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Bogasari maintaining dominant role in wheat flour market.

More than 30 years in operation in wheat flour business

Bogasari flour mills which is now a business unit of PT Indofood Sukses Makmur Tbk has been presence in the country's wheat flour business for more than 30 years.

From the time of its establishment in 1971 up to the middle of 1998, Bogasari was set up as only a flour miller to receive orders for milling from the Government through BULOG, the state-owned distribution and logistics company. This mechanism ruled that the import of wheat and the subsequent distribution of flour was completely under the control (monopoly) of BULOG. In June 1998, Indonesian Government liberalized (deregulated) the flour industry by removing the monopoly and, from that time forward, all national flour companies, including Bogasari have operated as flour producers who manage its own supply of wheat and distribution of wheat flour.

Bogasari was acquisitioned by PT Indofood Sukses Makmur on 30 June 1995.

Business operations and supporting facilities

Bogasari is an Indonesian wheat flour producer having a production capacity of 3.7 million tons per year, the largest in the world in a single location. The history of Bogasari began on 29 November 1971 with the official opening of the first factory in Tanjung Priok, North Jakarta. This mill is located near to the harbor to enjoy the economic of scale in production. It was found that shorter distance between mill and harbor reduces transportation cost. Bogasari, established in November 29, 1971 is located in Tanjung Priok, North Jakarta. After one year of establishment in Jakarta, Bogasari invested in a milling new factory in Tanjung Perak, Surabaya to expand its production line.

For nearly three decades, Bogasari has been serving the food needs of the Indonesian people with its three widely known brands of wheat flour: Cakra Kembar, Kunci Biru and Segitiga Biru. These three products are widely used by the noodle, bread and general baking industries, by large and small scale industries as well as households. In addition, Bogasari also produces byproducts in the form of bran, pollard for cooperatives and the animal feed industry, and industrial wheat for plywood industry

Bogasari Jakarta and Surabaya have milling capacities of 10,000 and 5,900 metric tons (mt) per day respectively. Moreover, Jakarta has a pelletizing capacity of 110 mt per hour and Surabaya 38 mt per hour.

Other than its two wheat flour factories, Bogasari also owns three other divisions: the Pasta Division and two subsidiaries, the Packaging (formerly the Textile Division) and the Maritime Divisions. The Pasta Division factory was established in December 1991 with a capacity of 60,000 metric tons per year. It produces "Long Pasta" and "Short Pasta", 80% of which is targeted for export markets.

To provide an adequate supply of wheat flour, Bogasari Jakarta has 140 wheat silos with a total capacity of [+ or -] 4000,000 mt, pellet silos with a capacity of 69,000 mt and warehouses for the storage of goods with a capacity of 65,000 mt. Surabaya has 84 wheat silos with a total capacity of [+ or -] 214,000 mt, pellet silos with a capacity of 60,000 mt, and storage warehouses that can hold 35,000 mt.

The Bogasari Packaging Division was established in 1977 in Citeureup, West Java to provide the calico bags for packaging the flour products from the two factories. Meanwhile, in order to ensure the steady supply of wheat, the Maritime Bogasari Division operates three ships for transporting wheat and three barges for inter-island service. These vessels have all received the international AMVER rating (Automated Mutual Assistance Vessel Rescue)

The [un]loading ports owned by Bogasari are one of the facilities that provide the most value added. Bogasari Jakarta operates two ports, 185 m and 200 m in length and 9 m and 14 m deep, that have a pneumatic equipment capacity of 3,800 mt per hour. One of these piers, which is relatively new having been constructed in 1996, can handle ships of the Panamax class size. Surabaya, on the other hand, operates one port with a length of 187 m, depth of 9 m and pneumatic equipment with a capacity of 1,800 mt per hour. These three ports can provide loading and unloading services for wheat flour and also other types of grain commodities.

The unloading facility is equipped with two towers using the pneumatic suction system. The grains will be directly transferred into the silo with the capacity of 10,000-15,000 MT per day. The transfer is done through the belt conveyor fully covered with the canopy to reduce loss to minimum level and to avoid humid and dirt during the transfer.

Supported with 80 units of silo with the storage capacity of 2,800 MT/silo, Bogasari grain terminal services (GTS) carries out unloading process with grain quality consistency for a hygienic storing process and FIFO method of issuance.

Delivery of unloaded grain can be in bulk or in pack (upon request). The bulk delivery is done directly from the silo to the truck with the speed of 8,000-10,000 MT per day. Meanwhile, the bagging plant consists of ten lines with the total packing capacity of 6,000 MT per day and is completed with digital scale.

