Indofood: Indonesia’s Total Food Solution Company

Imagine operating a recession-resistant company. Imagine that this company specialized in food, during the global food crisis.  Now imagine specializing in food and expanding during a crisis. As the world faces the challenges of food security, one company is successfully finding global opportunities; it is Indonesia’s largest food producer– Indofood.

Indofood business group is the largest instant noodle producer in the world.  Its instant noodle brand, Indomie, is the best known brand in Indonesia.  Indofood has a wide business portfolio which includes consumer branded products, noodles, dairy, seasonings, snacks, nutrition and special foods, packaging, agribusiness, plantations, cooking oils and fats, commodities, and distribution.

Since its establishment in 1997, Indofood has become an inseparable part of the Indonesian lifestyle. It has received much global prominence as well. Its main accomplishment lies in the strength of its brands. These include instant noodles (Indomie, Supermi and Sarimi), dairy (Indomilk and Cap Enaak), wheat flour (Segitiga Biru, Kunci Biru and Cakra Kembar), cooking oil (Bimoli), and margarine (Simas Palmia).

Despite intense competition, these brands remain market leaders with a reputation for quality, and are also very well accepted by various market segments.

The Steps to Total Food Solutions

Indofood is nearing its vision “to become a total food solutions company,” through several savvy business strategies.

In 2005, the company settled a joint venture with Nestlé and the acquisition of several plantation companies. From 2006 to 2008, the company continued to acquire several shipping and plantations companies, strengthening its agribusiness and distribution. In 2008, the company expanded its reach and entered the dairy sector.

The following two years, ending 2010, witnessed a major internal consolidation overhaul, and PT Indofood CBP Sukses Makmur (“ISM”) (BEI : INDF) was formed.

President and Chief Executive Officer Anthoni Salim revealed that the company was performing solidly and had achieved sustainable growth for six years beginning in 2005.  The results reflect the strength of the core business and management skills in addressing opportunities and challenges in the market.

Despite the recent bout of food shortages over recent years, Indofood has proved resilient and has maintained a wide control over its supply chain. Due to such confident sutures in holding the company together, a positive outlook remains in tact in facing the current food shortage and price surges of raw material. It may very well be that being such a large player, Indofood’s safety net is its economies of scale, allowing the company – to a certain extent – to control the prices in the sectors where it bodes as a market leader.

Indofood Financials (2007-2010)

Changing Lifestyle Rewards Indomie

Through lifestyle changes, Indomie, the instant noodle brand of the company has become its biggest success, hinting that the staple plate of rice is beginning to play second fiddle to many household menus.  Indomie has won a variety of prestigious awards such as Consumer Satisfaction Award Indonesia, Indonesia Best Brand Award, and Top Brand Award. In 2009, Indomie also clinched the Most Powerful Distribution Performance Award.

The success of Indomie is a result of the three A strategies; (1) acceptability of the product; (2) availability through distribution networks, and (3) affordability, reflected in Indomie’s retail prices.

Currently, Indofood is the largest player in the instant noodle market in Indonesia, as well as the biggest company in the instant noodle industry worldwide. Last year, Indofood started to build three new factories to increase the number of instant noodle production to 17.74 billion packs per year. The factories are expected to be completed in 2013.

A Look at the first ever Halal Food Investable Index

For all those who have wondered when and how the $1 trillion+ Islamic Finance industry and the estimated $640 billion+ world-wide ‘Halal’ food industry will ever connect—we hopefully now have a tool that will kick this off.

ThomsonReuters, in partnership with IdealRatings, have recently launched the SAMI Halal Food Index (Socially Acceptable Market Investments) which is a collection of food industry companies listed on OIC (Organization of Islamic Conference) member country public markets and screened for Halal compliance.  This Index has turned part of the Halal food market into an asset-class and made them approachable to the usually risk-averse Islamic Finance industry.

As large and real the Halal food industry is, it’s ironic very little Islamic Finance investment or transactions have taken place in the sector.  Conversely, the Halal food industry, which by definition is adhering to Islamic principles, has for the most part ignored Islamic compliance of their financing.  Furthermore, they are forgoing an available and compliant capital source that Islamic Finance can provide.

