Global pizza brand Pizza Hut recently decided to close 20 locations and reduce its workforce in Indonesia. Indonesia is the fourth most populous country in the world and the largest dining market in Southeast Asia, but consumption among the middle class, its main customer base, has been declining. Boy Rukito, Chief Executive Officer (CEO) of the Indonesian Pizza Hut operator Sari Mela Lati Ken Kana, said, "The Indonesian middle class is becoming more cautious with their spending."
On the 17th (local time), the Financial Times (FT) reported, "Companies selling a variety of goods from pizza to automobiles are being impacted by the reduction in Indonesia's middle class," noting that "the population classified as middle class by the government has decreased by 20% over the past six years. This not only poses a risk to the growth plans of populous Indonesia but also serves as a warning signal for potential investors like Apple."
According to the Indonesian government, as of March last year, the middle class population was 47.9 million, a 20% decrease from 60 million six years ago. Considering that the middle class population had increased by 21 million over four years until 2018, the size of the middle class peaked at 60 million and has since turned to a decrease. The government defines those with monthly expenditures between 2 million and 9.9 million rupiah (170,000 to 880,000 won) as middle class.
The purchasing power of the middle class is also weakening. According to the automobile manufacturers' association, car sales in Indonesia decreased by 14% year-on-year last year, which is attributed to the weakened purchasing power of the middle class. Budihardjo Idhuansha, chairman of the Indonesian Retail and Rental Association, said, "The middle class is increasingly preferring to save and postponing expenditures," noting a decline in shopping mall visitors. Experts warn that the decrease in the middle class poses a significant threat to retail.
The reasons for the weakening of Indonesia's middle class are complex. First, a lack of formal sector jobs is cited as a major factor. The proportion of employment in the informal sector, such as low-wage and unstable day laborers, increased from 57% in 2018 to 59% in 2023. Chatip Basri, former Minister of Finance of Indonesia, stated, "The main reason for the reduction in the middle class is the failure to create sufficient jobs in the formal sector," adding, "Since 2019, most new jobs have been created in the informal sector."
Moreover, the weakening of the middle class is accelerating as the manufacturing sector fails to grow. Generally, manufacturing serves as a foundation for promoting middle-class growth, but Indonesia has not sufficiently nurtured this sector. The Indonesian government, the world's largest nickel producer, has banned the export of high-value nickel ores and instead focused on the export of primary resources like coal and palm oil. As a result, the manufacturing sector's share of Indonesia's gross domestic product (GDP) has steadily decreased from 31.95% in 2003 to 18.67% in 2023.
Teuku Riefki, a researcher at the Research Institute, pointed out, "The government is excessively focused on the resource sector, while manufacturing has a higher value added than the resource industry, but the share of manufacturing is lower in Indonesia." Foreign direct investment (FDI) that supports formal sector jobs and high-income industry growth is also concentrated in mining and mineral processing sectors. Experts express concern that the weakening of the middle class will cause delays in FDI inflow.
FT evaluated that "Indonesia has lagged behind Southeast Asian countries such as Vietnam and Malaysia in nurturing the manufacturing sector for a long time, and it is not benefitting properly from the outflow of corporations from China." The American Chamber of Commerce recently pointed out in a report that Indonesia's unstable policies, including mandatory use of local parts, restrictions on certain raw material imports, and changes to foreign exchange reserve regulations, have obstructed investment inflows.
There are also signs that the weakening middle class is leading to economic slowdown. Indonesia experienced deflation (a decrease in prices) for five consecutive months from May to September last year. By the end of the year, consumer prices rose due to a temporary increase in consumption, but last month, consumer prices sharply fell again, raising concerns about deflation. The Central Bank of Indonesia has also lowered its economic growth forecast for this year.
Warning signs have emerged regarding the Indonesian government's goal to raise the annual GDP growth rate from the current 5% to 8% over the next five years and to become a developed country by 2045. Former Minister Chatip said, "It is necessary to reduce unnecessary regulations, improve the investment environment, and continuously expand infrastructure to ensure that FDI flows into export-oriented industries."