Voluntary Report - public distribution

**Date:** 4/30/2004

**GAIN Report Number:** ID4015

ID4015

**Indonesia**

**Product Brief**

**Snack Foods**

**2004**

**Approved by:**

![](media/image1.wmf)Chris Rittgers

US ATO

**Prepared by:**

Agri Source Ltd

**Report Highlights:**

Indonesia's snack food market has experienced rapid growth in recent
years, and

expansion in retail distribution and improvements in processing promises
continued expansion in the future. Popcorn and potato chips currently
lead U.S. processed snack food sales, while potato flakes is the leading
U.S. raw material imported for the snack sector. As local distribution
and production systems continue to evolve, additional opportunities will
be created for U.S. exporters, particularly those that supply raw
materials.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Jakarta ATO \[ID2\]

\[ID\]

**SECTION I. MARKET OVERVIEW**

Estimates of the value of Indonesia's snack market vary considerably,
but it is generally considered to be in the range of \$450 million. Of
this total, traditional snacks account for about 50 percent of the
total, while Western snacks comprise about 20 percent. The remaining 20
percent of the market is peanuts and other nut snacks.

# General Structure of Indonesia's Snack Industry, 2002

Despite differing views estimates of the overall market size,
unquestionably Indonesia's snack market has grown significantly in
recent years. According to figures provided by industry members used in
the chart below, the market almost doubled in value and volume from 1998
to 2002.

Both large snack producers and Small & Medium Enterprises (SMEs) play
key roles in the snack market. Generally, larger firms produce Western
style snacks for middle and upper income consumers, while SMEs produce
mainly traditional snacks for lower income consumers. Snacks produced by
SMEs are often not branded and sold in bulk without packaging. However,
these snacks are popular and compete very strongly against snacks
produced by large-scale manufacturers.

![](media/image2.wmf)Continued strong growth in the snack food market is
expected. If the current rate of growth continues, the Indonesian snack
market could reach a value of 6,000 billion Rupiah (\$723 million) or
more by the year 2007.

**I.1 Traditional Snacks Dominate Indonesian Snack Market**

Snacks are a major part of the daily diet for many Indonesians as can be
seen in the abundant variety of traditional local snacks available
throughout the country. The wide availability of these snacks is due to
the large numbers of SMEs and home industries operating in the snack
industry. The majority of these snack producers often market their
snacks only in the local area.

The wide availability of traditional snacks gives this segment of the
snack industry an advantage over western snacks, which are mainly found
only in modern retail outlets in urban areas. Traditional snacks made by
local SMEs, on the other hand, can be found in almost any outlet
nationwide, from larger retail outlets down to small village shops and
kiosks. Very few SME snack producers sell their products through modern
retail outlets because the fees charged are usually too high. The vast
majority of snacks produced by SMEs are nuts, crackers, and chips, which
make up almost 70 percent of the entire snack market.

**I.2 Prospects for Growth in Modern Snacks**

As the modern trade channel continues to expand throughout the country,
this will also bring increasingly good sales prospects for modern
snacks. Sales volume has returned to pre-1997/98 economic crisis levels,
and the ever-expanding distribution network through the modern retail
sector will fuel future growth. However, this growth will be limited
largely to urban areas as the retail expansion is occurring primarily in
major cities.

Estimated Market Shares By Raw Materials (Billion Rupiahs) 2002

![](media/image3.wmf)

As a result of on-going economic challenges, many snack food producers
have cut costs by reducing imported ingredients. Many, particularly
SMEs, have stopped using imported ingredients altogether, unless the raw
materials and ingredients for their production are unavailable locally.
Imported materials and ingredients such as peas, potato flakes, and
wheat for milling, account for a rather small portion of the overall
snack market. However, some larger producers of modern style snacks
still rely heavily on imported ingredients due to their quality and
quantity requirements. Furthermore, the gradual economic recovery and
relatively strong growth in the snack food market is again enhancing
prospects for imported ingredients.

# SECTION II. MARKET SECTOR OPPORTUNITIES AND THREATS

Following table summarizes the opportunities and constraints of U.S.
Exporters to the Indonesian Snacks Market.