This first of its kind Halal Food Index was unveiled at the opening of the World Halal Forum on April 4th, 2011 by Tun Abdullah Ahmad Badawi, former Malaysian prime minister.  The visionary behind the Index, Mr. Rushdi Siddiqui, Global Head of Islamic Finance and OIC at ThomsonReuters, calls this the re-uniting of twins separated at birth.

Here are some basic facts about the SAMI index and comments from Mr. Siddiqui on its relevance to individual investors, Islamic Finance industry, and the Halal food industry.

Summary Profile

The Socially Acceptable Market Investments (Sami) Halal Food Index is about companies involved in food processing, distribution, fishing, farming, etc. The companies in the index, at stage one, are from 15 OIC member countries, about 270 plus companies with market capitalization of $114 billion.

SAMI Index key criteria:

  • Nation: Member of OIC countries
  • Business Activity: Restaurants, Beverages – Non-alcoholic, Fishing, Farming, Food Processing, Food Distribution
  • Non-permissible Revenue: Has no revenue from pork, alcohol, tobacco and impermissible foods
  • Investment Guidelines: Set of Minimum Market Cap, Minimum Free Float Market Cap and Trading Volume restrictions
  • Shariah Compliance: Equities have to be compliant according to respective Shariah mandate
  • (Click here to download PDF document with detailed methodology)
  • (See list of top performing SAMI Index Companies)

What is the relevance of this Index to retail investors?

Muslims, as consumers, already invest in these companies by buying their Halal products. Now they can be investors of such companies by purchasing shares in these companies directly or through funds. To those (Muslims) who have been saying investing in the stock market is gambling–investing in publicly listed Halal food companies in Muslim countries becomes a true investment vehicle for its own local/regional economies.

Shariah compliance is not enough for many retail Muslim investors, there has to be more connectivity to companies if Islamic investing is going to make commercial bank depositors into capital market investors. For example, there are only 560 plus Islamic funds and total AUMs of $37B, and we speak about 1.6 billion Muslims, do the math!

Islamic equity investors in the west have difficulties understanding why and how Microsoft, IBM, Apple, Pfizer, etc., are Shariah compliant, but they invest because (1) approved by a Shariah scholar AND (2) there is, at minimum, market performance.  The dilemma of understanding becomes more pronounced in Muslim countries where investors typically invest locally or regionally, as they know these companies, use their products, etc.

What does this index mean for Islamic finance?

The industry has been talking about authenticity, innovation, Sharia based funds etc, and the Sami Halal Food index may just be the model for these. It is about Muslim money staying in Muslim countries for growing and building companies that contribute to the real economy.

For Islamic finance, the Halal industry has generally been viewed as the (1) ‘kebabs for lunch’ and (2) as a business model deemed too risky for Islamic corporate loans. But, when Halal presented also as an asset class and about inward investments or even investment banking, it becomes an interesting conversation.

One of the attractiveness of this Index is that it’s much easier to explain to the users/consumers of Halal products.  In the west, typically consumers of products become investors of those companies. It may even go as far as HNWs buying these companies because the products are superior.

Thus, we can now take this Sami Halal food index, 200 plus companies from the Muslim countries, and create a fund based on it for investors. These potential investors are also consumers of these companies’ products in their respective countries. For example, if I’m a fund sales-person tasked to gather investor’s money into the fund, the sales script is much easier than other Shariah compliant funds. The consumer will realize the credibility of the offering, because they are familiar with the company products.

Relevance to Halal Food Industry Players

The Halal food industry has not done itself well in explaining its proposition to either Islamic finance or media journalists in Islamic finance. For example, there is a well known journalist covering Islamic finance for about 20 years, and his coverage on the Sami Halal food Index was that Islamic finance may not move from its comfort zone of real estate understandings to give compliant loans to Halal food manufacturers. Yes, agreed. But, here we are talking about two areas where Sukuk can be utilized by Halal food companies:

1.     To build factories where Halal food is ‘made,’ a true asset backed financing, an Ijara Sukuk makes sense, all things being equal to conventional loans/bonds and level regulatory/tax field. Thus, a Sukuk financed Halal food factory, is an end to end Shariah based solution!

