Indonesia’s F&B startups are more robust with the resilience of Indonesia’s economy
East Ventures’ thesis on DTC F&B startups
June 24, 2022
Food and Beverage (F&B) has appeared as a resilient sector for Indonesia despite the slowdown during the pandemic. While most industries experienced a contraction, the F&B sector still grew by 0.2 percent in revenue growth year-on-year (YoY) in the second quarter of 2020, as Statistics Indonesia (BPS) data shows.
Although the pandemic had curbed the physical movement, including banning the dining activities in restaurants in 2020, the F&B industry was able to revive steadily due to its digital presence.
Online food delivery has become the key infrastructure in supporting the F&B ecosystem. According to Google, Temasek, Bain & Co report in 2021, the demand for online food delivery in Indonesia increased significantly, driven by the massive number of existing players and the presence of new players. The demand level has increased compared to the pre-pandemic level.
The Gross Merchandise Value (GMV) of the transport and food delivery sector was estimated to rise 36% from US$ 5.1 Billion in 2020 to US$ 6.9 billion in 2021. The industry is expected to grow up to US$ 16.8 billion in 2025.
Supported by the food delivery service, some vertical F&B businesses have emerged and seized the potential market, including the F&B brand owners, cloud kitchens, and coffee chain startups.
This year, the industry has rebounded from the COVID-19 crisis, as restrictions loosened, and people can resume dining activities in restaurants. We saw an increase in the number of people dining out at restaurants, and we think the F&B market will grow exponentially after having slow growth in the past two years.
The trend of Penetrating the 2nd and 3rd Tier Cities
Aside from the hustle and bustle of the F&B industry in the big cities, we find a movement where some F&B brands are expanding their markets to the second and third-tier cities. This movement is driven by a stronger economy in Indonesia’s consumption, both in the big cities, medium and small-sized cities.
The Asian Development Bank (ADB) report estimated that Indonesia’s economic growth will be 5.0% in 2022 and 5.2% in 2023, as domestic demand continues to recover. Indonesia’s consumer spending and manufacturing activities are consistently rising due to the pickup in incomes, jobs, and confidence.
Moreover, consumers in the second and third-tier cities have an enormous interest in attempting the new F&B brands which have been hyped in Jakarta but are still rare to be found in those places. The competition is also not as tough as in the big cities, where F&B players have to exert significant effort to engage their customers. Therefore, we see the second and third-tier markets as very potential and encouraging for F&B players.
Standardization is crucial for the F&B industry
Funding from investors and digitalization have boosted the growth of the F&B industry’s market size faster than in previous years.
However, we noticed that standardization is a crucial element for F&B businesses to sustain their operations in the long term, particularly for businesses with multiple chains or are aiming for wide expansion. The more stores in different cities or places, the more complicated it is for the company to manage the F&B quality in each store. Therefore, technology is critical to assist the company in ensuring the same quality in every store. For instance, how the company can utilize warehouses for inventory management systems or manage the supply chain for their restaurants.
Another challenge that we see is the dense competition in the F&B industry. Consumers might find many options of similar menus among the F&B brands. The rising stars of local brands also faced tough competition from the global brands, which already existed and had a strong market. Thus, the F&B startups might need to spend more on the marketing cost to possess robust marketing strategies in embracing the market.
As an early believer in Indonesia’s digital ecosystem, East Ventures places a strong interest in the F&B industry, which will be enhanced by Indonesia’s economic growth. We also see some integration among the portfolios, such as supplying some products from our agritech company to the F&B industry. Therefore, from upstream to downstream, we invest in the F&B ecosystem, including the restaurant, coffee brands, brands, cloud kitchens, and the back-end F&B providers.
By Mohammad Fahmi, Investment Associate at East Ventures