Unlocking the urban middle-class: Insights from Indonesia’s fast-growing consumer segment

Southeast Asia (SEA), a region populated by nearly 700 million people, is poised for remarkable digital economy growth over the next couple of years. The latest e-Conomy SEA 2024 report by Google, Temasek, and Bain&Company projected a 15% increase in GMV up to US$263 billion. This growth is also largely driven by the rising tech consumption within the region, where consumers are shifting towards digital services.

Additionally, existing consumers now account for up to 70% of e-commerce expansion, indicating a significant shift in consumer behavior from first-time buyers to repeat purchasers. This shift is further reshaping the competitive landscape of SEA’s consumer market, especially when the industry is fuelled by video commerce, becoming an even more attractive playing field for both businesses and consumers.

In Indonesia, specifically, the burgeoning urban middle class is increasingly influencing the consumer landscape. Studies show that Indonesia’s urban middle class makes up about 20.5% of the nation’s population of over 280 million people. This demographic alone drives nearly half of Indonesia’s total consumption, making it an indispensable contributor to the country’s overall economic growth.

Even then, the middle-class demography is further segmented into tier-2 and 3 cities, displaying different behavior when it comes to making purchase decisions. What can companies and business owners do to target these segments, and what strategies are applicable to stay ahead of the ever-changing trends?

At the recent East Ventures Summit 2024, four leaders of East Ventures-backed portfolio companies sat together and conversed on Indonesia’s diverse consumer landscape: Alvin Arief, CEO and Co-Founder of UENA; Matthew Adrian, CMO of Fore Coffee; Paulina Purnomowati, CMO of TipTip; and Chrisanti Indiana, CMO and Co-Foudner of Sociolla. Moderated by Elisa Suteja, Entrepreneur in Residence at East Ventures, the panel emphasized the importance of understanding the unique characteristics of different tiers of cities in Indonesia, highlighting that opportunities extend beyond major urban centers like Jakarta.

The transcript of the panel discussion below has been edited for clarity and brevity.

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Elisa Suteja: Indonesia has over 280 million population, but, Indonesia is not only Jakarta. According to the EV-DCI 2024 report, tier-one cities include the greater Jakarta area, Surabaya, Bandung, and more. But beyond these cities, Indonesia has opportunities in smaller non-metropolitan cities like Medan, Makassar, and Yogyakarta.

Today, we are eager to delve deeper into consumer behavior, explore opportunities, and gain insight from leading companies like TipTip, UENA, Fore Coffee, and Sociolla here. 

Starting with UENA, who has done impressive work in serving the Greater Jakarta area middle class through delicious, affordable meals with memorable customer experiences. In your perspective, how should businesses position themselves effectively to serve middle-class customers?

Alvin Arief: For us at UENA, we are serving affordable daily food as the daily solution for the Indonesian mass market. We believe that serving the emerging middle class is almost like “targeting a moving target.” The most important thing is to be sensitive to the direction and the degree of the movement of the trends. In F&B itself, we see two trends. First, dining out; which we believe even the middle class is already doing right now. They are looking for a better experience and better quality. Second, a shift from cooking at home to buying food outside. For us at UENA, we see the second trend especially interesting because it poses a very big opportunity.

One thing that we might not realize is that in Indonesia, we have the lowest ratio of food eaten outside compared to food cooked at home: only one out of four, around 25%. So we believe that, as people and consumers move into the middle class and are supported by other factors such as dual-income lifestyles and living in smaller houses, people are going to get more and more keen to actually buy their food outside.

That is also how we segment our menu to capture both markets. One is for daily food, which is more functional. They care about value for money and portions. But another is for an aspiring lifestyle, where they want a nicer and better experience.

Elisa Suteja: I think at Fore Coffee, we had the opportunity to see the behavior not only for the customer in Jakarta but also in tier two and three cities. I’m very interested to understand from Matthew’s perspective. How is the behavior of middle-class customers from one city to another? Are there any clear differences? And what is the go-to-market to tap into these customers?

Matthew Adrian: We started the brand in 2018, starting in Jakarta, followed by other big cities like Medan and Surabaya. In 2022, we had a presence in 30 cities. I would say the journey of expansion in tier two and tier three started then. We brought this “affordable premium” concept into tier two and tier three. We understand that in Indonesia, people drink coffee like water, especially with the rise of Gen Z drinkers. 

