Food Canada Agri-Food Trade Service

Characteristics of the Market for Bakery Ingredients in Indonesia

March 2009

Prepared for: Regional Agri-Food Trade Commissioner, Southeast Asia and Embassy of Canada, Indonesia Prepared by: Stanton, Emms & Sia 80 Raffles Place, Level 36, UOB Plaza 1, Singapore 048264 Tel: +65 6334 7030 Fax: +65 6234 1083 Email: emmsia@pacific.net.sg (General) Website URL: stantonemmsandsia.foodandbeverage.biz

1. Introduction
This briefing has been prepared as a "first view" introduction to Canadian exporters of bakery ingredients. It should not be construed as a detailed study of Indonesia's bakery industry or its demand for ingredients. The products that are covered by this briefing include wheat flour, dairy products, canola oil/shortening/margarine, yeasts, chocolate, frozen eggs/egg powder, dried fruits, frozen berries/fruits, premixes and doughs, and purees and jams. The products covered by this briefing are directly linked to agrifood commodities that are produced by Canadian farmers, e.g. wheat, fruits, and those with secondary links to such products, e.g. dairy products, canola oil and various bakery ingredients.

2. Policy affecting bakery ingredients

Indonesia has a tropical climate and cannot grow wheat. Its cultural links to the Netherlands and investment by local companies over the past 10 to 15 years has resulted in a steady growth in the consumption of baked produ cts. Wheat is also used by what is reported to be the world's 2nd largest instant noodle industry. Although the government is promoting rice production and consumption, it also recognises that wheat is well entrenched in the local diet in both noodles and daily baked products.

The consumption of noodle and bakery quality wheats is significant. See Table below for the trends in wheat imports from Australia, Canada and the USA, which are the main quality players in the Indonesian market. Australia has tended to dominate the market because of its wheat's functionalities for the production of noodles. Canada (2007 market share: 32%) and the USA are mainly focused on the bakery flour segment of the market. As can be seen from the Table, imports from both countries have grown supporting comments from the trade that baked product consumption has been growing over the past 5 years.
Imports of Wheat from Australia, Canada and the USA 2003 to 2007

Source: Official import data.

The policy towards imported food ingredients that can be used by bakeries has been quite liberal since the end of Suharto's rule in the late 1990s. Import duties are generally set at low levels. Having stated this, high tariff rates are set on some product s that might threaten indigenous industries, e.g. palm oil and cocoa based products. There are no major barriers to products that can comply with Indonesia's food health and safety and halal regulations. In 2008, the Indonesian government implemented some new import regulations and procedures, and reinvigorated enforcement of some existing laws covering imported food products. This has had some spin off impacts on a range of products that can be used as bakery ingredients. More information on this matter can be found in a following section of this briefing titled: Market access for the products covered by this briefing.

3. The bakery industry in brief overview

Indonesia's bakery industry is highly fragmented, relative to other sectors of its food processing industry. According to the Indonesian Bakery Entrepreneurs Association (APEBI), Indonesia has about 120,000 operational bakeries today. Indonesia has a very small number of large bakeries. The bulk of operations are micro-bakeries that have annual sales of C$ 30,000 or less (see Chart below).
Structure of Indonesia's Bakery Industry in 2009

Source: Indonesian Bakery Entrepreneurs Association (APEBI)

Trade sources comment that: y The industry is diverse and includes: o A few large industrial bakeries producing branded products, e.g. Nippon Indosari with its Sari Roti branded packaged products, and products for fast food outlets such as McDonald's, produced by Havi Food Services Indonesia. o Very small cottage industry bakeries, known in Indonesia as home industries. There are around 400 medium sized bakery businesses operating all over the Indonesian archipelago. Many of these businesses are longstanding operations with traditional products that were developed prior to independence by Indonesian ethnic Chinese families, e.g. in Jakarta, the Tan Ek Tjoan and Lauw bakeries. Holland Bakery is a larger version of these bakeries that has expanded into a retail bakery chain. A local bakery franchise system is being developed across Indonesia by Roti Buana (Buana Bakery). This franchised network is reported to have 100 outlets located in the key cities. Its target is to develop over 200 such outlets across the whole of the Indonesia archipelago within 5 years. 90% of all baking flour produced in Indonesia is used by lower end bakeries. The industry has been particularly dynamic since 2001 and has seen the number of bakeries growing at between 8% and 10% per annum. This growth has been spurred on by improvements in household incomes all across Indonesia since that year. Distribution of daily baked products takes place through a variety of channels, including: o The modern retail trade, i.e. supermarkets, hypermarkets and convenience stores. These also include in-store bakeries, as in Carrefour hypermarkets; o Retail bakeries, both traditional (run by the above referred ethnic Chinese businesses) and modern boutique concepts, e.g. Bread Talk (from

y y

Singapore) which have developed over the past 3 to 5 years; and Traditional channels, i.e. street cart and vendors that deliver bread to households, which are still used by the abovementioned Tan Ek Tjoan and Lauw bakeries.