+------------------------------------+---------------------------------+
| # Opportunities & Advantages       | # Constraints & Weaknesses      |
+------------------------------------+---------------------------------+
| Population is over 200 million     | Majority of population has weak |
| with snacking as part of           | purchasing power as middle to   |
| traditional culture.               | upper class consumers comprise  |
|                                    | 15-20% of total population.     |
+------------------------------------+---------------------------------+
| The increasing amount and          | U.S. suppliers are often unable |
| popularity of modern trade         | to meet "Halal" food            |
| channels make imported products    | requirements.                   |
| more readily available.            |                                 |
+------------------------------------+---------------------------------+
| Many middle and upper income       | Modern snacks only hold about   |
| consumers are consuming more       | 13% of volume market share due  |
| western style snacks.              | to high price.                  |
+------------------------------------+---------------------------------+
| Modern retail sector becoming more | Internal transport and storage  |
| efficient.                         | infrastructure still weak.      |
+------------------------------------+---------------------------------+
| Growing health awareness fueling   | Prices for imported products    |
| demand for higher quality          | are much higher local products  |
| products.                          | prices.                         |
+------------------------------------+---------------------------------+
| Local ingredients unavailable or   | Shipping time from U.S. may be  |
| insufficient, while US products    | an impediment as products will  |
| considered high quality.           | need a relatively long shelf    |
|                                    | life.                           |
+------------------------------------+---------------------------------+

# SECTION III. Key Market Trends, Products, Players, and Performance

# III.1 Consumer & Product Trends

Indonesia's population of about 220 million is spread across over 18,000
islands, but the majority of the population resides on the islands of
Java (58 percent) and Sumatra (21 percent). An estimated 65 percent of
the population resides in rural areas, while 35 percent lives in urban
area, including the major cities of Jakarta, Surabaya, and Bandung.
About 85 percent of the population is Muslim, making Indonesia the
largest Muslim country in the world. Approximately 55 percent of the
population is under the age of 25. These demographic factors have a
tremendous impact on the consumption of both locally produced and
imported snacks and ingredients.

The average Indonesian consumer spends roughly 60 percent of total
expenditures on food products. Of this 60 percent, only an estimated 25
percent is spent on processed foods or beverages. Generally, processed
food products are too expensive for most Indonesian consumers. The main
consumers of processed foods are middle-income consumers, which
represent less than 20 percent of the population. These consumers are
now more price conscious and more likely to choose a lower priced
traditional snack over a more expensive western snack.

In general, Indonesian snack consumers do not exhibit product loyalty,
regardless of their buying power, and are always changing brands and
flavor preferences. However, brand recognition and loyalty can still
play a major role in the purchasing decisions of some Indonesian
consumers. Many higher-income consumers still choose to purchase
products from major producers such as Indofood Frito-Lay and Garudafood
over lesser-known brands that may be less expensive. These companies are
the market leaders in advertising and also in providing new types of
snacks.

As Indonesia's market for snacks becomes larger and more complex with
more competitors, consumers are increasingly relying on product image
when making their purchasing decisions. This does not necessarily mean
that consumers will purchase well known brands, but rather that they
will purchase snacks that "look good." Packaging and advertising thus
play an important role in affecting consumers' purchasing decisions.
Companies in the modern snack trade are expected to increase their use
of advertising and promotional activities, while small companies with
limited resources are more likely to promote their products by giving
out free samples and discounting prices. Many SME snack producers insert
small cheap toys in their packages to boost sales to young school
children.

To address the price concerns of consumers, companies are providing
smaller pack sizes and no-frill products in order to reduce costs. This
will make the products more affordable and hopefully expand the market
for snacks to a wider range of customers. Promotions and free give-away
items in snacks are also key drivers of sales.

There is small but growing demand for healthy snacks. Children usually
buy whatever snack they desire, but offering or promoting healthier
snacks has been proven to be effective in marketing to mothers and
adults.

The third and fourth quarters (July-September and October-December) are
usually the biggest demand periods for snacks. July is a big demand
month because schools open during that month. As in other Asian
countries, the fourth quarter is a peak demand period due to many public
and religious holidays. To more effectively balance peak demand and
production capacity, large-scale producers of western snacks use high
quality metalized foil packaging to maintain and extend product shelf
life during some periods.

# III.2 Import of Snack Products for Retail Market

Imports of ready to eat snack products of cereal based snacks, potato
chips, and nuts in 2002, according to Indonesian official statistics,
was about US\$ 7.31 million. Industry sources estimate that the actual
figure for snack imports is higher. However, the total value of imported
snack products is still considerably small compared to the total value
of Indonesia's snack market. Imported snack products with high potential
in the Indonesian market are noted below.

[Prepared Foods Obtained by the Swelling or Roasting of Cereals (HS
190410000)]{.underline}

The Philippines was by far the leading supplier for cereal-based snacks
during the past several years with a market share of over 70 percent.
The primary supplier of these snacks was URC Snacks. However, URC Snacks
has recently established a base of operations in Indonesia, thus imports
from the Philippines is expected to decline significantly in the future.
The second leading suppliers were Thailand and Germany.

[Prepared Potatoes (HS 200520000)]{.underline}

Imports of potato chip snack products have been minimal. Australia has
been the leading supplier. China and the U.S. also supply chips. Potato
chips are the leading prepared snack food import from the United States,
totaling about \$881,000 in 2003.

