Welcome to Indonesia Digital Deconstructed, where we break apart and dive deep into the different parts of the Indonesian Tech scene to get an insider's look into how each space is evolving. Leveraging off our research, proprietary insights and working with leading entrepreneurs will bring you the insider's view of the industry as we navigate our way around one of the world's fastest growing tech scenes.
Welcome back to IDD. Each year, Bain & Company releases a comprehensive list of what it calls Insurgent Brands, defined primarily as high-growth independent local consumer brands not owned by a multinational corporation. They compete head on with the market's largest incumbents or create new categories for themselves altogether. Indonesia is predicted to be the world's fourth largest economy by 2045. Estimates suggest its GDP per capita could
reach $7,500 by 2030. When you put these ingredients together, you end up with a market where disposable incomes are set to explode and inevitably fuel the growth of consumer sectors like wellness, luxury goods, cosmetics, beauty clinics and more. With us today to discuss is Melina Anlin, VP of Investment at AC Ventures, a former senior manager at Bain in Indonesia and an expert on the rise of local insurgent brands.
It is my great pleasure to introduce my friend and colleague Melina Anlin, VP of Investment at AC Ventures. A big part of what Melina has been doing recently is understanding the investment opportunities in Indonesia's fast growing consumer sector.
For those who may not already know you, can you just share a very quick primer on your background and how you came to be so involved and entrenched in the consumer space obviously looking for investment opportunities, but can you just kind of give us the abridged version of how you got from point A to point B?
I'm quite fortunate to start my career at Bain and company here in Southeast Asia. I was part of the private equity team and a lot of the work that I did was looking into businesses, more of the traditional businesses in Southeast Asia and Indonesia. It's kind of like fortunate that the type of companies that I happen to look at in my first few months of my Bain career happens to be in a consumer and retail sector.
My own personal interest and passion as well, I understand a lot of consumer-facing companies always intrigues me and interests me on how consumer behave at different income segments as the country gets more developed, how do consumers in Indonesia and Southeast Asia get influenced by Western culture, Korean culture, or different type of culture into their consumption behavior.
When I got into AC Ventures, I was also quite lucky that I'm able to cover the space and have this sector as my core area of focus. I mean, it sounds like you definitely have your work cut out for you because coming from Bain, I'm sure you're familiar with the term insurgent brands.
So in this market, I think we're definitely seeing a lot of those pop up, but in addition to that, I think you're kind of at a very interesting nexus because Indonesia is predicted to be the world's fourth largest economy by 2045. It will grow consistently between 5% and 6% annually in terms of GDP. Meanwhile, domestic consumption accounts for around 59% of the country's GDP and the IMF recently clocked the nation's GDP per capita at about $5,000.
And then estimates suggest that it could reach as high as $7,500 by 2030. Does all that data track with you or am I off the mark? I know that you have all these numbers floating around in your head. Yeah, no, no, no, it definitely tracks the mark, right? And you know, a lot of what you said is true. Indonesia consumption accounts for almost 60% of the country's GDP that clearly shows that Indonesia is a consumer driven economy to begin with. And that what makes the sector interesting.
And the second layer to that, like as you're writing pointed out, I think that our GDP per capita now at 5.5K USD is kind of like at the point of infection. Where it's just going to accelerate further into the future, reaching, you know, if you take a 5% kegare and every single year is probably going to reach about 7.5K as you were being pointed out by 2030. But some sources out there also have a more optimistic and aggressive estimates that it could reach up to like 10K USD per capita.
So we're going to start to see that a lot of the sub sectors of consumers in Indonesia in terms of like the consumer spending for the sector and the market size for a lot of the different sub sectors is just set to explode in the next like 2 to 5 years. And that that's actually what's really exciting about looking to the consumers base and finding it as an opportunity here. Malina, let's talk about FNB because I know that this is something that you have been focusing on quite a bit in your work.