Amongst the most prominent bakeries operating in Jakarta today are Healthy Choice, The Harvest, KS, AJ, Holland, Jesslyn, Delicious, Komug and Majestik. The range of products is also wide and expanding. This was stimulated after Bread Talk entered the market with a new portfolio of products, which sparked off a wave of new middle and upper income group demand of daily b aked products. Other outlets that are channels for baked products are McCafe, Starbucks, Coffee Bean & Tea Leaf, and Delifrance, which has just entered Jakarta. The bakery industry utilises about 25% of all wheat flour that is milled in Indonesia. Consumption by the industry was estimated at about 750,000 tonnes in 2007. The modern bakeries that have been developing over the past 5 years are also a market for baker's premixes, the bulk of which are made in Indonesia. Suppliers to the bakery industry include the flour mills and their associated businesses, which are large scale operations and smaller businesses, including importers. The bulk of ingredients used today are made in Indonesia.

4. Overview of the markets for bakery ingredients

The value of the ingredients covered by this briefing was C$ 607.5 million in 2007, up from C$ 317 million in 2003. The Table below provides an overview of import trade in the products covered by this briefing based on official import data as released by the Indonesian Gov ernment. It should be noted that some of these products have applications outside the bakery sector, e.g. skim milk powder, which is used by milk processors to produce a range of dairy products in Indonesia, yeast for breweries, chocolate ingredients, frui t purees, maple syrup, etc.

Product

2003 Imports

2007 Imports

Import Market Shares of Leading Supply Countries

Wheat flour

343,145 tonnes valued at C$ 107.7 million

580,937 tonnes valued at C$ 192.9 million

In 2007, based on tonnes landed: -Turkey: 30% -Australia: 26% -Sri Lanka: 20%.

Butter

3,139 tonnes valued at C$ 5.2 million

5,406 tonnes valued at C$ 13.3 million

In 2007, based on tonnes landed: -New Zealand: 47%. -Netherlands: 19%. -Australia: 13%.

Cheese, natural, e.g. pizza cheese and other bakery cheeses.

391 tonnes valued at C$ 0.8 million

544 tonnes valued at C$ 1.7 million.

In 2007, based on tonnes landed: -Netherlands: 37%. -New Zealand: 33%. -USA: 13%.

Skim milk powder

66,619 tonnes valued at C$ 162.3 million.

90,767 tonnes valued at C$ 338.6 million.

In 2007, based on tonnes landed: -New Zealand: 32%. -USA: 24%. -Australia: 17%.

Margarine

835 tonnes valued at C$ 1.6 million

793 tonnes valued at C$ 1.4 million.

In 2007, based on tonnes landed: -Malaysia: 24%. -Australia: 23%. -Belgium: 17%. -Germany: 13%.

Product

2003 Imports

2007 Imports

Import Market Shares of Leading Supply Countries

Canola oil, refined

118 tonnes valued at C$ 164,000.

364 tonnes valued at C$ 0.5 million.

In 2007, based on tonnes landed: -Malaysia: 69% -Singapore: 30%.

Shortening

2,171 tonnes valued at C$ 4.8 million.

10,700 tonnes valued at C$ 11.5 million

In 2007, based on tonnes landed: -Malaysia: 69%. -Japan: 16%. -Australia: 8%.

Yeast, active

2,278 tonnes valued at C$ 7.8 million

3,229 tonnes valued C$ 7.9 million

In 2007, based on tonnes landed: -China: 26%. -Belgium: 24%.

-Turkey: 17%.

Baking powders

148 tonnes valued at C$ 153,000

1,245 tonnes valued at C$ 2.9 million.

In 2007, based on tonnes landed: -France: 85%. -Australia: 4%.

Chocolate powder, sweetened

7,073 tonnes valued at C$ 15.5 million

11,662 tonnes valued at C$ 20.4 million

In 2007, based on tonnes landed: -Malaysia: 67%. -Singapore: 30%. -France: 2%.

Chocolate industrial ingredients, not powder

1,923 tonnes valued at C$ 1.5 million.

826 tonnes valued at C$ 1.4 million

In 2007, based on tonnes landed: -Malaysia: 59%. -Singapore: 26%. -Sweden: 6%.

