Agrifood Sector Studies Indonesia: Restructuring of agrifood chains in Indonesia - National and local meso study

by Ronnie S. Natawidjaja, Elly Rasmikayati, Bayu Kharisma, Kusnandar, Dian Purwanto, Thomas Reardon

The retail and processing 'symbiosis‘ is a key part of food market restructuring in Indonesia. The rapid growth of the supermarket sector was triggered by the removal of the Foreign Direct Investment (FDI) restriction in 1998 and complemented by the growth of the urban population and investment in property. The fresh fruit and vegetable sales (FFV) share in supermarket sales increase very rapidly in a short time, and a very high proportion of those fresh fruit and vegetable sales are of imported produce - at least double to triple the imports share in supermarket fresh fruit and vegetable sales in comparable developing countries.

The leading supermarket chains have moved very early on to the use of supply channels other than the traditional wholesale markets. They increasingly source local vegetables via new-generation specialized wholesalers dedicated to the modern market and grower/packer/shippers using outgrower schemes. The reason behind this early move by the supermarket sector to new commercial agents outside the traditional wholesale markets was the poor quality and efficiency of the main wholesale market system.

Food industry development has also been very consistent with the retail market restructuring. In 1995, food stuffs - whether fresh or processed - were nearly all sold via small shops and wet markets. By 2005 most of processed foods were being sold via modern retail outlets. While supermarkets went from approximately 5 - 30 percent of food retail sales overall from 1995 to 2005 (as was usual in all countries), the penetration was much quicker in processed foods and much slower in fresh foods. The share of fresh fruit and vegetables sold via modern retail outlets is low, less than 10 percent. Hence the effect of market restructuring is expected to be via a chain process of retail, affecting processing which in turn affects farmers, rather than the (expected slight) effect of retail directly on farmers.

Potatoes are a major crop in Indonesia; they are ranked second in vegetable production and in the top five vegetables sold in supermarkets and wet markets. Indonesia does not import fresh potatoes for consumption but does import some seed potatoes. Demand for potatoes has been rapidly increased by the change in consumption channelled by the demand of modern retail outlets, the Americanization of chain restaurants, and the demand of the food industry for raw materials for processing. Domestic potato production has been constrained by limited certified seed potato availability and, more significantly, by an import restriction on seed potatoes import that has been in place since 2004. From the beginning of the demand surge, total potato imports increased eight-fold in a decade (1994 to 2005), especially for potato starch, and frozen and processed/preserved potatoes.