The consumer sector is one of the supporting sectors of the Indonesian economy.

Looking at the gross domestic product (GDP) structure, private consumption accounted for an average of 56 percent of Indonesia'€™s total output over the past five years.

The role of the consumer sector, which relies on the domestic market, has become increasingly important as a driver of economic growth at a time when the external sector (exports) fell as a result of the global economic slowdown and great uncertainty about the economic future.

Judging from the capital market, the consumer sector is also still considered attractive by investors. This is indicated by the growth of the consumer goods sub-index under the benchmark Jakarta Composite Index (JCI), in comparison with other sectors.

In 2014, the consumer goods price index grew by 22.2 percent, the third highest in the Indonesia Stock Exchange after the property and real estate index as well as the infrastructure, utilities and transportation index, which grew respectively by 55.8 percent and 24.7 percent. In the same period, the JCI grew by 22.3 percent. As of Feb. 6 this year, the consumer goods sub-index grew by 5.9 percent (year-to-date) compared with JCI'€™s 2.2 percent gain.

The Consumer Confidence Index (CCI), which indicates the level of optimism among Indonesian consumers, is still quite high in comparison with other countries. The Global Consumer Confidence Report for the fourth quarter (Q4) of 2014, which was released by AC Nielsen, shows that the CCI in Indonesia is 120, the second most optimistic in the world after India (129). Previously, the Indonesian CCI actually occupied the top position for five consecutive quarters (from Q1 2013 to Q1 2014) among the 60 countries surveyed.

Meanwhile, the CCI released in Bank Indonesia'€™s consumer survey also showed a strengthening trend. The CCI in January 2015 stood at 120.2, near its highest level of 120.6 in October 2014.

The consumer sector is predicted to grow moderately in 2015. From the demand side, consumers'€™ purchasing power has eroded as the government increased the subsidized fuel price in November 2014 is estimated to normalize after three to six months and get stronger as the government decreased the subsidized fuel price in the early and mid-January 2015.

Other factors that will have a positive impact on the consumer sector are better economic growth projections for this year and the number of infrastructure development projects that are expected to improve the distribution of consumer products.

Meanwhile, challenges to the consumer sector will be more on the supply side. Given the high import content in the consumer-related industry (raw materials dominate above 50 percent of the production cost structure), the fluctuation of the rupiah exchange rate is of great concern to the consumer-related industry this year, even though it is expected to fluctuate slightly less than it did in 2014. The rupiah exchange rate in 2015 is expected to hover around Rp 12,500 per US dollar (on average).

Mitigation of risks related to exchange rate fluctuations should be carried out. Besides that, an increase in the minimum wage and a potential increase in other production costs as well as increasing competition are going be a concern.

However, the potential of Indonesia'€™s consumer sector in the medium- to long- term remains strong. There are some key points from a consumer sector panel discussion in Mandiri Investment Forum on Jan. 27 this year, which could likely act as catalysts for positive nationwide consumer sector growth going forward.

Looking at Indonesia'€™s demography, it is currently in a phase of changing age structure in which more than 50 percent of the total population is younger than 30. As these are people are in a productive age, there will be more labor supply, more work participation and increasing disposable income, which should also drive consumption.

Further, we have also witnessed changes in lifestyle and consumption patterns in-line with the rising urbanization trend. By 2030, it is estimated that 71 percent of the total Indonesian population will live in urban areas compared with about 55-57 percent at present. Consequently, these people whom we categorize as middle-income people are growing in size to become the new support of the consumer market in Indonesia.

According to AC Nielsen, 48 percent of total spending on fast moving consumer goods comes from the middle class. The proportion of the middle class itself is expected to rise, from 56.5 percent of Indonesia'€™s total population in 2010 to 68.4 percent in 2015, and as much as 76.1 percent of the total population in 2020.

According to McKinsey, Indonesian consumers have some specific shopping behaviors. They are risk averse and brand loyal. Based on McKinsey'€™s survey, 63 percent of Indonesian consumers only buy products with brands they already know. This condition positions them as late adopters because they are not willing to try new products (risk averse) up until it is suggested by their family members.

Better network infrastructure encourages an e-commerce market. According to XL Axiata, the number of mobile subscribers is continuously increasing with an estimation of 209 million in 2014 and 314 million SIM cards in the market this year. With better network access, currently around 73 percent of the total Indonesian population already has access to internet.

McKinsey also reported that internet usage in urban Indonesia had grown by 40 percent over the past two years, especially for social networking and searching information purposes. Internet access from smart phones has allowed consumers to conveniently shop without going to stores.

As technology rapidly evolves, e-commerce platforms will also improve with an increasing number of sellers and gradually intensifying data traffic.

Indonesia'€™s e-commerce faces short term hurdles, which include a lack of online purchasing behavior. But we believe that consumer education and IT development could affect the consumer behavior, which eventually corresponds to the producers'€™ advertising and branding strategies. The emerging middle class with better education and knowledge will create highly demanding consumers for instant information and convenience, which will lead to more innovative and competitive industries.

In conclusion, the consumer sector will remain as a strong sector in 2015, supported by a confident consumer base, stable macroeconomic policies and better infrastructure development projects.

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The writer is an industry analyst at PT Bank Mandiri (Persero) Tbk.

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