Unilever Faces Boycott and Market Share Decline in Indonesia Amid Rising Local Competition

The situation for Unilever (LON: UL) in Indonesia is growing increasingly complex as the company faces a damaging boycott, exacerbating its market share erosion in Southeast Asia's largest economy. The boycott, driven by sentiments related to Israel's military actions in Gaza, has prompted consumers in predominantly Muslim nations, including Indonesia, to rethink their spending on products from multinational companies like Unilever.

Recent data shows that Unilever's market share in Indonesia dropped to 34.9% in Q3, down from 38.5% a year earlier. This decline is particularly concerning considering Unilever's significant revenue from its Jakarta-listed operations, which contributed $2.39 billion in 2023, accounting for 3.8% of the group's overall sales. However, navigating the local consumer landscape has proven challenging as consumers lean towards more affordable local brands amid rising costs and economic pressures.

Despite boasting a variety of well-known products—such as Axe deodorant, Royco seasoning, and Cornetto ice cream—Unilever has struggled to attract customers over the past decade. An analysis by Kantar indicates that many of Unilever’s flagship brands, including Lifebuoy and Sunlight, were once among the top ten in Indonesia back in 2020. Fast forward to 2023, and only Royco remains on that elite list, with local players like Wings Group and Mayora Indah taking over the throne. The company even raised prices during the pandemic to keep pace with inflation, which may have further alienated budget-conscious shoppers.

And it’s not just local brands that are breathing down Unilever's neck; emerging competitors such as Paragon's halal beauty line Wardah and the Chinese ice cream brand Skintific are making significant inroads into the market. The cost disparity is palpable, as evident from the comparison of products. For instance, a standard 400-milliliter bottle of liquid soap from Wings' Nuvo brand sells for approximately 20% less than Unilever's Lifebuoy, while a 700-milliliter bottle of Wings' SoKlin laundry detergent is about 7% cheaper than Unilever's Rinso.

This competitive landscape is further complicated by the shrinking size of Indonesia's middle class, a trend exacerbated by job losses and reduced employment opportunities. Local retailers' association Tutum Rahanta points out that this economic contraction has fostered a growing demand for more affordable grocery options. Unilever acknowledges these market shifts and is reportedly attempting to revitalize its brand presence and pricing strategy to better align with consumer pricing sensitivities and shopping habits that are increasingly steering online.

Benjie Yap, President of Unilever Indonesia, stated that the company understands the pressing need to adapt to these "significant societal changes." Despite the challenges, he believes Unilever is on the right path to navigate this tough market landscape. The goal is to implement more consistent pricing, expand product availability in diverse retail environments, and enhance e-commerce operations.

The impact of the ongoing boycott on Unilever's sales is undeniable, despite the company withholding specific details about the financial ramifications. In an October report, PT Unilever Indonesia Tbk revealed an alarming 18.2% drop in quarterly underlying sales, totaling 8.4 trillion Indonesian rupiah (approximately $533 million). With a population that is approximately 87% Muslim, consumer sentiment towards companies operating in Israel has fostered a rise in anti-Unilever sentiment, particularly as pro-Palestine groups advocate for boycotting the brand.

Innovative tools, like the "No Thanks" app, developed to promote conscious consumerism, have emerged as tools for shoppers to guide their purchasing decisions based on their views of corporate responsibility amidst geopolitical tensions. The user base of this application claims to encompass 7 million individuals actively avoiding brands associated with practices they find objectionable.

The growth of Unilever's competitors in Indonesia, which formed around product categories such as packaged food and beauty, emphasizes the current struggle. The Indonesian home care market is projected to grow by 11.5% to $3.4 billion this year, while the packaged food segment is anticipated to see an uptick of around 11.7%, reaching an estimated $21.8 billion. Meanwhile, Unilever's sales in home care and personal goods have experienced a troubling decline of 20.8%, with underlying food and refreshment sales down 13.3% during the same quarter.

Analysts, including Cheria Widjaja from DBS Bank who recently downgraded Unilever's Indonesian operations from 'hold' to 'fully valued,' highlight that the market conditions have presented ample opportunity for both local and foreign brands to seize the moment and ramp up aggressive marketing and promotional campaigns, especially within the booming e-commerce sector.