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Contributed 30 % to Indofood sales

As a member of the Indofood group of companies since 1995, Bogasari is a vital component in Indofood's success story as an integrated "Total Solution Food" company. Indofood group classifies its business activities into ten (10) major operating business segments, which are grouped into four (4) strategic business groups, namely:

* Consumer Branded Products business group consisting of five (5) business.

* segments namely: Noodles, Dairy, Food Seasonings, Snack Foods, Nutrition and Special Foods.

* Bogasari business group as one (1) business segment.

* Agribusiness group consisting of three (3) business segments namely: Plantations, Cooking Oil and Fats, and Commodities.

* Distribution business group as one (1) business segment.

In 2008, Bogasari contributed 30.1% to the consolidated net sales of PT Indofood Sukses Makmur, declined from 34 % in the previous year due to lower sales volume. In the meantime, the share of agrobusiness business group rose sharply from 19% to 27% following rising commodity price. In this business groups include palm oil plantation, cooking oil and copra business.

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Reforms to maintain dominant role in the market

BULOG, National Logistic Agency, was previously the sole authorized importer of wheat grain and it controls the distribution of wheat. However, Bulog does not process wheat grain into wheat flour, it merely just import wheat grain. Bulog provides the imported wheat to some milling factories including Bogasari.

Deregulation in the wheat flour industry has shifted the national market structure. BULOG is no longer the sole authority in importing wheat and distributing wheat flour. Removal of BULOG authority in wheat import and distributing wheat flour altered the established distribution channel. Bogasari had to established its own wheat flour distribution channel.

As disclosed by Bogasari's executive, Philip S. Purnama, it is not easy to give up the comfort of protection and venture into the liberalized market. The flour-processing company had by then for many years monopolized the market as a supplier for the State Logistics Agency (Bulog) to supply flour to meet domestic demand.

For the sake of the company's long-term goal, Bogasari's forward-looking vision, which calls "Vision 2020" was formulated. The vision says "To become the leading global integrated provider of premium quality agrifoods and related products and services."

Efficiency in every line production, sales and distribution were introduced Line function was reinforced, while staff function was reduced. While originally there were only five sales administrative staffers to handle a sales volume of Rp 1 trillion, the marketing force was then increased to 500 salespeople.

More intensive efforts were adopted to secure wheat supplies. Bogasari continued to implement various cost efficiency programs, including improvement in broken bag levels, raise shelf life of wheat flour product and consumption savings of utilities, to ensure its products competitiveness.

Bogasari no longer launched generic products onto the market; instead it gave its products unique labels that distinguished them from similar products. From originally only three regular brands popular during the BULOG era, Bogasari has now developed about 30 new brands for more specialized segments, among others Segitiga Biru, Cakra Kembar, Kunci, Pena Kembar, Taj Mahal, Kastil, Lencana Merah and Payung. Seven of these brands are for "non-flour" products, such as pasta, premix flour, rice flour and cassava flour.

To introduce the brands of its flour products, Bogasari has not only placed ordinary advertisements but has also undertaken innovative promotion through a co-branding program with other popular brands, among others with Sari Roti, Oreo, Bakmi GM, Roma, Holland Bakery, Khong Guan, Family, Tango and Arnotts. This joint marketing has proven effective to jack up the popularity of Bogasari. To consolidate its brands, Bogasari has also established its own bakery school, conferred citations to cake makers and sent them overseas to take part in cake-making courses and established an association of noodle sellers.

More importantly, Bogasari is applying the Customer Relation Management (CRM) concept. Through its bakery school, Bogasari has introduced 500 new recipes and run nine main programs as well as special courses. Today there are 32 baking centers across Indonesia with some 30,000 graduates, most of whom have become entrepreneurs in the bakery business. Customer loyalty was further enhanced through various programs implemented under Bogasari Mitra Card banner and through Small Medium Enterpreses 'Paguyuban" (SME associations)

Bogasari encountered difficult conditions during 2008, with high wheat prices and declining purchasing power, particularly affecting the important small and medium-sized enterprises (SMEs) segment. Further complicating conditions for Bogasari, new competitors emerged and the temporary removal of Indonesian National Standard (SNI) quality certification led to a rush of flour imports. This combination of factors led to declining sales volume as well as market share of Bogasari in 2008.

Bogasari responded to the changing market conditions by introducing the Bima brand of flour to help small and medium enterprises beset with high costs and falling demand. The Payung brand was relaunched to provide another alternative for cash-strapped SMEs.