2.     Many of the Halal companies have been built/ financed by conventional debt, hence; fail the debt/asset or debt/market cap financial ratios of Shariah compliant screening. This presents an interesting opportunity to issue a Sukuk and refinance conventional debt with Islamic paper, hence, increase supply of corporate Sukuk and number of companies in the Halal food space that pass the Shariah complaint financial screens. Malaysia has shown this can be done, and has done it. For example, during my days at my previous employer, an index provider, PLUS, the major toll operator, was failing the debt screen, issued a Sukuk (aligned to AAOIFI standards) and sued proceeds to refinance conventional and BBA debt, hence, becoming a  Shariah complaint company in the Islamic index for the country.

What is the role of IdealRatings and World Halal Forum?

IdealRatings has been screening companies for Sharia adherence for a number of years. They do research-based screening over the commonly used automated screening. World Halal Forum, along with International Halal Integrity Alliance, has full understanding of the Halal food process.

Tun Abdullah Ahmad Badawi, former Malaysian prime minister, congratulating Mr. Rushdi Siddiqui on the launch of the SAMI Index at the World Halal Forum held April 4-5, 2011, in Malaysia

What are the challenges faced by food companies in the index?

The major challenges include: (1) excessive weighting of Malaysia’s Sime Derby, we had to put a ceiling on its weighting to 20 per cent; (2) free float is small for many companies and (3) illiquidity for many companies. These are common issues when investing in emerging and frontier markets. However, the more important point is that these companies, including the small capitalized companies, are now in the world’s first Halal Food Index, and are on the radar screens of investors.

What are the expectations of the Index?

We expect investment products like mutual and exchange-traded funds will be launched off of the Index, giving consumers another viable avenue to invest. A Halal food fund may be easier to explain to the Muslim ‘woman and man on the street’ than Sharia compliant companies like Exxon Mobile, Pfizer or Procter & Gamble. As the index gathers traction over time in the marketplace, it will become a high-profile index, hence, an ideal marketing opportunity for investor relations department for companies in the index. It may even encourage privately held Halal food companies to go public to be included in the index.

SAMI Halal Food Participation Index (March ‘10 – March ‘11)

(Disclaimer Note:  DinarStandard is on the Advisory Board of the SAMI Halal Food Index)

Related:  DinarStandard Research Brief “State of Food Insecurity & Opportunities in the OIC Countries.”

State of Food Insecurity & Opportunities in OIC Countries

DinarStandard Advisory: Research Brief


Do you remember the food crisis riots of 2008 that spread across Egypt, Bangladesh, Yemen and many other developing countries?  According to the World Bank, the 2008 increases (eg. wheat and rice prices doubled) added 119 million malnourished people world-wide, bringing the total to nearly one billion (967 million) people globally malnourished!

So where are we today?  While food prices had come down somewhat since 2008, they are going up again and more so than ever.   Between March 2010-11, sugar prices had increased 60%, soybeans, 41%, and wheat 24%.    As a result, according to the World Bank Food Price Watch Report, 44 million additional people went into extreme poverty (just between June 2010- Jan 2011).

Within the OIC (Organization of Islamic Conference mostly Muslim majority 57) countries there are essentially four categories of countries who are exposed to the food crisis in different ways.   Those suffering the most are facing high malnutrition and are also net food importers (e.g. Somalia, Tajikistan, Yemen).  Then there are those with high malnutrition but ironically are also agriculturally endowed countries (e.g. Pakistan, Sudan.)   The third category is of high-income OIC nations who are major importers of food and exposed to global food supply fluctuations (e.g. UAE, Saudi Arabia.)  The final category is of those OIC countries who are major exporters of food while maintaining a healthy nutrition rate (e.g. Turkey, Malaysia.) and are relatively the most secure.

In this research brief we present the state of food security across the 57 member OIC countries.  Given our focus on the business sector, we look primarily at business and investment opportunities that also address and solve OIC food security needs.   We present here a unique OIC-wide food and agriculture cluster approach that identifies opportunities for sustainable growth and investments.