Product

2003 Imports

2007 Imports

Import Market Shares of Leading Supply Countries

Processed eggs, dried or frozen

306 tonnes valued at C$ 1.2 million.

1,157 tonnes valued at C$ 4.1 million.

In 2007, based on tonnes landed: -India: 50%. -China: 22%. -USA: 20%.

Frozen strawberries

33 tonnes valued at C$ 110,000

324 tonnes valued at C$ 0.6 million.

In 2007, based on tonnes landed: -China: 59%. -Australia: 34%. -Canada: 6%.

Frozen raspberries, blueberries, etc.

22 tonnes valued at C$ 56,000

15 tonnes valued at C$ 51,000

In 2007, based on tonnes landed: -France: 71%. -Canada: 19%.

Bakery premixes and prepared doughs

1,430 tonnes valued at C$ 3 million.

1,877 tonnes valued at C$ 3.4 million.

In 2007, based on tonnes landed: -Thailand: 26%. -USA: 19%.

-Germany: 11%. -Canada: Negligible.

Maple syrup, including flavoured products

360 tonnes valued at C$ 435,000

45 tonnes valued at C$ 58,000

In 2007, based on tonnes landed: -USA: 49%. -Taiwan: 33%.

Dried apples

4 tonnes valued at C$ 11,000

81 tonnes valued at C$ 116,000

In 2007, based on tonnes landed: -China: 98%.

Product

2003 Imports

2007 Imports

Import Market Shares of Leading Supply Countries

Other dried fruits, not raisins or dates

2,813 tonnes valued at C$ 0.8 million

3,864 tonnes valued at C$ 1.6 million.

In 2007, based on tonnes landed: -Myanmar: 83%. -Thailand: 9%. -Singapore: 3%.

Fruit purees and jams

1,926 tonnes valued at C$ 3.8 million.

2,953 tonnes valued at C$ 5.1 million.

In 2007, based on tonnes landed: -Brazil: 19%. -China: 15%. -Malaysia: 12%. -Canada: Negligible.

5. Developed country involvement in the market (incl. Canadian exports)

The Developed World plays an important role in supplying food ingredients that can be used by bakeries. It supplied around 40% of all of the products that are covered by this briefing in 2007. The main supply countries involved in the market are: y y y y Australia (170,000 tonnes exported in 2007); Belgium (50,000 tonnes); New Zealand (32,000 tonnes); and USA (23,000 tonnes).

Two other EU countries also have a sizeable impact on some market segments, the Netherlands (5,700 tonnes) and France (4,000 tonnes). All of these countries supply a wide range of products to Indonesia, including: y Wheat flour (Australia only);

y y y y y y y y

Dairy products; Edible oil products; Yeast, active; Bakery premixes, doughs and powders; Chocolate-based ingredients; Processed eggs; Frozen berries; and Maple syrup, mainly flavoured products.

Canada has small markets in Indonesia, which have shown erratic development trends over the past 5 years (see Table below).

Canada's Ingredient Exports to Indonesia (Selected Products) 2004 to 2008 (In $Cdn)

HS

PRODUCT DESCRIPTION

2004

2005

2006

2007

2008

0402100 0

Milk powder not exceeding 1.5% fat

3,553,8 41

2,075,6 97

1,789,5 48

0811100 0

Strawberries, uncooked or steamed or boiled in water,sweetened or not, frozen

5,396

37,323

0811200 0

Raspberries,mulberries,etc,uncook, steam or boil in water,sweetened or not,frozen

722

0811901 2

Blueberries, cultivated,uncook, steam or boil in water, sweet or not, frozen,

2,595

1514190 0

Low erucic acid rape (canola) or colza oil & its fractions, refined

3,893

68,13 0

1515909 0

Veg fats & oils, nes & their fractions, refined or not but not chemically mod

11,900

23,80 0

1901201 0

Mixes for the prep of bakers'' wares of heading 19.05, nes

14,318

2007990 0

Jams,fruit jellies, fruit or nut pure & paste, ckd prep,sugared,sweetened or no

383

2102100 0

Yeasts, active

2,847

2102300 0

Baking powders, prepared

22,51 5

14,457

9,279

Source: Agriculture & Agrifood Canada

6. Market access for the products covered by this briefing

Indonesia's import duties for the products covered by this briefing are generally low at 5% ad valorem (see Table below). The only rates that are higher have been established to provide some level of protection to the local edible oil industry.

Product

Import Duty (MFN)

Wheat flour

5%

Butter

5%

Cheese, natural, e.g. pizza cheese and other bakery cheeses.