So how do the insurgent brands and the FNB space stack up against the incumbents in general, what are your thoughts on FNB consumer in Indonesia today? Yeah, so you know, interestingly, I think in my previous life that being a lot of the consumer brands, including FNB brands that I used to look at belongs to the legacy players in this region.
And I think a lot of the new and up and coming so called insurgent brands that I looked at this part of my life at ACB is the insurgent brands and the challenger brands that is, you know, coming out with different product narratives, product values, brand values and brand ethos that is going to try to either disrupt the market that the legacy brands have a stronghold in. Or in another way is they're trying to be a category maker in the new category that we haven't seen in Indonesia before.
So there is a lot of dynamics here that we can unpack, but I think the first one is, you know, in FNB, I like to think of it about like two things. One is the package FNB products, more like FNCG type that you will see in modern trade retailers like supermarkets or the GT of my distributors. Another type of FNB is actually that chain restaurants that, you know, people go out and consume. So let's talk about the first type of FNB in the first place, which is the package products.
There's a couple of angles. One is how, how do they make sure that they have a unique brand positioning that could actually communicate in a more direct way and a more authentic way with the consumers today and of tomorrow. That means that not only the millennials and the Gen Zs that we're talking about these days, but also the next wave or the next pocket of consumers, which is the Gen Alpha.
So they're trying to find ways to even target, you know, consumers as young as, you know, teenagers, right, or we're still in little school or we're still in high school. And trying to find ways that connect with them in terms of the brand value whether it's more on the ethical sourcing angle or in a more like a health conscious type of raw materials and goods to begin that in in terms of how they market and how they sell their products.
So this is something that I feel that the insurgent brands in the individual and Southeast area that we have seen is doing in a much more authentic way than what the legacy brands are doing and the legacy brands here includes the local conglomerates as well as the international and the sea brands in the space.
So that's one angle. I think the second angle is the way that this insurgent brands are penetrating the market. The legacy brands typically have a strong football and have a advantage in terms of having a leadership in the offline distribution channels whether it's both more than trade or the traditional trade channels where they already have a very wide and massive distribution skill in terms of POS point of sales that they are present in.
But typically a lot of these legacy players are not strong yet in terms of the online channel and how to communicate and sell products to the online consumers. And where I think this is playing field could potentially be leveled is that a lot of those gen brands are able to sell like really quickly and market their brands like really quickly through online marketplaces and e-commerce platforms and a very very minimal cost.
And the type of digital marketing and online marketing that they do is dynamic and we could always adjust it according to the target consumers, like the one according to like different algorithms such that you know compared to the legacy players, they do not necessarily have to spend a ton of money on like the traditional type of marketing on TV ads or like billboards.
And this gives a lot of the Instagram brands like a fighting chance to get their brand out there to get their brand to be top of mine to a lot of consumers. Getting the consumers to try and purchase them through online channel thanks to the digital infrastructure that Indonesia already has today. So it kind of like gives them like a celebrated week to get into the selection of brands for the consumers to choose from.
So we've seen this a lot happening even if some of our consumer portfolio companies like Simplas for example, right and online first brand for like small appliances that is currently selling across a lot of the Southeast Asian countries. And if you look at Simplas as a brand in the small home appliances category, they actually has consistently ranked top three across all the e-commerce places.
And they do that by creating a strong brand such that like it's top of mind or amongst the consumers and consumers is actually searching for a lot of the Simplas products when you're thinking about buying a small home appliances. And likewise with other of our portfolio companies in like the beauty space like Rosy all day, I think they have done like really well in terms of building their brand online.
And then once these type of insertion brands have a strong presence and strong brand online, then you know it gives them kind of like a leeway to penetrate to the offline channels. As we know like going to the offline channels is it's more expensive so called and consignment fees could be up to like 30 to 40% especially if you're a new brand. So if you already if you're a brand that already have an established presence and online, it's typically easier for them to go into the offline channel.
And Indonesia at the end of the day is still an offline play. I think our online penetration rate for a lot of the consumer categories is still at about 20%. So COVID obviously accelerated the online penetration for a lot of consumer products, but at the end of the day is still an offline play.