[Prepared Unroasted Groundnuts (HS 200811900)]{.underline}

Imports of prepared/preserved unroasted groundnuts (peanuts) and other
snack nuts have been significantly greater than potato chip imports.
Growth in total imports in this category is being driven by significant
increase in imports from China. Australia and Vietnam are also important
suppliers.

[Popcorn (HS 1005.904.040)]{.underline}

U.S. exports of popcorn have grown significantly over the last five
years. Total export value has increased steadily from 1998 (\$176,000)
to 2003 (\$755,000). After potato chips, popcorn is the most significant
processed snack food product imported from the United States. Brand name
micro-wave popcorn has proved to be quite popular.

III.3 Import of Snack Raw Material/Ingredients for Indonesian Snack
Manufacturers

As previously noted, imported materials and ingredients account for a
rather small portion of the overall Indonesian snack market. However,
the gradual economic recovery and relatively strong growth in the snack
food market is raising the prospects for imported ingredients. Raw
material imports range from fresh and processed potatoes, wheat, corn,
seeds and nuts, to flavorings and seasonings.

[Potato Based Snacks]{.underline}

Potato based snacks include all snack products using fresh potatoes,
potato flakes, potato flour and starch as their basic ingredients.
Demand for potato chips has been increasing in

recent years. Total sales in this segment are estimated at about 24,000
metric tons valued at approximately 440 billion Rupiah (approximately
\$53 million). This gives the segment approximately a 13 percent share
of the overall value of the snack market. Although domestic potato
supply is relatively abundant, less than one percent of domestic potato
supplies are suitable for snack manufacturing, and potato imports have
been continuously increasing.

Indofood Frito-Lay is the market leader in this market and relies on
both local and imported raw materials and ingredients. Siantar Top is
another leading user of processed potatoes, mainly for extruded snacks.
Significant volumes of processed potatoes are also used by other food
processors, particularly in the biscuits and baking industry.

Given the local supply situation for fresh and processed potatoes, the
rising demand for all types of snacks, and the relatively low tariff
rates on potatoes and products, it seems likely that demand will
continue to grow. The greatest opportunity over the next five years or
more for U.S. and other foreign suppliers is to tap into the huge
potential demand among smaller scale snack processors that are not yet
utilizing potato flour, flakes, starch, and other processed potato
products. Although larger players producing mainly Western style snacks
are likely to maintain their dominant role, smaller snack makers,
collectively, offer significant long term potential.

-   *Fresh Potato Imports (HS 070190000)*

Major suppliers for potatoes include: Australia, China, Taiwan, U.S.,
India, UK, Netherlands, and New Zealand. Australia has been the leading
supplier with market shares of between 70 and 80 percent.

Imports of fresh potatoes are a good year-round supplement to local
sources. From September to February, Australia is out of the market, but
China and Taiwan are able to supply. The situation is reversed in the
other six months of the year. The supply of lowest priced products
varies each year for potatoes. At times, U.S. potatoes have been the
lowest priced among the major suppliers. However, buyers report that
U.S. potatoes often have quality problems on arrival due to the long
ocean transit time.

-   *Potato Flour Imports (HS 110510000)*

Imports of potato flour increased from 437 tons in 1999 to 7,268 in
2002. The large increase has been driven by the growing demand for
potato-based snacks and food products. Leading flour suppliers include
Germany, China, Japan, and Australia.

-   *Potato Flakes Imports (HS 110520000)*

Potato flake imports have increased significantly in recent years, with
imports jumping by over 700 percent in value terms from 1999 to 2002. In
2002, imports totaled 2,200 metric tons. The significant increase in
potato flake imports has been driven by the increasing demand for
potato-based snacks and food products. Similar to potato flour, most of
Indonesia's potato flake imports are used in the snack (paricularly
Western snacks), biscuits, and baking industries. The U.S. has been the
leading supplier each year, with around 80-85 percent of the market,
with Canada second. U.S. potato flakes, especially those from Oregon,
are considered to be high in quality as it gives more volume, better
texture and shelf life.

-   *Potato Starch Imports (HS 110813000)*

Potato starch imports totaled 4,750 metric tons in 2002. The Netherlands
has been the leading supplier in most years. Germany has consistently
held second place until it became the leading supplier in 2002. There
are also many Thai companies that export extruded potato-based snacks to
Indonesia. These companies include World Food International and Big One.
However, these companies are not considered to be very large players in
the total market.

[Wheat Based Snacks]{.underline}

Wheat based snacks comprise the second largest segment in the Indonesian
snack market after nut snacks, with an estimated 22 percent overall
market share. Total sales in this segment are estimated at around 45,000
tons in 2002. The main products in this segment include various extruded
snacks using wheat flour as the base material, or a combination of wheat
flour and other ingredients.