5%

Skim milk powder

5%

Margarine

5%

Canola oil, refined

10%

Shortening

5%

Yeast, active

5%

Baking powders

5%

Chocolate powder, sweetened

5%

Chocolate industrial ingredients, not powder

5%

Processed eggs, dried or frozen

5%

Frozen strawberries

5%

Frozen raspberries, blueberries, etc.

5%

Bakery premixes and prepared doughs

5%

Maple syrup, including flavoured products

5%

Dried apples

5%

Other dried fruits, not raisins or dates

5%

Fruit purees and jams

5%

Source: Indonesian Government

A number of imported products also attract additional luxury taxes. One of these is cheese, which incurs such a tax at a rate of 10%. Most of the duties listed above have been reduced to zero for exporters from other ASEAN countries under the terms of the ASEAN Free Trade Area (AFTA), of which Indonesia is a member. Under AFTA, Indonesia has committed to a duty of 5% on chocolate from other ASEAN countries, although this rate wi ll also reduce to 0% within 3 years. Indonesia is a signatory to the ASEAN Australia New Zealand Free Trade Area agreement, which was signed by all member states of ASEAN on 27th February 2009. Under this agreement, ASEAN, Australia and New Zealand wil l establish a free trade area from the 1st July 2009. It will also see the phasing in of lower tariffs on Australian and New Zealand products that are exported to the ASEAN member states. The Table below provides details of the tariffs that will be applicable to any such products that enter the Indonesian market.

New ASEAN Australia New Zealand FTA Tariff Rates

Product

MFN Base Rate

AANZFTA Preferential Tariff

Wheat flour

5%

4% from 2015

Butter

5%

0% from 2010

Cheese, natural, e.g. pizza cheese and other bakery cheeses.

5%

0% from 2010

Skim milk powder

5%

0% from 2010 or 4% from 2014, depending on product and packaging type

Margarine

5%

0% from 2010

Canola oil, refined

10%

0% from 2012

Shortening

5%

0% from 2010

Yeast, active

5%

0% from 2010

Baking powders

5%

0% from 2010

Chocolate powder, sweetened

5%

0% from 2010

Chocolate industrial ingredients, not powder

5%

0% from 2010

Processed eggs, dried or frozen

5%

0% from 2010

Frozen strawberries

5%

0% from 2010

Frozen raspberries, blueberries, etc.

5%

0% from 2010

Bakery premixes and prepared doughs

5%

4% from 2015

Maple syrup, including flavoured products

5%

0% from 2010

Dried apples

5%

0% from 2010

Other dried fruits, not raisins or dates

5%

0% from 2010

Fruit purees and jams

5%

0% from 2010

Source: Indonesia's tariff commitments under the ASEAN Australia New Zealand Free Trade Agreement

Based on the information in the above Table, the new ASEAN Australia New Zealand Free Trade Agreement will result in an immediate market entry price disadvantage for most of the Canadian origin products that are covered by this report. This could be a very important factor in making sales in a market where ingredient buyers are generally price sensitive. Market access issues for food, drinks and food ingredients became increasingly complex in Indonesia after Badan POM (the local Drug and Food Administration) issued a new regulation in 2008 stating that all imported processed food, food raw materials, food additives, processing aids, food ingredients and other related products must obtain import approval from the agency for every shipment. While the primary impact of this regulation was to enhance existing laws on the registration of imported retail packed food and drinks, the broadness of this new regulation and the practicalities of enforcing it have also created a very high degree of uncertainty over the requirements for food ingredients. In practice, several food ingredients are impacted on by the requirements for product registration. They include products that are under HS codes 1803 and 1806 (Cocoa and cocoa preparations) and in HS codes 1901, 1902, 1904 and 1905 (Preparations of cereals, flour, starch and pastry). The confusing nature of market access regulations, procedures and practices for all forms of food also became even more confusing after the Ministry of Trade issued another broader -based regulation with protectionist undertones that requires Indonesian importers to obtain an additional special import permit from this M inistry and subject the products they are handling to additional inspection procedures. This new regulation covers close to 190 food product categories and so may also be deemed relevant to certain food ingredients by localised officials. At the time of wr iting, there is still a very high degree of uncertainty over the operational aspects of this new regulation, which is causing concern to many Indonesian importers because it also covers a range of non-food products. In view of the high level of uncertainty and general lack of transparency over implementation of the above mentioned regulations, Canadian bakery ingredient exporters are advised to check with their agents/importers on all of the legal requirements with which their products have to comply before they are exported from Canada.