So once the insertion brands get a lot of the low hanging fruits on the e-commerce platform, then that's when they actually have to start looking into the offline channel in order for them to gain scale to making sure that they have the right number of distribution points especially beyond the tier one and tier two cities.
Yeah, I think it was very interesting to hear what you had to say about you know if you're an insurgent brand or a challenger brand and you're going to start up in Indonesia doing online only be it selling through your market places or through your own website as a form of awareness and validation in the market before going to the more capital intensive route of trying to get your product into brick and mortar stores is kind of a game changer.
I think because the entrepreneurs they want to validate the reception of their brand in the market first before sinking a bunch of money into what is otherwise a very capital intensive play right and that was the moat that the incumbent brands tend to have right in addition to like economies of scale manufacturing efficiencies and sweetheart deals with distributors is also just simply quite expensive at that level right.
Exactly. If these challenger brands can just kind of cut that out or rather do it on the cheap at first to get their validation and get their foot in the door in the market. I think they can command better deals right with the distributors and with the retail outlets when they do go to market in the offline sense would you agree or is there any like color to add to that.
You know, I think you got it totally right I think with the presence of like e-commerce market places that we have today plus you know in addition to social media channels like Instagram and TikTok which is like another whole big category that we can talk about leader.
It gives a very low cost way for brands to start right without having much cat facts in the beginning to kind of like test the products test the brand see what works we could you know fine tune life as there is not the brand and then achieve like a more like a stable or like a more for me on how do you want to position your brand and and once they got the right level of awareness and loyalty with the online consumers.
That's when they can actually like kind of treat offline in a slightly easier way. I've heard a lot of you know a lot of these like insertion brands right where we gain so much traction and popularity through online channels such that sometimes even the offline retailers approach them and want them to be on their stores so you have the bargaining power now.
So let's say you're an insertion brand you've done the online thing but you're really not that popular but you decide okay I want to go offline and you start approaching retailers and distributors are they going to skin you alive.
Are they just going to charge you like the highest that they can pretty much pretty much you have the consignment fee you have the listing fee you have to get yourself the door and and doing doing an awful lot of online play is so different that online and being in offline if let's say like you want to get your products to you know the lifestyle like in no more than
you have to think about the shelf space where they're going to put your shelf are you going to put your I love are you going to put you like the bottom part of the shelf that no one's going to pay attention to you have to think about the STU variety that you want in your shelf because you know shelf space you know and like pricing promotions sometimes offline retailers also would like
to have to put their own self promotion staff in the offline channels and all this cost could just like add up like super easily so you know our our suggestion to a lot of our consumer brands is always to have a very strong hold in online first and making sure that you know the
economics and the margins are are strong enough such that we have buffer to give out more margins into the offline channel and once even once those margins are given into the offline channel making sure that the return on investment in the respective channels is still positive to begin with right because it's easy to just get your products to scale in offline channels but the question is at what cost
and making sure also that a lot of this consumer brands should have the right team and skill sets to manage an offline play because it's just a totally different game the totally different operational skill sets that doing online once you go to offline you have to think about you know accounts receivable because when you're selling online the cash
receipts is in almost instantly you don't really have like an AR rule up that once you go into offline channels the distributors are retailers are going to ask for terms of payments right and that could could vary so a lot of this consumer brands that are in search of brands have to start thinking about how do you want to manage their cash flow their working capital making sure that the overall business is still in a very healthy financial position.