Another important product in this segment is dry snack noodles. Demand
has grown to very large volumes and many companies now compete in this
business. Several snack noodle suppliers noted that demand is so large
that manufacturers must often break good quality noodles to supply the
snack segment. There is also a wide range of snack biscuits and crackers
in the market.

Indonesia imports about 4 million tons of wheat annually, consuming
about 3.2 million tons of wheat flour equivalent. The majority of wheat
flour usage in Indonesia is for the fresh and instant noodles industry
(60 percent), and bakeries (35 percent). The snack sector uses only
about 0.6 percent of total wheat supply.

-   *Wheat Grain (HS 100190190)*

Indonesia's wheat and wheat flour total imports continue to hover around
4 million tons (wheat grain equivalent) annually. Australia is
consistently the major supplier, accounting for over 50 percent market
share recent years. Canada has also been a major supplier and usually
claims a 20-25 percent share. The U.S. has also been a major but less
consistent supplier, with market shares ranging from 7 to 29 percent
over the past four years. Depending on supplies, India, China, and the
FSU have also been important suppliers in recent years.

-   *Wheat Flour (HS 110100000)*

Wheat flour imports over the past few years have ranged from 200,000 to
300,000 tons. The U.A.E, Australia, Belgium, China, and India have been
leading suppliers. The amount of imported wheat flour used in the snack
industry is unknown, but is estimated to be a similar percentage as
local wheat flour, or about one percent. Based on this estimate, demand
is considered to total about 3,500 metric tons annually.

-   *Wheat Starch (HS 110811000)*

Indonesian imports of wheat starch have steadily declined in recent
years. Japan has consistently been the major supplier, with Australia
and Singapore providing lesser amounts. The amount of wheat starch used
in the snack industry is unknown, but trade sources indicate that the
volume is very small in comparison to wheat flour and other starch
sources.

[Corn Based Snacks]{.underline}

Total sales of corn-based snacks are estimated at approximately 20,000
tons. This segment accounts for about nine percent of the overall
market.

Most of the corn used is domestically produced yellow type. Some
imported yellow corn may also find its way into the snack industry, but
there is no evidence that any millers or snack makers are using
exclusively imported corn. Regardless or origin, the corn is
degerminated and milled to various size grits and flour, and then used
in making extruded snacks. Snack processors report that there are four
key corn millers supplying this market.

There is also some whole yellow and white corn used in making whole
puffed corn snacks. This snack is similar to popcorn, but does not
expand as much as popcorn. Most, if not all, of this whole corn is being
produced and supplied from various sources in East Java. There is also
reportedly some production of special types of white corn near Bogor in
West Java, which is being used exclusively in the snack industry.

-   *Corn Flour (HS 110220000)*

Corn flour is used in a wide range of food processing applications,
primarily as a thickener in sauces and in the baking industry. Its use
in the snack industry is much less than for milled corn grits or whole
corn, but some extruded snack makers reportedly use corn flour in their
ingredient mix. The annual usage for snacks is difficult to determine,
but is estimated at less than 200 metric tons. Imports have not been
significant.

-   *Corn Starch (HS 110812000)*

Corn starch is an important food processing ingredient and is used to
some extent in the snack industry. However, the bulk of Indonesia's
usage is for textile, paper, and other manufacturing processes. Imports
of corn starch have approached 35,000 tons in recent years, supplied
primarily by Japan, South Korea, and China. However, it is very unlikely
that corn starch imports will continue at recent levels. In 2003, a
local corn miller, PT Subah Indah Tbk, began operations at a new corn
wet milling facility near Jakarta. This plant is the largest of its kind
in Southeast Asia and should be able to supply most, if not all, of
Indonesia's requirements for corn starch and other corn-based products.
However, the plant will rely mainly on imported whole corn to meet its
1,000 metric tons per day capacity to produce corn starch and various
derivatives, such as glucose syrup and maltodextrines, as well as corn
oil.

[Dry Peas and Nuts Based Snacks]{.underline}

Total sales of peanut snacks in 2002 were approximately 70,000 tons. Pea
imports for use in the snack industry are estimated at about 12,000
tons. A large portion of this segment of the snack market is dominated
by SME and home-based processors, so total sales value is difficult to
estimate.

-   *Peanuts (HS 120210000 and 120220000)*

Historically, only about 7 percent of Indonesia's total peanut
production is used in the snack industry, with the balance used in a
wide range of other traditional foods. Despite the relatively large
domestic supply of peanuts, Indonesian snack producers and other food
processors rely on imports of shelled and in-shell peanuts to meet
seasonal demand and quality requirements. Imports have been over 100,000
tons per year. India, China, and Vietnam have been the primary
suppliers.

