Consumer Staples Sector Outlook

Expecting for a demand recovery in 2016

It has been a very challenging time for consumer sector throughout 2015 where its growth was hampered by the slowing demand, Rupiah depreciation and higher costs, resulting in a drag on its profitability. The September’s Consumer Confidence Index (CCI) fell to 97.5 in September for 112.6 in August, which is the lowest since August 2010, reflecting consumers’ less optimistic view on the current and future economic conditions. We still expect demand to stay resilient throughout the rest of the year, with the expectation of higher quarterly GDP growth and a more stable Rupiah in the last quarter of 2015. We also view that both consumption and spending will pick up and strengthen further in 2H16, as purchasing power recovers, public spending gathers pace and also expectation of a more stable exchange rate.

Hoping for government stimulus to improve demand

We are expecting for more government stimulus next year, targeting to bring down inflation as well as improvement in consumers’ purchasing power such as lower fuel price and electricity subsidies, helping to regain the consumers’ confidence back. Another plan is the disbursement of the direct cash assistance for households whose income is less than average.

Passing on costs will still be difficult

The weak demand happening throughout 2015 has also somehow restricted the defensive natures of the consumer companies, where passing on its cost pressures to its consumers were not as flexible as before. We expect that companies will apply less ASP hikes next year, as weaker demand could further dampen volume and also its revenue.

Margins to remain under pressure next year

The pro-longed Rupiah depreciation throughout the year has resulted in margin depressions for most of consumer companies in our coverage. Though food commodities’ prices such as wheat have shown declining trends, we believe that this is not a warrant to offset the expectation of continuous USD appreciation, opening the possibility for a further margin compressions in 2016.

Positive long-term outlook

Though in 2015, we witnessed slower economic and GDP growth, we believe that in the long term, Indonesia’s domestic consumption will remain robust on the back of the country’s excellent demographics. According to BPS statistics, in the last 10 years, the average of expenditure per capita for F&B reached 51% of their total expenditures. Long-term growth in Indonesia’s consumer market is to be expected in 2016.