I want to jump back to fnb for a moment because this is a point that you brought up to me the other day when we were chatting traditionally in Indonesia fnb brands have you know sourced raw materials or at least many have from Indonesia but then they export them to then be processed and then import them back into the country for final retail sales so I just want to understand your take on why it's been that way in the past and how things are changing and if you have any examples of
brands that have done well at that we'd love to hear. Yeah interesting day wrap this point because I think it stands back to the country's history of during the colonization era right where you know everyone knows that Indonesia very rich in our raw materials including spices right we used to export since you know since the Portuguese era that we used to you know a lot of the
I guess the colonizers tend to extract a lot of the raw materials of the country and kind of like export overseas and have them process overseas and what happens is that there isn't there isn't an investment in terms of technology and also teaching the local communities
you're in in Indonesia and how to process and add value to the raw materials that we have to make it something that people could buy off the supermarkets or even export right it's really quite a shame and an unfortunate that we haven't seen a lot of that examples and I think only until quite quite recently some of the brands that we've come across is actually doing this kind of domestic value add for package fnb so
companies are brands like yava that source a lot of like the nuts romantically in Indonesia so for those who are less familiar yava is a granola brand right yes is granola you can also like call them like a healthy type of snacks brand resource all the nuts in the local community and they actually
have a local processing plan manufacturing plan that is located very closely in the vicinity of the community itself and the company trains a lot of the local workers to process this products and that's where you get the value that that's where you can charge premium to the products and you know another example that we've come across is each Java
that code that is doing of like spices spreads and jans you know like pantry tables basically that you will see in your supermarkets and they also did a similar business model as yava that they source a lot of this spices locally in in Indonesia and making sure that they only source for like the best of the best right they process it the packages is all organic right so there's no like chemicals of pesticides in processing maybe guarantee the quality and it's
such a pride to see that like a local brand such as Java and these Java and core to use a lot of the richness that Indonesia has to offer and build something and make something and put a brand into it such that it could even be potentially exported overseas.
That's interesting to hear about those two brands that you're mentioning is Java and co and yava which was formerly East Bali cashews I believe and yeah so they're sourcing and producing locally which I'm sure saves them a small fortune in terms of their margin and gives them a lot more flexibility and how they can price the final product I believe it can probably help them undercut a lot of the competitors on the shelves while providing a superior product which I think is a win win if you're a consumer or a
brand in Indonesia so that kind of covers some case studies that I wanted to you know tease out from you a little bit let's move on here for a second so there's a lot of people in the tech ecosystem specifically where you and I work who credit the rise of insurgent brands primarily to ecommerce platforms think shoppy think was that etc.
But investment insiders will know that many of these brands they don't rely only on ecommerce platforms they tend to have a good mix of online and offline sales channels so I guess on the topic of direct to consumer D2C I want to ask Molina are there any myths that you'd like to bust or clarifications that you'd like to make to an audience of global investors.
Yeah, you know technically speaking need to see stands for direct to consumer right so it means that the brand sells therapy to consumer not by like a term party platform or anything and I think we use this terms like so lightly and so you sleep in this region because a lot of it will be taken from the US right and I think in the US like you you definitely see a lot of a truly need to see brands where you know a lot of the brands could just like set up like a brand.com
and people will actually trust the brand and trust the website and trust that when you purchase something from the website it will actually get the real yeah. It's going to be real it's not going to be like some some fixed stuff and and and a lot of these brands in the US then also set up like an offline store they're all like flagship store that consumers can have that you know experience touch and feel of the products try it out right get to see like what the brand is all about.
But I think over here in at least in Indonesia there really isn't a lot of the truly be to see brands because a lot of these brands sell online market places right so if they are selling true and online market places then they are not directly to consumer because at the end of the day the consumer still still belongs to your e-commerce platforms like shopping tick tock shop and and so on and so far.
So a lot of these brands typically do not even own the customer data so how can you say that these brands are like need to see brand right I think that's more like indirect to consumer yeah in the right to consumer yeah so so so I'm typically quite allergic when people say to see but it's actually not need to see but it's just a term that we use to lose ladies days and it's really talking about like the digitally native brands that will typically sell first on e-commerce platform.
That's a better term I think digital native brands so a lot of people think that like all right whether it's called D2C or whether it's called digital native right you're starting out on the cheap because you're selling online but there are a lot of hidden costs also associated with going through these e-commerce platforms and getting the kind of visibility and attraction that you want I mean it's not free to do well unless you have some sort of viral brand right can you get a little bit of light on what it takes for these insurgent brands to really become strong on say.