There are more than ten thousand coffee shops, especially coffee chains, in Indonesia. But none of them provide high-quality coffee at an affordable price. Hence, we want to capture that gap and provide high-quality coffee at an affordable price, which we call “affordable premium.” Right now, we operate more than 210 stores across 41 cities.

When we started expanding to tier two and tier three, we understood that we had a high duty, not only to introduce the best coffee quality but also to introduce a new coffee culture. We know that customers are into good values. It’s not only focusing on the price.

From what we observed, tier two is almost similar to tier one, but the problem with tier three is that they have higher price sensitivity, I would say. To give you context, our coffee price is very consistent. Our uniqueness and holistic customer approach are very important to making our coffee one of the most profitable coffee brands. 

Beyond just value, I think it’s also important to localize the brand approach, especially when we enter tier-two and three cities, where there has always been a price war. 

As a sustainable and also artisanal brand provider, we actually go beyond just providing a promotion on a daily basis. Understand that we have multiple channels: offline and online, meaning we also have an app.

Elisa Suteja: That’s a nice segue to Paulina. With TipTip as a digital product, at day one, you already tap into both online and offline customers. Interestingly, I think whenever I open the TipTip app, there’s always an event somewhere. I think it’s very unique. How do you see the insight of the key differences in digital consumption among consumers in different tiers of cities?

Paulina Purnomowati: I’m going to do a little bit of data dumping here just to give a perspective of how unique our tier two and tier three are in Indonesia. 

With a population of over 280 million, imagine around 70% of our population sits in tier two and tier three. Meanwhile, 70% of malls in Indonesia are in tier one. So there’s a contrast there. Then, 80% of Indonesians are already penetrated with the internet. It has become easier to access even someone in, say, tier four. 

One last piece of data: 75% of Indonesians appreciate the sense of commonality, or like being in a community, while the global standard is only about 54%.

What I’m trying to say is that there’s a lot of demand outside of tier one. Many high-touch markets already have the internet, but they are in a very less modern tier one.

For TipTip, we are a technology-based platform, and we don’t have a retail presence like Fore and Sociolla. What we do from day one is that we have a team that’s seated in tier two and three cities. 

It does not have to be a store or a massive team, but it is very important that any one of you understands tier three. It’s a very different contrast from Jakarta or even Surabaya. Influence from friends is very, very important as opposed to just seeing ads digitally. 

For TipTip, we actually have a team, say in East Java or West Java, just circling around and spreading the word and then teaching one to ten communities that, at the end of the day, are going to spread the word about how it is easy using TipTip to monetize the activities within their communities.

For example, it will be much more effective if someone’s friends say things like, “Hey, I have used this,” or “Hey, I have had coffee from Fore,” or “Hey, I bought this at Sociolla.” It is very communal and high-touch in tier-two and three cities.

Elisa Suteja: Moving on to Sociolla, you just opened a store in Kendari, the capital city of South Sulawesi. If we visit there, there aren’t many retail companies that have already expanded to Kendari. So my question to Chrisanti is, have you seen beyond the obvious, and can you share Sociolla’s expansion strategy?

Chrisanti Indiana: Since the beginning, we have believed that experience is truly the key to the consumer market, especially in the beauty industry. Although we started as an online e-commerce platform, we have always believed that you cannot only rely on aggressive promotions or digital presence for sustainable growth, but you have to have a tangible experience with the consumer.

With that in mind, we launched our first omnichannel store in July 2019, five years ago. We had two stores in 2019, and today, we have 78 stores across the country, not only in the Greater Jakarta area but also in tier-two and three cities.

We opened five stores this month only, and it seems like we are opening at a very rapid speed, but we open with confidence in every store, in every city, even the secondary and third-tier cities. Why?

We have been in this industry for almost ten years, and we are actually celebrating our ten-year anniversary next year. We have been collecting a massive and rich amount of data from Indonesian beauty consumers. This data is unique because we understand that we collect not only the normal consumer profile, like your age, location, and all, but we also collect their behavior, see their preferences, and see their beauty profiles.

We not only know their preferences or what they buy, but we can also predict, for example, this kind of consumer in which area, what kind of beauty preference they like, what kind of brands they will love, if they like this product, what kind of products that they will buy next, and if you have this skin problem, then what can we offer you?

So we can really personalize and tailor Sociolla’s offerings online and offline to our customers, which I think is the key thing about beauty: that is the beauty of beauty.

