A perfect storm of tax hikes and slowing economic activity is squeezing Indonesia’s shrinking middle class.
But that does mean companies with goods and services catering to the budget-friendly stand to gain.
A hike in value-added tax for luxury goods to 12% that kicked in at the start of the year will make passenger cars even more out of reach for most people.
The Indonesian government expects its economy to expand by 5.2% in 2025, a slight increase from 2024’s target of 5%. Economists that MONIIFY spoke to, however, are pessimistic about this target and see the country’s GDP growing at the same 5% this year too.
The economists’ modest expectations are based on high food prices and low formal employment. The latter hasn’t fully recovered to pre-pandemic levels.
Finding your niche
Despite the headwinds, some businesses are finding ways to thrive. Companies that sell their products directly to consumers, like beauty-and-wellness startup Base and glasses brand Saturdays, have drawn significant venture capital over the past couple of years due to their simple, straightforward models.
But sustaining this momentum won’t be easy.
Shifts in consumer behavior — like growing frugality among younger people — are affecting businesses. Today’s younger shoppers are all about value. “Quality matters more than ever,” Darryl Ratulangi, managing director at VC firm OCBC Ventura, tells MONIIFY.
For entrepreneurs entering the market, the key is finding a niche. For example, “verticals like health and wellness”, which cater to people who care about their health or are fitness enthusiasts, still hold promise, Rexi Christopher, partner at VC firm Init 6, tells MONIIFY.
Things are a bit different in the F&B industry, as people are willing to compromise more. Take the example of Jago Coffee, a Jakarta-based mobile cafe startup known for its “coffee shop on wheels” model. It serves cups starting at just 8,000 rupiahs [under $1], catering to the aspiring middle class.
According to CEO Yoshua Tanu, Jago’s transactions grew last year, and it increased its depots from three to 12 in 2024.
He says that the economic slowdown will hit mid-tier coffee chains the most, especially those selling their drinks between 20,000 and 30,000 rupiah.
“Consumers will either cut back or switch to more affordable alternatives,” Tanu says.
Middle-class struggles
A weakening economy will hit the middle class the hardest because it faces heavy taxes but gets little help, says Krisna Gupta, an analyst at the Center for Indonesian Policy Studies.
Bank Mandiri’s chief economist, Andry Asmoro, highlights three key factors shaping household spending this year.
Many middle- to lower-income earners have shifted to informal work. Food prices are another challenge, as the government must balance stability for consumers with incentives for farmers. Lastly, social assistance programs are vital to supporting the most vulnerable groups and maintaining basic consumption.
“Those in the informal sector without regular salaries will remain cautious about big purchases,” says Aldian Taloputra, an economist at Standard Chartered Bank.
Despite these challenges, primary consumer goods continue to show resilience. Stocks of major players like Indofood and Mayora, two of the largest food producers, have risen significantly in the past year.
On the other hand, the non-primary consumer goods sector, including household items, clothing, and luxury goods, is still in a downward trend, driven mainly by selling pressure, according to Herditya Wicaksana, head of retail research at MNC Sekuritas.
For instance, shares of beauty company Mustika Ratu and Mitra Adi Perkasa, the distributor of international retail brands, have seen a notable decline over the past year.
Edited by Victor Loh. If you have any tips, ideas or feedback, please get in touch: talk-to-us@moniify.com