7. User purchasing criteria

Indonesia bakeries are generally price sensitive when procuring ingredients. This situation exists because of past weaknesses in the consumer market and a history of variable consumer confidence amongst the middle income group. Although consumer

confidence is strong at the time of writing (March 2009), ingredient price is still very important to the bakeries of all sizes. The smaller traditional bakeries (mentioned earlier in this briefing) have a significant focus on the price of their ingredients because they generally operate in highly price sensitive markets. It is very common for ingredient buyers to identify a small number of trusted suppliers that they can negotiate with. Having stated this, businesses tend to have quite high level of loyalty to their existing suppliers, which can cause problems for new entrants. Ingredient quality and seeking value-for-money in terms of a balance of different demands is common amongst the bakeries that are focused on supplying higher quality products to the quality conscious upper-middle income and upper income groups. The factors considered by such bakeries include: y y y y Price; Overall ingredient quality; The functional characteristics of the ingredient, including its baked quality; and Service support, which often includes some form of technical assistance, including ideas about new products and new ways of using ingredients.

8. Conclusion for Canada

8.1 Review of the developing consumer market scenario in Indonesia Indonesia's economic performance for 2009 is now being forecast at between a recession of 1.3% (private analysts' worst case) and growth of 4% (best case). The forecasts for 2010 are more positive at between 0.6% and 5% growth, depending on what happens to the global economy in 2009 (see Table below).

Year

Worst Case Growth Scenario

Best Case Growth Scenario

2009

(1.3%)

3% to 4%

2010

0.6%

5%

Source: Indonesia Government, Asian Development Bank and the Economist (Latest at time of writing).

If realistic, these forecasts indicate that Indonesia could be one of the least affected countries in Asia, when it comes to the impact of the ongoing global finance industry and economic crisis.

Consumer and business confidence is surprisingly buoyant under the current conditions outside Indonesia. Local analysts comment that consumer confidence plunged in the first half of 2008 to a historic low point, because of rising food and energy/fuel prices, however, declining prices in the latter part of 2008 have now dramatically improved the situation. At the time of writing (March 2009), Indonesian consumers are reported to be some of the most positive in Asia. This is underpinned by lower retail prices, lower inflation, lower interest rates and the promise that the government's stimulus package and domestic economic activity (spending) will help the economy to avoid a major downturn or recession. While this is the viewpoint of both the government and analysts, the unknown impact of what is happening in the U.S., Japan and the EU still sits behind this generally positive outlook.

8.2 Future demand scenarios for bakery ingredients The bakery industry, whilst cautious because of the unknowns that exist outside Indonesia, are reasonable confident that demand for most of their products, with the possible exception of some higher priced luxury items, will remain firm over the next 2 years. Having stated this, the management of some of the boutique bakeries, which target the middle and upper income group consumers in Jakarta, are generally forecasting high growth rates for sales over the next 3 years, i.e. 8% to 10% per annum. Discounted pricing and price promotions will be used to keep demand strong. The core of demand is in the middle income group area of the market, which comprises between 25 and 30 million urban area consu mers. This is the environment in which imported bakery ingredients will have to operate in the shorter term.

8.3 Opportunities for Canadian exporters There is already high level competition for the basic bakery ingredients (flour, premixes, edible oil products, chocolate ingredients) from local suppliers. Additionally, ASEAN and China are also price competitive suppliers of some products, e.g. edible oil products, chocolate-based ingredients and, in the case of China, yeast, processed eggs and fruit based ingredients. Australia's proximity to Indonesia also makes it quite a formidable competitor in some markets, e.g. wheat flour, dairy products and fruit -based ingredients. In view of the competition from domestic suppliers, Asia and Australia, Canada's targ et markets are in the quality area of the market where there are demands for higher quality products, exotic ingredients and healthy/nutritious ingredients. Trade sources comment that Canadian exporters could have future opportunities in the markets for specialty flours and premixes (particularly healthy, nutritious and functional products), frozen berries, maple syrup (but needs clearer differentiation in the market), seeds, nuts and other healthy and nutritious ingredients that can be used in specialty baked products.

Active participation in these markets will require that Canadian exporters very clearly understand the opportunities that exist in the market and differentiate their products from the competition. Building markets in Indonesia under these c ircumstances will require: y Researching the opportunities in detail to understand how they can be developed. In view of the growth prospects arising from Indonesia's positive longer term economic development, it would be advisable to consider short term through to long term opportunities in this research. The development and activation of a well thought out export marketing strategy; and Identifying and developing a long term relationship with an Indonesian importer with the appropriate skills and capabilities to support exports from Canada.

y y

Canadian producers with other products related to opportunities in the markets profiled in this briefing, and who would like more market information or contacts, may contact the Agri-food Trade Commissioner at the Embassy of Canada in Indonesia at: jkrtatd@international.gc.ca. Date Modified: 2009-07-10 Top of Page Important Notices