizer's visit, the more

prominent the display is likely to be. However, as pointed out in Section

3.C., all the displays are ineffective for the large part of the consumer

population which does its shopping through intermediaries - servants or

children.

-70-

5.C.2. "MONEY-OFF" PROMOTIONS

These are usually only used where very tight control can be exercised by

the manufacturer. The problem is that the shop-keeper does not expect such

offers to lead to an increase in total sales, merely, and even that is

doubtful, to brand-switching. This is because few people can afford to buy

more than their normal amount at any one time. Therefore, if the money-off

offer gets as far as him, the dealer is likely simply to pocket the extra.

However, it will frequently be absorbed as extra margin by the distributor or

wholesaler and never reach him. Supermarkets are the exception to this

general rule.

5.C.3. FREE GIFTS

These seem to have fairly little effect on buying patterns, though they

are often welcomed by the customer and help re-inforce brand-loyalty. There

have been cases of shop-keepers charging more for packs with gifts attached!

5.C.4. COMPETITIONS

These can be very effective in terms of overall response though the

effect on sales is hard to identity in many cases. The trend is for many

small prizes rather than one large, though one manufacturer of a premium home

decoration product has had startling success with a "win a dream home"

competition aimed at the Tukangs, skilled labourers who do much of the actual

purchasing of their products. They got 260,000 entries from 300,000 forms

sent out, an 87% response rate which compares very favourably with the 5-10%

typically obtained in Europe.

5.C.5. TASTINGS + TRIALS

These are increasingly popular because they allow the manufacturers to

attack one major barrier to brand-switching and successful launches of new

products. People are reluctant to buy what they have not tried because they

cannot afford the luxury of a mistaken purchase in any but the highest-income

groups. Mail shots have not been extensively used for this purpose but

supermarket tastings are a proven success and door-to-door methods have been

used.

- 71 -

Trials may be associated in rural areas with visits from the companies

"propaganda" units showing promotional films. Such methods are often used to

encourage consumer "pull" through the local pasar in areas which do not

justify a visit from the rural merchandizing teams or distributors' reps.

They are popular with Jamu and unlisted drug companies and are rather similar

to the old medicine shows in the West.

5.C.6. SPONSORSHIP

Many companies sponsor football teams and matches, motor races and other

sporting or cultural events which give them visibility while associating

their products with worthy causes. These are usually arranged on a local

• basis.

5.C.7. TRADE PROMOTIONS

Given the uncertain nature of results from cosumer promotions, many

companies prefer to devote their promotional money to the "push" effect and

try to ensure that they achieve maximum penetration in the retail trade. The

objective is usually more to gain retailer loyalty than to achieve specific

sales increase; however, many bonus deals are tied to sales results over a

lengthy period. Prizes may be offered for the achievement of sales targets,

and at wholesaler and distributor levels these may be considerable. Some

companies offer special deals intended to even out the lop-sided monthly

sales-pattern. Lotteries, free gifts, and 3-for-the-price-of-two type offers

are common especially in association with new product launches. While

expenditure figures for this area are not available, it is almost certainly

higher than expenditure on promotions at the customer level.

6. MARKET RESEARCH

Only one or two companies in Indonesia are large enough to support market

research teams of significance, and even they use outside help on occasions.

Several highly professional market research organizations offer many of the

services that a marketing manager would expect to buy in the developed

countries. They will conduct attitude, awareness, and intention-to-buy

surveys for individual products, as well as more general investigations into

buying patterns. Market share estimates for many manufacturers have to be

extrapolated from storecheck data which reveals depth of penetration and what

-72-

products are sold in what quantities over a sample of outlets. There is no

specialist agency providing consistently accurate market share information,

mainly because the market is so wide and varied that the costs of collecting

such information would be too great to be borne by the relatively small

number of interested companies.

7. PRICING

Pricing is obviously one of the major marketing tools, and it is no less

important in Indonesia than in more developed countries. Indeed, the

price-consciousness of the typical Indonesian consumer is such that getting

the product to him at the right price is often the manufacturer's major

objective. Table 14 above shows why this is so. All Indonesians but the

very rich are acutely aware of the comparative cost-efficiency of competitive

products and will substitute without hesitation if the prices of their

preferred brands become significantly out of line. Very few have cash to

spare for anything but the daily necessities and the occasional hard-earned

and much anticipated luxury.

Most manufacturers sell their product throughout the archipeligo at the

same price though a few charge a supplement for the outer islands. This

means that widely differing transport costs are averaged across all

purchasers and, in effect, that those nearest the production points are

penalized with a higher price than their location warrants.

This standardized pricing is considered desirable for several reasons.

Firstly, the government wishes to encourage migration to and commercial

activity in the Outer Islands and feels that a higher cost of living tends to

discourage both.

Secondly, companies are also anxious to develop markets outside Java. So

long as one charges a national price, the others are obliged to follow suit,

and artificially low prices are seen by them as reducing the threat from

lower-cost local production. It can be said that it would be in the interest

of mavericks to sell only in Java and thus price lower for this crucial

market in order to gain share. However, the total of the outer- islands

service is not so great as to prevent most companies from lowering Javanese

prices if necessary. In this respect, the declared policy of Unilever, which

has the dominant share of several markets, helps to maintain pricing

stability.