Yeah you know I think if we were talking about you know five six years ago when one of the e-commerce giants like to compete in shop dealers at I think at that point in time there's also like Bukalapak there is still like fighting for a lot of the market share they are throwing money everywhere right and it the the the cost for a brand to set up shop online on the platform and sell it to consumers is much lower than what it would have cost for the brand today.
Right what I'm saying is that like the platform take rate specifically has increased over the past like five to seven years it has gone up so much that the take rate could be up to 10 to 15 for the e-commerce market places today that is pretty steep right pretty steep and it's not only that right I think previously in the past shipping is covered is free no longer now right so the question becomes whether the brand pays for the shipping or you want to pass it.
It's also getting more crowded on this e-commerce platform such that for every dollar of at spend on this e-commerce platform you really need to know how to use the different platforms of gardens at setting such that the marketing are all idea of today still makes sense for the brand is not as straightforward as low cost anymore as if it were to be like five to seven years ago if that makes sense.
And obviously we saw the entrance and the rise of tiktok shop starting about like two to three years ago right I think when tiktok shop first started we are here to grab market share right from the big encumbrance like like shop e especially so we're just the ticket is much lower than what shop e was offering we're subsidizing they're giving a lot of like a very lucrative as package for the brands but we see all those kind of starting to come down now.
Even even for tiktok shop right so yeah it's not as cheap as what people used to think it is for today right and with more brands on the platform is harder to make the dollar of at spend work harder for you as well just because you're competing for a limited so called shell space on the apps right now we're fighting with like a whole lot of brands out there to get your brands to be on the front.
Page on your FYP page of a tiktok for example the figure that I heard getting thrown around to be just taking beauty space for example there are twenty new local beauty brands per month coming up every single month in Indonesia alone so just think about the intensity of the competition out there.
If you're gonna have any sort of meaningful footprint on say tiktok shop for example or shop e live if you live streaming you're gonna want to use influencers right kos to help do your live streaming and that cost money right so it's not like you're completely doing it on the cheap anymore you could compare the capital intensity of both sides of the equation.
I've a little bit to add on that point right on like doing all this is offline I think even though the cost to sell online now is definitely increased compared to in the past right but I think what makes trying online first interesting is that it's a very dynamic and agile platform such that you can test and learn right so if something doesn't work out you can always reduce you know the at spend the at targeting and you can always like tweet.
You can make small bets right can make small bets and do a lot of like pilot test a lot of any testing and like see what works but an offline you cannot do that once you sign a contract that's like boom it is just there right it's a very good.
The customer for at least like a year or two so yeah yeah so so it's best then to think about these ecommerce platforms is sort of like a sandbox for you to get your your formula rights especially in terms of marketing and who you're targeting really understanding your customer right so maybe maybe that's the handle of it as it were small bets and and you know getting your learnings and and doing it without having to commit a lot of not just capital but also time.
Time and effort and people yeah yeah okay that's very interesting and insightful so building on that wanted to ask you just off the top of your head what are some of the most interesting trends you're seeing in the market I understand you've observed a wave of Chinese brands looking to gain a hold here in Indonesia as you mentioned and so I just want to understand if you have any data or color or just kind of quirks to share on that or any opinions that you have on the trends that are arising.
Yes yes good idea mentioned this wave of Chinese brands and that is coming into the region market or maybe I wouldn't say Chinese brands that I would say Chinese entrepreneurs either bring a brand from China and expanded to to Indonesia or build their own brand in the country so let's talk about that for a second I like to think of this wave of Chinese entrepreneurs as the second wave if you made Chinese immigrants from from China and venturing out overseas to the market.
