Pizza Hut’s Indonesian franchisee pinned its hopes on the middle class’s expansion in the world’s fourth-most populous country. But its decision to shut 20 stores and reduce its workforce offers a warning for those betting on a consumer boom in south-east Asia’s largest economy.
“We have observed shifts in consumer spending patterns in Indonesia, with a general trend of cautious spending among the middle class,” said Boy Lukito, chief executive of Sarimelati Kencana, the franchisee operator in Indonesia.
Businesses selling everything from pizzas to cars have been hit by Indonesia’s shrinking middle class. The number of people considered to be middle class by the government has declined 20 per cent over the past six years, a risk to the commodity giant’s growth plans and a warning for potential investors such as Apple.
Economists said the decline had been triggered by a lack of formal employment, a shortage of investment in higher-income industries and overreliance on a commodities sector that has produced poorly paid work — pressures that have been exacerbated by the Covid-19 pandemic.
A weaker middle class, which has traditionally been the backbone of Indonesia’s economy, could scupper President Prabowo Subianto’s ambitious plans to boost annual GDP growth to 8 per cent in the next five years, from the current 5 per cent, and become a developed economy by 2045. It could also put off much-needed foreign investment.
“Without structural reforms addressing the middle class issues, Indonesia will not achieve 8 per cent growth by 2045, let alone in the next five years,” said Teuku Riefky, a researcher at the Institute for Economic and Social Research.
There was “growing difficulty in getting formal jobs, and economic growth has been creating less formal jobs”, he said. “Growth is not enjoyed by all groups . . . it has not been inclusive.”
The number of Indonesians in the middle class had fallen to 47.9mn by March 2024, down from a peak of about 60mn in 2018, according to the most recent government data. Indonesia defines its middle class as those who spend Rp2mn-Rp9.9mn ($122-$605) a month. In the four years to 2018, the middle class grew by 21mn.
The middle class accounted for 17 per cent of the population last year, down from as much as 23 per cent in 2018. Indonesia has also seen an increase in the number of people in the “aspiring middle class” and “vulnerable” categories, indicating a reversal in economic progress, said analysts.
At the same time, employment in the informal sector — typically poorly paid and insecure — has risen to 59 per cent in 2023 from 57 per cent in 2018, according to government data.
“The culprit for this is the inability to produce jobs in the formal sector,” said Chatib Basri, a former finance minister who is now advising the government on the economy. “From 2019, most of the jobs created were basically in the informal sector.”
Such growth resulted in weaker consumer spending and lowered tax collection, said Eko Listiyanto, vice-director of the Institute for Development of Economics and Finance.
Manufacturing, a mainstay of middle-class jobs, as a contributor to GDP has dropped steadily over the past two decades. Instead, resource-rich Indonesia has focused on developing its commodities sector.
Indonesia is the world’s largest producer of nickel, a metal critical to stainless steel manufacturing and electric vehicle batteries. Foreign direct investment has increased in recent years, but much of that growth is linked to mining and mineral processing following Indonesia’s export ban on nickel ore. The country is also a large exporter of coal and palm oil.
“The issue is that [the government is] focusing too much on commodities. Manufacturing is better than commodities because prices are more stable and the added value creation is higher,” said Teuku.
Indonesia has long lagged behind its south-east Asian peers such as Vietnam and Malaysia in building a manufacturing sector and has failed to benefit from the production shift away from China.
Despite recent reforms, Indonesia’s local content requirements, import restrictions on some raw materials and erratic changes in some policies including earnings retained in the country had impeded investment, said the American Chamber of Commerce in Indonesia in a recent report.
Government welfare measures in recent years such as cash transfers have targeted the bottom 40 per cent of the economy. Former finance minister Chatib argued the solution for the shrinking middle class would be to create jobs in the formal sector, not just offer welfare measures.
“That is why attracting foreign direct investment is crucial,” he said. “We have to boost productivity and competitiveness, reduce red tape, improve the investment climate, continue to build infrastructure and focus FDI on export-oriented sectors.”
There are growing signs that the diminishing middle class is already affecting the economy.
Consumer spending has declined in recent months, and Indonesia saw month-on-month deflation last year for five straight months, though prices have since returned to growth. In January, the central bank lowered growth forecasts for 2025 and unexpectedly cut interest rates to bolster the economy.
“What we are seeing now is that the middle class is more keen on saving and holding off spending,” said Budihardjo Iduansjah, chair of the Indonesia Retail and Tenant Association, adding that traffic in shopping malls had dropped and retailers were finding it difficult to sell goods if they raised prices.
An automobile manufacturers’ association has blamed the weaker purchasing power for a 14 per cent drop in car sales last year. Analysts are increasingly warning of the risk to retailers from a diminished middle class.
Pizza Hut Indonesia hopes to get more people through its doors with promotions and a menu that goes beyond pizza, as well as expand by catering to events such as weddings and concerts, said Lukito.
Still, middle-class Indonesians are wary of spending too much. “I only buy new clothes when the old ones become unwearable,” said Dini, a civil servant. “I will allocate more towards saving and primary needs.”
Data visualisation by Haohsiang Ko