-73-

The third reason for national pricing is perhaps most important for the

foreign manufacturers. Most grant exclusive rights to geographical areas to

their distributors. If they sold product to them at a price including the

true cost of delivering product by conventional means, they would certainly

find the product being sold in the pasar at cheaper prices, having by-passed

the official network. The margins taken by wholesalers and traders are so

slim that a very minor difference in transport costs is sufficient basis for

an unofficial trading system to spring up. Such a difference exists between

the costs of sailing vessels by-passing administrative controls and those of

normal trading vessels. Even in Java, differences e*ist. A pasar trader in

Surabaya, for instance, might well have an illicit arrangement for movement

of goods with a lorry-driver travelling regularly from Jakarta. The

• consequences of all this are likely to be disgruntled distributors and

wholesalers and sales records showing unrealistically high sales in one area,

and impossibly low sales in another. This in turn can disturb allocation of

promotional and advertising expenditure and merchandizing personnel.

There are no legal restrictions on the pricing of consumer goods, though

there are very strict controls on basic commodities. Drug companies are

finding that price does become an, issue when they wish to register new

products. Market leaders also find that during periods of inflationary

pressure, the government will make it very clear that price increases are not

acceptable; it is difficult for foreign companies to resist this kind of

pressure.

Cigarettes are supposed to be sold at the price indicated on the bandroll

or excise stamp. However, street vendors will often ignore this rule and

hotels and restaurants have special dispensation to sell at higher prices.

The problem for tobacco companies is reduced flexibility because the bandroll

stickers come in specified denominations, the steps between which often don't

fit company plans, and because the obtaining of authorization for price

changes can be a slow and cumbersome process.

Most foreign companies find that it is hard to use pricing as a marketing

tool because they cannot directly determine the prices at which their

products will be sold to the consumer. For the retailer, be he supermarket

or street-vendor, the list price is a point of departure. He will offer a

discount or charge a premium if his competitors are doing the same; his price

does not necessarily reflect the cost of the goods to him - he will take as

- /4 -

much margin as he can. The foreign company sells product to a distributor

and if it wants to raise or reduce prices in the market place, it can only do

so by increasing or decreasing the discount it offers him. The distributor

will probably only pass the discount on down the line if he is convinced it

will increase his throughput. However, even if the company manages to

control its distributor it is very unlikely to be able to influence the

actions of the wholesaler and retailer and evidence suggests that these will

usually absorb price reduction as additional, windfall margin. If, in their

judgement, the market will not stand a price increase, they will often accept

reduced margins to absorb their cost increase. Most traders consider

stability of price to be extremely important in retaining their customers'

confidence and they do not like frequent fluctuations. They also require

considerable notice of price increases and expect to take delivery of as much

extra stock as they can finance to cushion the change. However, rumours of

shortages will cause immediate and dramatic price increases.

Because there are so many outlets for most consumer goods and the

awareness of price is so high in consumers, the Indonesian retail trade is

very nearly in a classical state of perfect competition. Extremely slim

margins are taken both at retail and wholesale levels and the relative ease

of entry to the trades via pavement stalls ensures that nobody does much more

than cover his financing costs and earn a bare living. In the area around

any given pasar it is extremely hard to find any variation at all in the

prices of commonly used goods regardless of the types of outlet selling them.

The supermarkets are an exception to this rule but much of their trade is

done in pack-sizes which are too large for the average consumer.

In Indonesia the "economy" size is not the jumbo pack which provides

product at a cheaper price per gram but the lowest-priced pack, which is of

course, the smallest. The highest unit sales of any detergent powder pack

are achieved by the 40 gram pack which sells for up to 125 Rp. This is

because few consumers can afford to pay 1400 Rp. for 2 kg of powder even

though the per gram cost is almost half that of the small packet. For the

same reason, single kretek sticks will sell at a premium of 50% over the

packet price. However, buying patterns are now shifting slightly towards the

larger pack-sizes as the "middle-class" expands and supermarkets become more

common. In the final analysis, the manufacturers main concern is to ensure

that he can produce at a low enough cost to provide the level of discount

which will get his product to the consumer at the desired price.

- 75 -

Table 32 below shows the amount of margin taken at different levels for

different types of product. All are, however, presented to the market as

premium products and may therefore sell at slightly higher than standard

margins. It is noticeable that the wholesalers work on extremely slim

margins and in fact they quite often use premium products as loss-leaders.

Margin taken at all levels depends to a great extent on the size of purchase

and the credit-terms offered. Basically, the bigger the purchase and the

shorter the credit, the lower the price.