To be honest the big first wave of Chinese immigrants that comes to Indonesia take place in the 60s right at that point in time during the cultural revolution in China a lot of people share that kind of like venture out right to to Southeast Asian Indonesia is definitely one of them and a lot of the conglomerates that we see in Indonesia today is actually the bottom right the first wave of Chinese immigrants and what we started to see now interestingly I think since early 2023
that's when I personally felt a big way for this are coming in and various reason right for trying to getting more competitive and I was getting more saturated and a lot of these Chinese entrepreneurs at least in my realm of work a lot of them are starting to do the consumer facing businesses that is a breads right whether it's in consumer models like beauty or FNB chains on retail they come in different forms right not all of them are the same so the background is different and some of them have actually
spend time working and living in Indonesia for the past 10 years or so and typically this group of Chinese entrepreneurs have a closer relationship to the country in the sense that they appreciate how Indonesia's market complexities and structures and nuances and have a deeper appreciation and understanding of the local culture and consumer behaviors
what I'm trying to say is that localization will be first and foremost very very key right I think a lot of the things that we see about this Chinese entrepreneurs is that they have seen how it plays out in China they have seen how it works they know the playbook is just a matter of taking that framework that playbook combined with an exceptional operational and execution skills
but the third point of localization I think is something that you know at least for us when we are looking into investing in consumer retail opportunities localization is something that's super super key right you need to really understand how Indonesian consumers think behave what is culturally respectful for them what is their spending behavior how are they influence in terms of their choices
and typically Chinese entrepreneurs who have spent enough time in the country in one way or another just gets to that localization point quicker right maybe they think that what worked you know a decade or two ago in China will work again here but that's not necessarily the case due to all of the things that you just mentioned these could be different language dialects going on in different regions the price sensitivity in different cities the infrastructure
the local manufacturing and supply chain and how you get yourself into it and optimize it's kind of a different animal I think and you're probably right those that have at least a bit of experience in the market are going to be better position to succeed or at least gain momentum in the early days right
to that like even measure it itself is a you know archipelago of like 17,000 islands and of course like 36 provinces and Indonesia does not equal Jakarta and Indonesia does not equal to Bali a lot of the times where we see is that it's so called you know relatively easy to crack greater Jakarta right but once you need to scale the brand and achieve scale outside of greater Jakarta
I think that's when you know some of the challenges come in and you know even even for us as investors you know we are always situated in metropolitan cities it takes us time to and some humility to actually like learn about what does it look like outside of our comfort zone yeah for sure that's interesting and so brands need to really internalize that as well right so central Java is not north Sumatra right like those are two different two different places that you need to study
the type of products the type of the type of like advertisements or videos that that work for the Jakarta consumers are like a two one city consumers might not necessarily work in other parts of the country and I think that's you know that's the exciting things for for a lot of this businesses to to figure out
yeah so you were mentioning these two different types of entrepreneurs in the context of coming from China but if we look locally I understand we're witnessing the passing of the torch from one generation to the next in terms of the local consumer brand businesses that already exist here
whereas the first generation very conservative central decision making well established traditions but this up and coming generation they are welcoming external capital and new ways of doing business so I just want to hear from you what are some of the most interesting observations that you have on this particular issue and what will it mean going forward
yeah there is definitely a generational shifts in a lot of the family own businesses right what we're witnessing now as you mentioned is the passing of the torch from the first gen to the second gen or from the second gen to the to the third gen
typically this next generation of of founders are more open minded right due to various reason one of them being they're more familiar with the concept of taking external capital and welcoming equity and investors like AC ventures to be a partner in their family businesses they understand better on what is the values that AC ventures could bring to the table
how we could help them steal up and take the business into the next level so what this means for us is definitely a great thing right suddenly we started to see that there's a lot of fast growing profitable businesses that is now open for investment opportunities
so where I see AC ventures clean a role is to provide a lot of the growth capital to fuel this businesses further a lot of this businesses they haven't received any external capital from the past and they have always been reinvesting their profits to growing the business organically so a lot of this businesses is super capital efficient very healthy in terms of their financial positions
and where we could come in is to help them accelerate that growth but also in terms of systemizing and improving a lot of the operational efficiencies