OIC Countries Impact:

According to the latest Food & Agriculture Organization (FAO) of the UN, an average of 15% of the total population of the 57 OIC countries is under-nourished.  The more immediate human impact of this increase is most felt in

Definitions:Food security: exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious foodUndernourishment: describes the status of persons whose food intake regularly provides less than their minimum energy requirementsSource: FAO – Food and Agriculture Organization of the United Nations

low-income, food deficit countries.  For citizens of low-income countries, average of 60-65% of income goes to food, whereas food is only 10-20% of income expenditure for developed countries.   This in-turn creates other problems as families can no longer afford education for their children and medical care in order to put food on their tables.

In addition to the human hunger crisis, for the richer OIC countries who are net food importers the concern is in reliable food supply.  Many commentators have also attributed rising food prices as one of the factors that sparked unrest across the Arab countries especially in cases of low-income countries or where prosperity is unjustly usurped by corrupt leadership.  Undoubtedly, the impact of food price increases is a critical issue.

Among the four categories of OIC countries that are being affected by the Food crisis, first are countries that have disproportionately high undernourishment amongst the population.  According to the 2010 FAO report, “State of Food Insecurity in the World,” amongst the OIC countries, Somalia has the highest percentage of population undernourished at 62%, whereas Pakistan has the highest number of undernourished people at 44 million (26% of the population.)

Ironically, some of these most undernourished OIC countries have large areas of arable land led by Sudan (20.7 million hectares), Pakistan (20.3 million hectares), Bangladesh (7.9 million hectares), and Afghanistan (7.8 million hectares).   These are the second category of countries.  They are also major global food commodity producers.  For example, Pakistan is world’s 4th largest dairy manufacturer, Bangladesh is a major rice producer, Sudan is a major livestock (goat and sheep meat) producer etc.  These countries present tremendous investment opportunities, requiring sustainable investment to boost productivity


The third set of countries affected by the food crisis are high-income OIC countries, some of whom are significant net importers of food, specially the one’s with low arable lands.   Pressured by uncertainty of food supplies and costs for imports, many of these countries are pursuing outside food and agriculture investments in order to control their food supply.

All six of the GCC countries (Saudi Arabia, UAE, Kuwait, Oman, Qatar and Bahrain) are the leading high-income, net food importers, from OIC countries.  Others include Lebanon, Libya, Jordan, Albania, and Brunei.  Except for Saudi Arabia, all of these countries also have small arable areas for agricultural development.  For Saudi Arabia and many GCC states that do have arable land, water scarcity is a major limitation to agricultural effectiveness.

The UAE and the other GCC states are following steps taken by China and investing heavily in agricultural land internationally.  According to a Gulf News report, by shipping the produce home and bypassing world markets, they can cut food costs by up to 25 per cent.   According to the International Food Policy Research Institute (IFPRI), UAE ranked third in the amount of agricultural land obtained by selected investors between 2006 and 2009. In first and second places were China and South Korea.

However, such investments are coming under much scrutiny and have to be carefully pursued.  Large-scale land acquisitions are known to cause land expropriation or unsustainable use, making foreign investments in agricultural land politically unpopular. Also, securing the interest of small farmers is a key component in creating a true win-win opportunity. Therefore such investments have to involve host governments, and the local people to ensure that these acquisitions/investments are properly negotiated, practices are sustainable, and benefits are shared.  Besides land acquisitions, the investments are also looking at food processing, logistics and infrastructure investments that make a big part of food value chain costs.

The final category of OIC countries are the most food secure.  These are low malnutrition, and agriculturally endowed countries who are either net food exporters or have large agriculture land that hasn’t been utilized or needs to be made productive.  While fairly mature in their production, they present attractive investment opportunities as well.

Overall, the response to the food crisis in OIC countries seems to be much more geared towards the security of high-income countries rather than the low-income ones that are agriculturally endowed but are in need of investments with shared benefits.

Food & Agriculture Opportunities: A OIC-wide Cluster Approach

OIC countries’ total food & agriculture trade balance stood at -$40.1 billion in 2009 with imports worth $126 billion (12% of global imports,) whereas its total exports were worth $85 billion (8% of global exports.) (Source: UN’s International Trade Center data.)