-   *Dry Peas (HS 071310000)*

Dry peas are used to produce mainly fried whole pea snacks, a popular
item that is commonly sold throughout Asia. Some dry pea raw material is
also used to make extruded pea snacks, although this type of end product
is less popular than fried whole pea snacks.

Dry pea production requires a long growing season (typically 100 days)
and long photoperiods, so this crop is not produced in Indonesia and
other tropical countries. Thus, all dry pea raw materials used in the
snack industry are imported.

All fried and extruded pea snacks that appear in the retail market are
dyed green in color to appeal more to consumers. However, a wide range
of dry pea types and colors are imported for processing. The most common
types of dry peas used include green, yellow, marrowfat, Dun, and maple
peas.

The level of imports is difficult to determine, but leading importers
and end-users indicate the level may have been close to 12,000 tons in
2003. New Zealand, Canada, and Australia have been the primary
suppliers.

[Tapioca, Rice, & Soybean Snacks]{.underline}

-   *Tapioca Snacks*

Indonesia is a major producer of tapioca (cassava), with annual
production of tapioca roots totaling about 16 million tons. Only a small
fraction of total output, estimated at about 0.1 percent of production
is used in the snack industry each year. Krupuk, or traditional fried
shrimp crackers, is the primary end use for most tapioca flour used in
snacks. There are hundreds of SME krupuk producers operating throughout
the country.

Most of the demand for tapioca in packaged modern snacks is to produce
pelleted snacks. Manufacturers use mainly tapioca starch mixed with some
wheat flour (or other types of flour) to produce a thick paste that is
machine-stamped into pellets. The pellets are then dried and later fried
to make the snacks.

-   *Rice Snacks*

Rice production in Indonesia has averaged about 50 million tons each
year over the last five years, making it the country's most important
crop. However, only about 0.03 percent of total rice production is used
in the snack industry each year. Rice is often used as a secondary
ingredient to improve texture and flavor, or to reduce costs, in many
extruded snacks manufactured by larger processors. Overall though,
production of rice-based snacks is dominated by smaller processors
located throughout the country.

-   *Soybean Snacks*

Soybean-based foods, including tofu, tempe, and other products, are
consumed in large quantities in Indonesia. However, fried soybean snacks
are a relatively more recent addition to the diet, but popularity is
growing, particularly among lower income consumers. Most of these snacks
are produced by SMEs and sold locally or regionally. In 2003, PT
Garudafood launched a high quality modern soybean snack called "Snack
Kedele" and is marketing it as a nutritious, high-protein snack. The
product is a fried or roasted whole soybean that is coated with tapioca
flour and then fried in vegetable oil and seasoned with salt, sugar,
garlic, coriander, and pepper. The packaging quality is equal to or
better than their peanut-based snacks.

Local soybean production is inadequate to meet demand, so large volumes
of imported food-grade soybeans enter from the U.S., Argentina, and
Brazil. The import level is about 1.4 million tons per year. The amount
of soybeans used in snacks is estimated to be about 10,000 metric tons
per year.

[Seasonings, Flavorings, Vegetable Oils]{.underline}

Imported seasonings and flavorings are used primarily in the Western
style snacks produced by larger firms, while the majority of SMEs obtain
their seasonings and flavorings locally. Accurate data for individual
types of seasonings and flavorings is difficult to estimate, as there
are a large number of different types of seasonings and flavorings used
by each company. Most snack producers use palm oil, palm olein, or
coconut oil, all of which are available in Indonesia.

# III.4 Key Players

[Indofood Frito-Lay Makmur]{.underline}

Indofood Frito-Lay Makmur is a joint venture between Indofood Sukses
Makmur and Frito-Lay. Indofood Sukses Makmur Tbk (Indofood) is by far
the number one processed foods company in Indonesia, with a leading
market share for most of its products. Besides snack foods, the company
also produces instant noodles, wheat flour, branded edible oils and
fats, baby foods, and seasoning products. Indofood Sukses operates the
world's largest flour mill and is also the world's largest instant
noodles manufacturer. Indofood also operates the largest distribution
network in the country, with its products available in more than 150,000
retail outlets throughout the country. Indofood dominates the instant
noodle market (75 percent market share) wheat milling (68 percent),
cooking oil (60 percent), and snacks (55 percent).

The company's joint venture with Frito-Lay makes it the largest snack
manufacturer in the country. Indofood Frito-Lay is a snack importer,
distributor, producer, and marketer. Its main target market is
middle-income consumers and up. Indofood Frito-Lay claims to hold a 60
percent share of the modern snack segment, which comprises about 20
percent of the overall snack market value. The company produces mainly
extruded snacks and fried potato chips. They expect to produce more
fried products in the future.

