The Impacts of the 12% VAT Increase in 2025 Toward The FMCG Sector

The planned increase in Indonesia’s Value-Added Tax (VAT) from 11% to 12% in January 2025 marks a critical shift in the country’s fiscal policy.

This change will significantly affect the Fast-Moving Consumer Goods (FMCG) sector, which relies on high sales volume and consumer spending on essential goods. Understanding the implications for manufacturers, retailers, and consumers will be essential for navigating this transition.

Anticipated Impacts on the FMCG Sector

1. Rising Product Prices
   
   • FMCG products, including everyday essentials such as packaged food, beverages, toiletries, and household items, will see a direct price hike due to the increased VAT rate. The higher costs may deter consumers from purchasing premium products, leading to a decline in overall sales volume for certain categories.
2. Shift Toward Value-Oriented Products
   
   • Consumers are likely to gravitate toward affordable alternatives, such as private-label goods or locally-produced items, over established brands. This trend could disrupt brand loyalty, forcing manufacturers to recalibrate their strategies to retain their customer base.
3. Decline in Non-Essential Purchases
   
   • Non-essential FMCG categories, such as luxury snacks and cosmetics, are expected to face the steepest declines. Consumers will likely reduce their frequency of purchases or trade down to more affordable options.
4. Supply Chain and Operational Challenges
   
   • Increased VAT will impact not only product pricing but also operational costs, including transportation, warehousing, and manufacturing. Companies will need to decide whether to absorb these additional costs or pass them on to consumers, potentially further increasing prices.

Changing Consumer Behavior

1. Focus on Essentials
   
   • Indonesian households are likely to focus spending on basic necessities like food staples, hygiene products, and cleaning supplies. This shift will challenge companies in the luxury and lifestyle FMCG sectors to maintain relevance.
2. Rising Demand for Promotions and Discounts
   
   • As price sensitivity increases, consumers will actively seek discounts, promotional bundles, and loyalty rewards. Retailers and FMCG brands must innovate with compelling offers to attract budget-conscious shoppers.
3. Preference for Smaller Packaging
   
   • Smaller, more affordable packaging sizes may gain popularity, allowing consumers to manage limited budgets without compromising access to essential products.
4. Migration to E-Commerce Platforms
   
   • The digital transformation of shopping is expected to accelerate. Online platforms offer competitive pricing, cashback deals, and convenience, making them attractive options for consumers adapting to tighter budgets. FMCG companies should optimize their online presence to capture this growing market.

Opportunities for FMCG Businesses

1. Product Portfolio Diversification
   
   • Introducing budget-friendly product lines and innovative packaging can help brands appeal to cost-sensitive consumers. For example, offering smaller or bulk-packaged goods may cater to diverse purchasing preferences.
2. Investment in Supply Chain Efficiency
   
   • Streamlining logistics and reducing waste will be critical for maintaining competitive pricing. Investments in energy-efficient manufacturing and local sourcing can help offset increased costs while maintaining product affordability.
3. Leveraging Digital Marketing
   
   • Targeted advertising campaigns on social media and e-commerce platforms can help brands connect with consumers. Highlighting promotions, affordability, and product quality will be essential to retaining market share.
4. Collaborating with Retailers
   
   • Strengthening partnerships with retailers to develop joint promotions or loyalty programs can ensure consistent visibility and accessibility of FMCG products. Retailers can also benefit by enhancing their private-label offerings to meet growing demand for affordable alternatives.

Broader Economic Implications for FMCG

The VAT hike may exacerbate inflationary pressures, reducing overall consumer spending power. This poses a risk to the FMCG sector, which thrives on high-volume sales. However, the policy could also encourage innovation as businesses adapt to meet evolving consumer needs.

Government interventions, such as VAT exemptions for essential goods or targeted subsidies for low-income groups, could help ease the burden on consumers while supporting businesses in maintaining stability.

Sources:

1.      https://ekonomi.bisnis.com/read/20241119/12/1817282/tahun-depan-ppn-jadi-12-pengusaha-ritel-was-was-masyarakat-rem-belanja-kebutuhan

2.      https://industri.kontan.co.id/news/kenaikan-ppn-jadi-12-berisiko-tekan-pertumbuhan-industri-ritel