Based on our earlier description of the four categories of OIC countries and the nature of their resources, food supplies and demands, we see complementary opportunities among these markets . DinarStandard Research & Advisory has applied its OIC Industry Clustering Model across OIC food supply and demand centers to identify unique investment and growth opportunities.

Why a Region-Wide Cluster Approach?

Given global technology and communication developments, complementary business operations no longer need to be in close proximity to each other (e.g. Silicon Valley).  Rather, a complementary set of competencies within various regions combine to deliver a more robust Cluster.  Global companies such as P&G, GE and most all of the innovative companies have different operational setups across the world that come together to deliver world-class solutions.

Within such clusters, a Hub is a particular location that has sufficient critical mass to support driving development, while a Node is a location that can significantly support a Hub with complementary processes.

The OIC Food & Agriculture Cluster Opportunities

Within the OIC member countries, at the highest level and based on overall exports, the OIC Food & Agriculture hubs are Indonesia, Malaysia, and Turkey.  Meanwhile, the nodes are Ivory Coast, Morocco, Pakistan, Egypt, Nigeria and Kazakhstan. DinarStandard’s OIC based list of food companies as well as the recently released SAMI index highlight some of the major OIC based Food & Agriculture companies showing a presence of strong domestic players.

The more meaningful view of the Cluster is at the specific sub-cluster level.  DinarStandard Research & Advisory has identified 30+ subsector OIC clusters covering Animal & Animal Products, Vegetable products, Food processing/ manufacturing, and Services sub-sectors.

Value creation from amongst these clusters is derived from finding inefficiencies, product/services gaps and sustainable productivity needs, within different part of their value chain (see Diagram below). These gaps and needs can then generate opportunities in three areas:

  1. Investment opportunities: M&A, technology investment, and Joint Venture opportunities are the primary opportunities.  Target Company capabilities can be strengthened through investments in productivity, marketing and research.  For Institutional investors, investments can also be pursued through funds associated with the recently launched SAMI Index.
  2. Halal value chain alliances:  Given the fast growing ‘Halal’ food market is seeking‘farm to fork’ halal verifications, through such OIC food clusters, we are able to identify relevant Halal certified partners to improve efficiencies and competitiveness.
  3. New growth markets:  The OIC food clusters also show gaps and opportunities where companies can expand into the weaker markets.

Current Global Food Price Trends:

The Food & Agriculture Organization of the UN maintains a global Food Prices index which is a measure of the monthly change in international prices of a basket of food commodities.  As of May 2011, the Food Price Index is higher than it was at its peak in 2008.  While the steep rise of sugar prices has subsided, cereal prices (wheat and rice) continue to rise.  So for many in the OIC countries for whom wheat is a big part of their diet this is a particular problem (e.g. as much as 35 percent of daily calories consumed in Arab countries come from wheat alone, according to latest World Bank Food Security study.)

Key Food Crisis Drivers

A variety of reasons, short-term and long-term are being attributed to the growing global food crisis.  The extent of each reasons impact is widely debated, however it is clear these are all contributing to the crisis.  Below is our summary of the key drivers that include demand-side fundamentals, supply-side fundamentals, market barriers related drivers, and finally one we feel is important not to ignore — social drivers.


Population growth & Affluence

According to the World Bank, agricultural production will have to increase by 70% by 2050 to feed a population of some 9 billion people by then.  In addition, the growing affluence of major population centers India and China is increasing the demand for food and increasing overall consumption habits.  In some developing countries there has been a doubling of per-capita meat consumption which in-turn also affects the feed demand for animals.


Use of valuable land and growing edible crops for bio-fuels to address energy shortages is also having an adverse effect of food availability at least at some levels.  Various studies show the impact to be at different levels, with estimates ranging from 75% of food price increase attributed to Bio-fuels to less than 3%.


Rising Input prices

High Oil prices have been attributed to short-term increases in food prices.  As the oil prices subsided after 2008, food prices also came down.  However, the continued fluctuation in oil and other energy prices continue to have an impact on food prices as well.