[Siantar Top]{.underline}

Siantar top is a major competitor to Indofood Frito Lay in many snack
segments, particularly in corn-based products. The company has a history
of being very innovative in providing new flavors and products. They are
also integrated into other businesses, such as the production of snack
packaging machines. The majority of Siantar Top's snack products are
extruded.

[Garuda Food]{.underline}

PT Garudafood is the market leader in the snack nuts segment, with an
estimated 40 percent share. The company's products include popular
coated peanuts and roasted peanut snacks.

This company is a market leader in developing new products and using
modern technology in producing snacks, and has spent a large amount on
the research and development of equipment that is best suited for
production of their products.

[URC Indonesia]{.underline}

Universal Robina Corporation, a Philippine-based company, has recently
establish PT URC Indonesia and has opened a factory in Cikarang near
Jakarta to manufacture its snacks. URC had been the leading importer of
snacks into Indonesia, but with the opening of this factory, the
company's import totals should decline significantly. The production
capacity for the new factory will be around 18,000 tons per year. The
company plans to use the newest technology and machinery in producing
high quality products at competitive prices. URC will be partnering with
Garudafood's subsidiary, PT Sinar Niaga Sejahtera, for the distribution
of its products.

[ABC President Enterprises]{.underline}

ABC is one of the leading food companies in Indonesia, with subsidiaries
producing drinks and syrups, instant noodles, sauces, canned goods,
candies and confectionery items, snacks, and other products.

[Pacific Food]{.underline}

The company is a joint venture between PT Mamee Pacific Buana and
Pacific Food Sales & Service Sdn. Bhd (Malaysia). The company's products
include noodles, biscuits, candies, and snacks. Pacific Food's most
popular snacks include Double Decker, Smax, and Best. The company's
factory is located in Manis Industrial Estate and has an estimated
production capacity of 5,000 tons per year.

[Sumber Sari Pangan]{.underline}

This company is typical of a medium size snack producer in Indonesia,
relying mainly on local raw materials, distributing mainly through
traditional channels (not much modern retail), and targeting middle and
low-income consumers. This medium size snack producer is the second or
third largest in the Surabaya area. The company is currently producing
mainly extruded snacks, as well as some pellets.

[Candi Jaya Amerta]{.underline}

This company produces various types of cracker products, including
Shrimp Crackers, Vegetable Crackers, Prawn Sticks, Soy Bean Crackers,
Hot and Spicy Shrimp Crackers, and Cassava Crackers. The company began
as a home industry using traditional production methods and marketed its
products only to the domestic market.

The company began to grow and started to develop new products and
improve production methods. In 1985, the company began exporting its
products, initially to Saudi Arabia.

The company has continued to grow and has added more snacks to its
product line, as well as investing in modern processing equipment. It
now exports products to several countries, including the Netherlands,
Belgium, Spain, the United Kingdom, U.S., Australia, Taiwan, Malaysia,
Egypt, and the United Arab Emirates.

# III.5 Distribution

Distribution is a constant challenge in Indonesia due to the country's
vast distances, many islands, rather undeveloped transportation
infrastructure, and the huge number of consumers living in rural areas
far from larger cities and the main island of Java. These and many other
factors make distribution a highly complex and important process for
snack makers and others active in the food business. One of the major
complaints among many wholesalers and retailers nationwide is the
inadequate ports throughout the country. Existing ports are also often
not up to standards. Drafts in many of these ports are often too
shallow, thus requiring products to be unloaded onto smaller ships so
they can be taken to the port. The inadequate number of facilities also
results in frequent congestion, causing shipping times to be much long.

The distribution system includes approximately 10 national distributors
who service the entire country and numerous agents/distributors with a
more local penetration. There are also hundreds of wholesalers and
millions of retailers. Many companies, both large and small, maintain
their own distribution systems directly or via subsidiary companies.
Costs of shipping by air are prohibitive and the rail system is limited
and inefficient, so most snack products are distributed by truck and
inter-island ships.

East Java, particularly the Surabaya area, is an important snack
producing, repacking, and distribution center. The region is an
important source of corn and other raw materials, which is why many
snack producers choose to locate in this area. In addition, Surabaya is
a major port city and is well located to serve both Java and the eastern
islands. Its location makes it a major transshipment port for domestic
and imported products, which must be offloaded from deep draft vessels
and on to shallow draft vessels for distribution in the eastern islands.
The process works in reverse for products arriving into Surabaya from
the eastern islands.

***Distribution System for Imported Snack Products***

Distribution of imported snacks is often a difficult undertaking, even
for larger importers and local producers. Snack products usually are
imported into the two major ports of Jakarta and Surabaya by
importer-distributors or agents. After importation, the products are
usually trucked to the modern retail outlets in the major cities and
other urban areas. Imported snacks are rarely found in traditional
distribution outlets due to their relatively higher prices. Smaller
importers still rely on local distributors and agents in order to sell
their products. Some larger retailers may obtain the products directly
from these exporters, bypassing the distributors entirely.