Table 32

TRADE MARGINS

TYPE PRODUCTRevenue

ManufactuerRevenue

DistributorRevenue

WholesalerRevenueRetailer List Price

Premium Decoration : 75 86-90 90-92 95-100 100

Premium Bedding : 70 95 - 100 100

Cigarettes : 85 91 95 100-105 100

Personal Hygiene : 66 80 85 95-100 100

Camera Film : 80-90 - 85-95 95-100 .100

Source : Company Interviews

Some pricing arrangments are enormously complicated as a result of

volume bonus arrangements. One foreign company sells to its distributor at

24.5% off list price. The distributor sells at a discount of 7.5% off

list, usually with a further 2.5% after 3 months, and an annual volume

bonus which can be up to 4%. The distributor's margin may therefore vary

from 10.% to 17% off list with 3 months use of 2.5% of this and up to a

year's use of 4%!

The margins taken by the distributors will, to some extent, depend on

the way they do business. If they undertake transport ex-factory, and hold

high stocks in their depots as a result, they will take a larger percentage

than if they accept weekly deliveries from regionally located manufac-

turer's depots.

-76-

8. CREDIT

It is not at all surprising that in a country as cash-tight as Indonesia

credit has become a marketing tool of some importance. For the small

retailer, the length of credit obtainable from wholesalers or distributors is

a crucial factor in his decision on which products he will stock. Though the

,critical factor for the wholesaler is reliability of his customer and the

quantity of his purchases, he will often pass on credit he receives forspecific product lines. The extension of credit can therefore help a

marketing manager achieve penetration.

The existence of the distributor insulating it from retailers and whole-

salers makes the use of this tool very difficult for the foreign company.

The distributor usually takes on the credit risk in a market where credit

control is notoriously complicated and while the foreign company benefits

from this, the cost of the service is effectively included in the % taken by

the distributor.

The dominance by the Chinese community of the distribution business is

often attributed, amongst other factors, to their ease of access to credit

and financial resources. It is a tight-knit community and in some senses

could be said to operate a closed economy within the national economy. Most

Foreign companies in Indonesia find themselves dealing with Chinese partners

who are at least as interested in the cash-flow potential of a distributor-

ship as in its apparent profitability, and so negotiation of credit terms,

and subsequent control of credit taken are extremely important. It is very

difficult for a manufacturer to get a sole distributor to pay any attention

to contractual credit limits and actual credit taken will often be more in

function of the distributor's cash needs than any contractual agreement. One

manufacturer has 90 days in the contract, and is satisfied if credit does not

exceed 180 days, despite the fact that its distributor enforces 120 days at

the wholesale level. The distributor carries very little stock and is

therefore getting nearly 2 months free use of all sales revenue. In this

particular case, the manufacturer has been forced to accept credit risk on

wholesale purchases, despite the fact that it has no say in sales decisions.

- 77 -

The government has recently granted tax exemption on the interest from

bank deposits and some companies have even borrowed money from the bank,

taken the tax benefit on the interest payable, redeposited their loan and

pocketed the differential percentage. The general interest in remaining as

cash rich as possible is entirely understandable under the circumstances.

Credit terms may vary very widely from industry to industry and between

the different levels of the distributor chain. The amount of credit granted

is to some extent dependent on the manufacturers' physical distribution

system. One with depots all around the country will not expect its

distributors to carry much stock and credit terms will accordingly be short,

while one which delivers to distributors around the country direct from the

factory may have to finance large stockholdings - particularly in the outer

islands where transport delays force high stock cover.

In the fast moving, relatively low value sectors, credit terms are

usually fairly tight. Tobacco and packaged goods typically are sold for cash

or 2 to 3 days credit at the small retailer end, and 2 weeks credit at the

wholesaler or large retailer level (with the distributor receiving 1-2

weeks). Most pharmaceutical distributors offer around 50 days credit to Toho

Obats and Apothiks, but considerably less to smaller general shops. They

expect to break even on credit, receiving from the manufacturer enough credit

to cover stock and credit offered.

One major general distributor carries the cost of nearly 2 months credit

since it gets 45 days from a manufacturer of baby care products, but offers

an average of 24 days to customers and has stock cover of 2 1/2 months.

However, it covers this with a relatively high margin. It offers up to 2

months credit but 60% of sales are for cash (which for the distributor means

a cheque post-dated 14 days in many cases). Post-dated cheques are a

frequently used method of ensuring that credit limits are met.

A cosmetic company gives its distributor 60 days to pay even though sales

are made on a maximum of one month's credit. A bedding manufacturer offers

3% cash discount, or 30 days, but has an average debtors of 30 days because

those taking credit average 60 days.

-78-

Thus, at the retailer end, credit ranges from from zero to 120 days,

distributors get betwen 15 and 180 days. There is no hard and fast rule for

any sector except that almost everyone takes more than he is strictly

entitled to at the higher levels. Essentially, the time value of money is

extremely clear to everyone in the Indonesian business world and, in general,

the cost of doing business in any particular sector should be even between

competing firms (provided that contract negotiators do their job). This is

because low margin means high credit and low credit high margin. It is also

fairly generally true that credit terms are lowest in sectors when

competition is heaviest - analgesics are a good example of this effect.

There is extremely little consumer credit, hire-purchase being almost

unknown. Something under 5% of the consumer durable trade is on installment

terms with the sales agent being responsible for collecting regular payments.

Payment by cheque or credit card is extremely rare in the packaged consumer

goods field.