The segmentation is unique; it is not about whether you’re in the middle class or upper class, but it is about, say, a teenager in Jakarta who might just start to learn about makeup, and maybe there is someone living in Makassar in their 40s who just start to expand their makeup knowledge.

We can see that they are actually looking at the same product and can actually shop the same assortments. This is unique because you cannot really see the segmentation only based on economic status and location; it is deeper than that, and that is how we execute our expansions.

Stores in smaller cities like Palu or Kendari have a unique format: we build our stores in the lobby of the malls. The thing is, every time we open the stores, there will always be lines—not solely because “it’s Sociolla,” but because we give them the assortments and offerings they really want. 

When the team went to visit the Kendari store, for instance, it was very crowded! Some of the top ten highest-selling brands in this store are very niche like premium Korean brands that we wouldn’t expect to be selling that much in Kendari.

Fun fact: On their opening day, both Kendari and Palu stores became the top stores for our internal sales across the nation, even compared to those in bigger cities like Jakarta and Surabaya. There is definitely buying power; it is just a matter of how you can really cater to it.

Elisa Suteja: We talked about offline expansions. For F&B, location is one of the most important factors, and for UENA itself, there was a shift in your offline expansion strategy. From your perspective, what is the most important characteristic of a location, and how has this transformed over the years?

Alvin Arief: We are serving daily food for the daily usage of the mass market of Indonesians. With that in mind, our main target is actually to be as close to the customers as possible.

That is why we are not in the malls right now. For our target market, even paying for parking becomes a luxury. The location that we chose is not even on the primary or secondary roads. We are actually looking into areas where the local neighborhoods are alive—usually, around areas near a wet (traditional) market, pharmacy, etc. We chose these locations because we believe that we can enter the real lifestyle of our customers.

As I mentioned right now, the middle class aspires to have a better experience. We believe that our locations become the daily community for local areas and the people in the neighborhood.

Elisa Suteja: I’m tapping on a little bit from your first section, Matthew. Can you share what you think is the main decision driver for middle-class customers? What kind of value should we, as businesses, give to middle-class customers?

Matthew Adrian: Let’s talk about price sensitivity, especially in tier-two and three cities. I can totally relate to what Chrisanti said. If Sociolla in Kendari shows great performance, one of the largest stores that we operate is actually in Manado instead of Jakarta. It’s one of the largest flagships with the highest performance to date.

So, when talking about values, price cannot be the only factor. We do quarterly research, which we call brand health tracking. Every quarter, we identify the three key main drivers for Fore Coffee: values, quality, and price.

Surprisingly, in tier-two and three cities, the effort basket size and the number of transactions are actually higher compared to tier-one. I would not also expect that the performance would be so good there, but I think these stores really put in so much work to craft a good product. This can be sustainable because even though the digital penetration is not there yet, they significantly contribute to our offline store.

Paulina also mentioned earlier that the people in these areas prefer to be in a group rather than individualist. That is why Fore Coffee’s basket size is quite big in tier two and three cities.

Elisa Suteja: Paulina, regarding this behavior, can you give a short explanation of how brands can tap into it?

Paulina Purnomowati: Basically, people in tier two and three cities like to group of common interests and shared activities. What TipTip does is enable them to monetize what they are having. These kinds of communities are not big, but what they are doing is very, very manual. If you asked “How come there is a lot of activities in TipTip and tier two and three?” —It is because of that: our team presence is there, and we understand how they do it.

Elisa Suteja: Last but not least, Chrisanti, you mentioned that your customers in Sulawesi actually have the same preferences as the customers in Jakarta. I think the beauty of Sociolla is that you have everything. So, can you share a bit about the pattern of the middle-class customer? Are they really that price-sensitive, and how do you see the behavior of this customer?

Chrisanti Indiana: Currently, we have about 400+ brands onboard on Sociolla, and it consists of many different kinds of brands: Korean, Japanese, and US brands, and of course, a lot of local brands as well. This mix has changed a lot since we started ten years ago, and it is also influenced by the rise of social media and all of this digital content.

The segmentation is not based on the classes of the cities, but it is more like the profile of the consumer. You can have preferences on local brands for makeup, but then you prefer to have Korean skincare brands, and we see this behavior not only in tier-one city but also in tier-two and three cities.

Especially with the COVID-19 pandemic, there is an acceleration of content consumption, and people are getting to know more than just what they are exposed to in their cities. They get to know what kind of new brands are coming, and I think that is also helped the industry grow even faster, and local brands have innovated even faster as well.

Get the full insights by watching the panel below.