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HIKE IN PRICE OF INSTANT-NOODLES INEVITABLE

The continued depreciation of the rupiah against the US dollar has had direct impact on the prices of products with high import contents, including instant-noodles. Although the import of wheat flour, the basic material for instant-noodles, is subsidized by the Government, the price of instant-noodles has increased by an average 85 % since the beginning of 1998 due to hikes in the production cost.

The rise in the price of instant-noodles produced by PT Indofood Sukses Makmur (ISM) of the Indofood Group has had direct impact on the prices of instant-noodles produced by other companies. This is so because PT ISM, which controls 80% of the domestic market for instant noodles, determines the market price of such products.

Despite the continued hike in the production cost, it would have been difficult for other instant-noodle producers to increase the price of their products if Indofood had not changed the price of its instant-noodles. If Indofood had refrained from increasing the price of its instant-noodles, other producers would have collapsed. This year, a number of instant-noodles products from non-Indofood producers have disappeared from the market. However, although Indofood has raised the price of its instant-noodles, it is still difficult for other producers to maintain their survival in the face of competition from the former. Moreover, with the people's purchasing power weakened, a growing number of customers have reduced their instant-noodles consumption.

In fact, the Government still subsidizes the import of wheat flour by setting the exchange rate of the rupiah at Rp 6,000 to the dollar. However, since the actual value of the dollar has lately increased to Rp 15,000, the production cost has continued to increase, reducing the effectiveness of the wheat flour subsidy as well as the instant-noodles producers' profit margin. Indofood, for example, has seen its profit margin decline by 15%. Thus, Indofood has had no choice but to raise the price of its instant-noodles. Even so, Indofood has also promised that it will not increase the price further unless efficiency-improvement efforts fail.

Currently, with the wheat flour subsidy still provided, Indofood can still purchase the commodity from Bulog (the National Logistics Agency) at Rp 1,250/kg. Without the subsidy, the Bulog price of wheat flour would have increased to Rp 5,000/kg. With the subsidy still existing, Indofood can still keep its production cost at as low as Rp 369/pack with the following breakdown: Rp 75 for the wheat flour, Rp 90 for the ingredients, and the rest for the packaging and other production-cost elements.

According to Indofood, the rise in the production cost started in February 1998, when the value of the US dollar rose to Rp 16,000. In the subsequent months, the value of the US dollar stabilized at around Rp 10,000. Now, it ranges around Rp 15,000. In February, Indofood raised the price of its instant-noodles by 50%. According to the management of Indofood, the company has been losing money from its instant-noodles sales since April due to hikes in the production cost. However, Indofood is optimistic that in the medium-term, the company will regain profit. This optimism is based on the fact that Indofood is fundamentally a strong company thanks to the trends in demand, to the popularity of its brandnames, to the retail price of its products, and to its dominant control of the domestic market.

Wheat flour

The Government has planned to cease the wheat and wheat flour subsidy in mid-1999. If and when this happens, consumers of wheat flour and wheat-flour based products, including instant-noodles, will have to put up with a 200%-300% increase in prices. The subsidy for the import of food materials and drugs has been set at Rp 5.1 trillion, of which 1.7 trillion is for wheat and wheat flour.

The instant-noodles industry is indeed dependent on the Government's subsidy for its survival because its wheat and wheat flour demand has to be procured fully from imports. Over the years, the volume of such imports has continued to increase with the rapid growth of the industry, and this has posed an increasingly heavy burden on the Government's subsidy, more so because the value of the rupiah is becoming increasingly irrational, standing at around Rp 15,000 to the greenback.

Non-Indofood products increasingly difficult to find

Until very recently, although the domestic market for instant-noodles continued to be dominated by Indofood products, the company was faced with increasingly significant competition from agressive newcomers in the industry such as Mie ABC (produced by the ABC Group), Michiyo (by Wicaksana), Supmi/Maggi (by Nestle), Salam (by Saritama Tunggal), Mie Duo (by Delly Food), and Barokah (by Inkopotren) as instant-noodles became increasingly popular as an alternative staple-food item in addition to rice. These newplayers managed to penetrate the existing market niches through agressive promotional campaigns, attractive packagins, and competitive prices.

Of late, however, a growing number of these non-Indofood instant-noodles brands have disappeared from the market, largely because they do not have a strong distribution network. Michiyo, for example, which aimed at the middle-upper market segments and made itself available at supermarkets in large cities, has now disappeared in the face of competition from Indofood. A similar fate has also been experienced by the less popular non-Indofood brands such as Khong Guan, Doremi (produced by Supmi Sakti), and others. They have completely vanished from the market. The more popular non-Indofood brands such as Mie Maggi, Salam, and Barokah are now increasingly difficult to find at supermarkets.

PT Indofood Sukses Makmur (ISM), the largest producer of instant-noodles in Indonesia, is the result of a merger of six Indofood Group companies and has become publicly listed. In 1996, PT ISM formed alliance with PT Nissin Mas of the Roda Mas Group, which turned out such instant-noodles brands as Cup Newdless and Doraemon.

PT Nissin Mas, which was established in 1992, is now 49% owned by PT ISM, 49% by Nissin Food Product Co. Ltd., a leading Japanese instant-noodles producer, and 2% by Nisso Iwai Corporation, a Japanese leading trading company.

By co-managing Nissin Mas, Indofood - which is the largest instant-noodles producer in Indonesia - wishes to be able to increase its penetration into the export market. Nissin Food Product iteslf controls the Japanese market for instant-noodles by supplying it with 5.2 billion packs annually. In addition, the company also exports its products to the United States, China, Brazil, Hong Kong, India, Singapore, Thailand, and the Netherlands. PT ISM itself currently exports its instant-noodles to 33 countries.

Utilization of production capacity optimum

The entry of newcomers into the instant-noodles industry over the recent years continued to drive up the industry's production capacity. In 1997, it reached 450,000 tons/annum. Given that the actual output for 1997 was 404,925 tons, the rate of production capacity utilization with the industry for the same year was around 90%.

The rate of instant-noodles production capacity utilization was high because a number of producers, e.g. PT Myojo Prima Lestari -which produces low-cholesterol instant-noodles under brand name Miojo - are affiliates of the Indofood Group. Similarly, PT Nissin Mas has been an affiliate of the Indofood Group in 1996.

Exports down

Over the past sixe years (1992-1997), the volume of Indonesia's instant-noodles exports reached its peak level of 38,604 tons (worth US$ 25 million) in 1996. In 1997, however, it dropped by 43.1% to 21,969 tons (worth US$ 14.5 million), partly because the Indofood Group commenced the operations of its instant-noodles plant in Saudi Arabia and Nigeria. The former supplied instant-noodles to Middle-East countries and the later to African countries.
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Comment:Indonesia: Instant noodle prices increase 85% due to rising production costs despite government subsidy of wheat flour
Publication:Indonesian Commercial Newsletter
Geographic Code:9INDO
Date:Jul 27, 1998
Words:1265
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