Imported products being sold in traditional trade channels are forced to
go through a number of distribution hubs in key cities throughout the
country. Most products move through these hubs before they make there
way to distributors and wholesalers before being delivered to local
retailers.

***Retailers***

Indonesia's food retail system is still dependent on traditional wet and
dry markets in smaller towns and villages but modern trade channels are
growing in numbers and importance, particularly in the snack industry.
The number of supermarkets is approaching 900 and mini-marts total more
than 3,000. An estimated 25 percent of retail food sales in Jakarta are
through modern trade channels.

Large stores such as Carrefour, Hero & Giant, Alfa, Matahari, Lion,
Super Indo, Indomart, and Makro have expanded their presence in Jakarta,
Surabaya, and throughout Indonesia. These outlets have become very
popular among the middle to high-income consumer groups. As store
numbers increase, these new retail outlets are drawing an increasing
amount of middle-income and low-income consumers, as well as small shop
owners.

Sales of modern snacks are expected to increase along with the
development of modern trade channels. This is also likely to bring an
increasing emphasis on product quality, which should tend to favor
imported ingredients and higher quality local raw material suppliers.

***Packaging***

Products produced by large-scale manufacturers are usually packed in
poly-metalized foil packages. The shelf life for snacks packaged in this
material is approximately three to four months. Most SMEs package their
products in clear plastic bags, often without a brand name. The shelf
life for chips packaged in plastic bags is usually one month or less.
This difference in shelf life is one reason why snacks with better
packaging can be distributed to all areas of the country, while
small-scale produced snacks are often sold near where they are produced.

# III.6 Procurement 

Many of the larger snack companies are vertically integrated. Some have
created subsidiaries from which they obtain a large share of their basic
raw materials and some also have formed partnerships with local farmers
to obtain raw materials. Larger companies that use imported ingredients
tend to buy directly from foreign suppliers, perhaps working through a
local agent or distributor. SMEs generally use few, if any, imported raw
materials except for some seasonings and flavorings. For these items,
they usually rely on importer-distributors who hold distribution
agreements with foreign suppliers.

***Strength of Current Supplier***

Snack producers report that the primary strengths of their current
suppliers include good pricing, availability of supply, and on-time
delivery. However, price is still the key determinant for choosing a
supplier, particularly for SMEs who seek to obtain the lowest priced raw
materials and ingredients at the expense of quality.

***Weakness of Current Supplier***

The Indonesian snack market is highly competitive, so companies that
cannot keep their manufacturing costs low will have difficulty
maintaining sales and profits. As a result, and contradicting the
supplier strengths noted above, poor pricing is the main supplier
weakness mentioned by the majority of snack companies, particularly
SMEs. However, many of the companies who choose lower price suppliers
often suffer the consequences in contaminated and low quality products.

A weakness of foreign suppliers noted by manufacturers is the slow
response time to communications and lack of customer service. Many snack
companies also complain that they receive little or no technical
assistance from their foreign suppliers. Another weakness of foreign
suppliers is their inability to offer a Halal certificate for certain
products.

The higher cost for locally milled wheat flour compared to imported
wheat flour is another frequent complaint.

# III.7 Trends and Outlooks

Although the modern trade channels have been rapidly expanding,
traditional trade channels are expected to remain the dominant snack
distribution channel. Even Jakarta, the largest city in the country,
still relies mainly on the traditional trade channels, which account for
approximately 70 percent of all retail food sales in the city. The
traditional trade channel's share of retail food sales is expected to
decline to not less than 60 percent over the next five years, even as
modern trade channels expand.

In the coming decade, there will be more retailers who will import raw
materials and finished products directly from foreign exporters, whereas
in the past they tended to obtain products from local
importer-distributors. Many of these retailers will establish new
factories, which will use modern technology and equipment, in or near
major cities. They will operate central warehousing and distribution
systems in the larger cities, while opening more outlets in the smaller
cities in order to make their distribution systems more efficient.

Similar changes are also expected to occur in the traditional trade
channels. Major distributors operating nationwide are expected to set up
centralized distribution systems in order to increase direct delivery of
products to traditional market outlets. More major snack producers are
expected to follow this pattern.

Sales of modern snacks are expected to increase significantly in tandem
with the increase in modern retail and distribution systems. This should
bring greater emphasis on product quality.

Value-for-money will remain important to consumers, but they will also
be looking for greater variety in snacks. There is also likely to be
greater concern with the nutrition aspects of snacks and other food
products.

# SECTION IV. POLICIES & REGULATIONS

# IV.1 Tariffs & Quotas

Majority of snack ingredients mentioned in this report has 5 percent
tariff, except for wheat grain which 0 percent tariff.