Climate change, natural disasters, drought

Crop failure in Russia, Ukraine, Kazakhstan were attributed as triggers of the 2008 food crisis when Russia put export controls on its production to preserve local food security.  According to UN, the 2010 Pakistan floods submerged fifth of the land area destroying millions of hectares of farmland and killing 1.2 million livestock.


Water Scarcity

Given that only a few percent of world’s water is suitable for human use, and given population growths and other demands, water shortages maybe even a bigger fundamental crisis than food.  Food we eat of course involves much water use to produce. A FinancialTimes report cited that it takes 140 litres of fresh water to make just a single cup of coffee!  A hamburger requires 2,400 litres of water, counting the water that goes to irrigating the wheat and producing the cattle feed.  Saudi Arabia has slowed its local agriculture development plans because of the massive water intake involved.

Lack of Productivity

Given all the factors affecting food availability, productivity of food production and delivery (in a sustainable manner) is a key contributor to addressing food crisis.    According to a report by ECG this productivity is not just in food production, but also access to water, access to credit, formalization of land rights, transportation, marketing, etc.  However, many of the OIC countries lag behind in productivity as well as investments in it.  For example, a recent World Bank report shows that across the Arab countries cereal production yields are currently only half of the average yield worldwide—and the gap is growing.  The same report shows that investment in agricultural research and development, which despite average rates of return of 36 percent in Arab countries, receives less funding than in the rest of the world.

Loss of agricultural land

According to The Foresight Project report, about 24% of 11.5 billion hectares of vegetated land has already undergone human-induced soil degradation.  It warns that in the next 40 years, agricultural land will be lost to urbanization, desertification, sea level rise and increasingly salty water.


Speculation & Hoarding

While many of the fundamental drivers cannot be argued against as contributors to the growing food crisis, financial market speculation has emerged as another big driver.   According to a well circulated report by Oilivier De Schutter, UN’s special rapporteur on the right of food, “ there is a reason to believe that a significant role was played by the entry into markets for derivatives based on food commodities of large, powerful institutional investors such as hedge funds, pension funds and investment banks, all of which are generally unconcerned with agricultural market fundamentals.”  According to the Report, this new phenomenon began given recent de-regulations which allowed bankers to take large positions in grains as they liked, an opportunity that had mostly been available to only those who actually had something to do with the production of food.

The International Food Policy Research Institute (“IFPRI”) reports that, “rising expectations, speculation, hoarding, and hysteria are among the additional factors that have played a role in the increasing level and volatility of food prices.”

Trade policies

The 2008 food crisis prompted widespread use of export controls in global trade.   These controls added to the crisis because they tightened supplies.  Crop failure in Russia, Ukraine, Kazakhstan were attributed as triggers of the 2008 food crisis when Russia put export controls on its production to preserve local food security.


Food Loss & Waste

The FAO’s latest report on food loss and waste has stated that about 1.3 billion tons of food is lost or wasted every year, which amounts to roughly one third of all the food produced for human consumption.  According to the report, food losses occur as a result of inefficiencies in food production and processing operations that diminish supplies. Food waste, by contrast, is when retailers and consumers throw edible food in the trash.  Consumers in rich nations waste a combined 222 million tons a year, according to the report. That’s almost as much as all the food produced in sub-Saharan Africa.

Rich & Poor divide

It cannot be ignored that the in-equality in distribution of wealth, between rich and poor within a country and between countries, is also a contributor to the millions of people living under mal-nutrition.  This is especially true in low-income countries where corruption by the ruling elites takes undue toll on the otherwise healthy national resources causing increased poverty.   The recent uprisings in Tunisia and Egypt are a reflection of this divide.

Over-Eating, “Gluttony”

The World Health Organization has declared obesity as an epidemic. According to the International Association for the Study of Obesity, Adult obesity is now more common globally than under-nutrition, and is the third biggest cause of premature death and disability in the affluent world after smoking and high blood pressure.  Also, “gluttony” or excessive eating and indulgence in un-healthy food is a social values based issue for which both consumers and marketers in societies have to reflect upon.


This Research Brief is part of DinarStandard Advisory teams OIC market growth strategy analysisContact its experts here.