Marketing and advertising programs also helped to make the best of a difficult year. Advertising and promotion programs with advertising campaigns utilizing billboards, shop signs, print media and industry-oriented programs were intensified, aimed at boosting brand loyalty.

Anticipating more intense competition with the entry of new competitors, Bogasari will further improve its production processes and implement stringent cost efficiency programs.

Research and development will be enhanced to ensure product quality and consistency, as well as to innovate new products to meet changing customer needs. Relationships with customers will also be boosted in order to maintain loyalty, while advertising and promotion programs will continue to cement Top of Mind brand status among customers and strengthen brand equity.

EBIT margin fell to 8.3 %

Total flour sales of Bogasari fell from 2.57 million tons in 2007 to 2.07 million tons in 2008. Despite lower total sales volume, total sales value of Bogasari increased 28.7% to Rp14.94 trillion in 2008 from Rp11.61 trillion in 2007, due to significant increase in average selling price in response to higher wheat prices during the year. Meanwhile EBIT margin (gross profit and income from operation) fell to 8.3% from 11.5% in 2007 on lower volume and higher wheat cost. Bogasari contributed 30.1% to consolidated net sales, compared to 34.0% in 2007, while the EBIT contribution to consolidated EBIT was 28.6% compared to 46.6% in 2007.

Bogasari's operating costs were also impacted by high crude oil prices in the first half of 2008. Shipping costs moved significantly higher during the first half, falling back in the second half of the year. The following table presents financial highlight of Bogasari finance:
Table-3

Highlight of Bogasari financial statement, 2004-2008

Description 2004 2005 2006

Sales to external 5,986,220 6,460,089 7,285,279
 customers
Inter segment sales 1,592,425 1,463,309 1,712,144
Total sales 7,578,645 7,923,398 8,997,423
Growth (%) 5 14
Segments income
 before expense
 allocation 892,494 831,914 409,388
expenses allocation 79,642 91,883 -89,353
Operation profit
 after expense
allocation 812,852 740,031 329,035
Profit Margin (%) 10.7 9.3 3.7

 (Rp million)
Description 2007 2008

Sales to external 9,465,814 11,661,937
 customers
Inter segment sales 2,147,691 3,282,057
Total sales 11,613,505 14,943,994
Growth (%) 29 29
Segments income
 before expense
 allocation 1,482,347 1,372,661
expenses allocation -141,419 -113,285
Operation profit
 after expense
allocation 1,340,928 1,240,444
Profit Margin (%) 11.5 8.3

Source: Annual report PT ISM

Table-1

Bogasari flour mills production and supporting facilities

Description Jakarta mill Surabaya mill

Start operation 1,971 1,972
Plant size (Ha) 29 13
Port Length(m) 185+200 187
Unloading (unit) 3 + 2 3
Unloading capacity 1800 + 2000 1,800
(MT/hour)
Milling capacity (MT/day) 10,000 5,900
Flour production cap 2.4 million 1.3 million
(MT/year)
Silo capacity 404,000 216,000
Pasta production
Packaging division

Maritime division

Description Other division

Start operation
Plant size (Ha)
Port Length(m)
Unloading (unit)
Unloading capacity
(MT/hour)
Milling capacity (MT/day)
Flour production cap
(MT/year)
Silo capacity
Pasta production 60,000 MT/ Year
Packaging division 4.5 million cotton and
 PP sacks
Maritime division 2 Panamax & 3
 handimax vessels for
 wheat transportation

Source : Data Consult

Table-2

Consolidated sales of PT Indofood Sukses Makmur Tbk, and
contribution of Bogasari, 2006-2008

Business groups Sales to external customers (Rp billion)

 2006 2007 2008

Consumer Branded
 Products 8,144 9,399 11,954
Bogasari 7,285 9,466 11,662
Agrobusiness 3,380 5,330 10,442
Distribution 3,133 3,664 4,742
Total 21,942 27,859 38,800

Business groups Shares total sales (%)

 2006 2007 2008

Consumer Branded
 Products 37.1 33.7 30.8
Bogasari 33.2 34.0 30.1
Agrobusiness 15.4 19.1 26.9
Distribution 14.3 13.2 12.2
Total 100.0 100.0 100.0

Source: Annual report ISM
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Title Annotation:COMPANY PROFILE
Publication:Indonesian Commercial Newsletter
Date:Jun 1, 2009
Words:2369
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