# IV. 2 Customs and Product Registration Regulations

Indonesia's food regulation and labeling requirements are governed by
Government Regulation No. 69 year 1999. However, many local importers
and distributors often ignore some of these regulations such as the GMO
& irradiation requirements, as they are not usually strictly enforced.
The regulations also often act as a non-tariff barrier to imports due to
the amount of detailed information that is required for registration.

It is recommended that companies exporting products to Indonesia have
reliable freight forwarding and customs clearing companies represent
them in the goods clearing process and with customs relations. Product
registration procedures are usually carried out by the importer,
distributor, or an agent on behalf of the exporting company. Product
registration must be completed before the product can be imported into
Indonesia. Products approvals are issued by the National Agency for Drug
and Food Control of the Department of Health. The NADFC will provide a
registration number that must be printed on each individual product
label.

All producer and importers of food products intended for retail sale in
Indonesia must place a label on all their products. These labels must be
attached on each item where they are easily visible and legible. This
label should provide all required information about the product, such
as: the name of the product, a list of contents and their total weight,
name and address of the producer and importer, and date of expiry. The
food production batch codes should also be placed on the product label,
container, or package.

Any information, statements, or other details placed on the label must
be true and cannot be misleading. Any health claims placed on the label
must be supported by documented scientific findings. These statements
should also be printed in Bahasa.

Any producer or importer who claims that their food is safe for
consumption by Moslems are required to have Halal food certification.

Product labels should also include nutritional facts. This information
should include, in the following order: Total calories from fat, protein
and carbohydrate and total values of fat, saturated fat, cholesterol,
total carbohydrate, fiber, sugar, protein, vitamin and mineral.

Genetically modified products must bear the words Genetically Modified
Food in the label.

Irradiated food products must bear the words Irradiated Foods on the
label. The label for irradiated food should contain the name and address
of the irradiating agency (if not producer), month and year of
irradiation, and the name of the country where the irradiation took
place.

# SECTION V. COMPETITION

The U.S. is a leading player for some processed food products and
ingredients. U.S. ingredients have a positive quality image and many
Indonesians are familiar with American products from study, travel, or
relatives abroad. They have also been exposed to American foods and
lifestyles through movies. However, due to its closer proximity,
Australia enjoys a freight advantage in terms of shipping times and
rates.

Products from China, Korea, Malaysia, Thailand, and Taiwan are
especially strong in retail outlets that serve middle and lower income
groups. Products from these countries are also more common in stores
outside of Jakarta. Low price is a major selling point for these items.

The United States will remain a leading supplier of snacks and other
imported high value food products to Indonesia. This is due largely to
the favorable image of American products among consumers. However,
Australia will be a major threat to the US market position. By 2004, due
to the ASEAN Free Trade Agreement) there will be new opportunities for
Malaysia, Thailand, and the Philippines to be new competitors in the
Indonesian market.

Following are comments from snack producers regarding U.S. imports
compared to other supplying countries:

-   Prices for U.S. raw materials and ingredients are usually higher.

-   U.S. suppliers often require more demanding and limiting contract
    terms and conditions.

-   U.S. suppliers often require a minimum order quantity that is much
    higher than what producers need.

-   Many producers commented that the response time to requests was
    often very slow. In some cases no response was received.

-   Time zone differences makes communications difficult, as business
    hours do not match up

-   U.S. suppliers often cannot meet special requirements for Muslim
    foods, including Halal certification.

-   The U.S. supplier has no representative office in the region.

-   Many snack producers also noted that prices for imported raw
    materials have been too unstable. Constant fluctuations in exchange
    rates make it difficult to accurately determine the costs of
    production in advance.

# SECTION VI. CONCLUSIONS

# VI.1 Conclusions

Indonesia's demand for many snack products and ingredients is relatively
high and has significant potential to expand, particularly as the
country's economy recovers, disposable incomes improve, and as modern
snack production and distribution systems continue to develop.

There are opportunities for U.S. snacks and ingredients in the
Indonesian market. However, some of these factors, such as poor price
competitiveness with other international suppliers, are difficult or
impossible for U.S. suppliers to influence. Nevertheless, there are also
several key constraints that U.S. suppliers can immediately focus on
that will help them to gain a larger share of the market. These
constraints include:

-   Inadequate technical support and timely sales service.

-   Lack of knowledge concerning U.S. products.

Many of the most interesting and valuable shows and events to snack
producers are held in the US. These are excellent venues to introduce
buyers to U.S. products and suppliers, and for U.S. suppliers to gain a
better understanding of Indonesian buyers' needs. Often, Indonesian
buyers are not aware of these events, or they do not have the resources
to attend. Supporting Indonesian buyers' attendance to these trade show
would act to overcome some of the constraints listed above.