Opportunities for Investors in Indonesia’s Cosmetics Industry

We discuss the business opportunities catering to halal cosmetics and personal care products in Indonesia’s beauty industry as domestic purchasing power increases.

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Indonesia’s beauty industry has experienced rapid growth in recent years, creating lucrative prospects for global players. In 2023 alone, the industry grew by five percent, with projections indicating a further surge to nine percent by 2026. The cosmetics and personal care products segment reported annual growth of 14 percent in 2022 and is expected to maintain average annual growth of 4.5 percent between 2024 and 2027.

The main driver of growth in Indonesia’s cosmetics industry is the country’s increasing middle-class cohort, which is estimated to be around 54 million people. Projections suggest that this demographic will expand to a staggering 135 million people by 2030. As such, businesses are poised to tap into key trends serving this growing consumer base.  

Halal cosmetics on the rise in Indonesia

Although halal cosmetic products were first introduced into the Indonesian market in 1995, the products did not become mainstream until 2014. Local cosmetics company Wardah is considered the pioneer of Halal cosmetics in the country.

Halal cosmetics are products that are produced in accordance with Islamic sharia i.e., they do not contain materials deemed prohibited under Islam, such as alcohol, lard, blood, etc.

The national halal cosmetics industry recorded a market value of US$4.19 billion in 2022 and was projected to grow by 8 percent until 2023.

Further, Indonesia’s Government Regulation 39 of 2021 (GR 39/2021) sets out the requirements for businesses to obtain Halal certification for their goods and services. Under the law, products that enter, circulate, and are traded in Indonesia must be halal-certified.

According to GR 39/2021, the following goods and services must be halal-certified:

Goods:

• Food and beverages;
• Pharmaceuticals;
• Cosmetics;
• Chemical products;
• Genetically modified products;
• Biological products; and
• Other goods people utilize.

Services:

• Processing;
• Storage;
• Packaging;
• Distribution;
• Animal slaughter; and
• Sales.

The government has taken into consideration the time businesses need to prepare their operations to be halal-compliant. Therefore, the government has set stages for halal certification based on product type.

As the world’s most populous Muslim country, Indonesia is naturally also the world’s largest halal market, particularly for the food, tourism, cosmetic, and pharmaceutical sectors. Before the pandemic, global spending on halal products reached over US$2 trillion with Indonesian consumers spending some 10 percent or over US$200 billion of this total on halal products and services.

Increasing awareness from the youth as well as non-Muslim consumers

Indonesia’s halal cosmetics industry has gained increasing popularity among millennials and generation Z consumers, as well as from the non-Muslim demographic.

Several local cosmetic companies such as Base has found success in exporting halal cosmetics to markets with small Muslim populations like Australia. Halal beauty products often only utilize plant-based materials and can capture the market demand for organic, natural, and vegan products in Muslim minority countries.

Challenges facing the halal industry

Despite the huge growth potential of Indonesia’s cosmetics industry, the industry does face key challenges.

Raw material imports

Around 90 percent of the raw materials used in Indonesia’s cosmetics industry is imported with most of the raw materials originating from Japan, South Korea, and the U.S. This not only increases the costs for businesses, but with the halal regulation in place, this adds considerable complexity in the halal verification process of the raw materials. There will be further challenges when auditors need to certify the production facilities from where the raw materials were sourced as there is currently no unified international Halal certification in place.

Increasing competition

The cosmetics industry in Indonesia is encountering rising competition from both local and international beauty companies, all vying to capitalize on the vast market. International cosmetics giants are able to leverage their extensive experience and global networks, providing them with distinct advantages in marketing and branding. On the other hand, local cosmetic products have gained traction by offering affordable alternatives, making them accessible to the burgeoning lower middle-class demographic entering the consumer market in Indonesia.

Yet, despite the local affordability advantage, Indonesia’s cosmetics industry faces intense competition from the influx of Chinese cosmetic products, adding another layer of challenge for global market players.

This underscores the need for strategic positioning and innovation by cosmetics brands and OEM suppliers to navigate the competitive terrain and cater to the diverse preferences and purchasing power within the Indonesian consumer market.

Opportunities for foreign investors in Indonesia’s cosmetic industry

The Indonesia cosmetics industry has great potential to grow and develop. Several opportunities exist for foreign investors, some of which we discuss below.

A large and growing market

Indonesia has a large population, namely around 270 million people. This makes Indonesia one of the largest cosmetic markets in the world. Apart from that, Indonesia’s rapid economic growth has also encouraged an increase in people’s purchasing power, thereby increasing demand for cosmetic products.

Research and development

Indonesia is the second most biologically diverse country in the world, and such resources have the potential to be used as raw materials. There are huge opportunities for R&D investments in the upstream cosmetics industry, which in turn will reduce the industry’s dependence on imports. Global players seeking to tap into domestic demand can explore local sourcing options and support R&D efforts through collaboration and partnerships. Ultimately, this will increase the competitiveness of Indonesia’s cosmetics industry and boost the participation of micro, small, and medium enterprises in global value chains.

Development of halal cosmetic products

The halal cosmetics market in Indonesia continues to grow, along with the increasing number of Muslims in Indonesia. Foreign companies can invest in developing halal cosmetic products, both for domestic consumers and export markets.

The Indonesian government has implemented measures to enhance accessibility to halal certification for domestic products, notably in the cosmetics industry. The registration fee for halal certification for domestic products has been significantly reduced to US$3. Additionally, streamlining the process, the government has expedited halal registration services for cosmetics companies, reducing the timeframe to just 15 days. This initiative aims to facilitate a more efficient and cost-effective halal certification process, encouraging widespread compliance within the cosmetics sector in Indonesia. The introduction of multiple organizations for verifying halal documents further contributes to the ease of obtaining and establishing halal certifications.

Summary

In conclusion, Indonesia’s cosmetics industry has witnessed significant growth, driven primarily by the expanding middle class and the increasing demand for halal products. The industry is poised for further expansion, with projections indicating substantial market growth, especially in the halal cosmetics segment.