By Janeman Latul and Neil Chatterjee
JAKARTA (Reuters) - Global consumer firms such as Nestle and Procter & Gamble are investing hundreds of millions of dollars in Indonesia, drawn by the combination of rising wealth and youth in a country with 22 million people under the age of four.
On paper, Indonesia looks like a sure bet. The middle class in the world's fourth largest population is expected to swell to 150 million people by 2014. Economic growth picked up to a stronger-than-expected 6.4 percent last quarter, defying a global downturn because of domestic consumption and investment.
The consumer product with the fastest rate of sales growth is disposable diapers. Yet demand for milk -- which would seem like another obvious winner considering Indonesia has Asia's second-highest birth rate -- still trails the regional average.
Lactose intolerance is common. Mothers in some parts of Indonesia have traditionally fed their infants bananas or even mashed beef instead of fresh milk, which is expensive to transport in a tropical archipelago with poor roads and ports.
But consumer companies are confident that all Indonesia needs is time and a little marketing for aspirational middle-class parents to embrace Western-style consumption.
"Indonesians didn't have a milk culture, since many people were lactose intolerant," said Boenjamin Setiawan, founder of Southeast Asia's biggest pharmaceutical firm PT Kalbe Farma, which sells milk. "But everything has changed now because of our middle class."
Children who are introduced to milk at a young age tend to develop a tolerance for lactose.
Sales of powdered and fresh milk have risen 9 percent on average in the past five years, the second-fastest pace in Asia after China, to become a $3.7 billion market. Still, milk consumption per capita is just 2.7 kg per year, versus a regional average of 17 kg, according to the U.S. Food and Agricultural Policy Research Institute.
Nestle invested $200 million in 2011 to start production of powdered milk and its Milo drink by 2014, while New Zealand dairy giant Fonterra is investing this year in a new dairy packing plant.
"With dairy demand in Indonesia forecast to grow by around 50 percent over the next eight years, it is a key market for us," said Maspiyono Handoyo, managing director at Fonterra's Indonesian unit.
Local food company Indofood Sukses Makmur, the world's biggest noodle maker, is building a $130 million milk factory on densely populated Java island. It has 14 percent of Indonesia's milk market and wants a global partner to help chase market leader Nestle, its chief executive says.
"We are trying to find a strategy to get bigger market share," said Indofood's Anthony Salim.
Marketing has followed the investment. PT Kalbe, the pharmaceutical firm that sells milk, spends 12 to 13 percent of its fast-growing revenues on advertising, said Vidjongtius, its finance director.
Firms are trying to link the health benefits of milk with the physical and mental success that an expanding middle class wants for its children.
A Nestle ad shows a toddler drinking its "Dancow" powdered milk and growing faster and being more active than other kids.
Nestle Indonesia director Debora Tjandrakusuma said the firm sees social media becoming a more important advertising medium in a nation that is among the biggest users of Facebook and Twitter.
Rival Danone has run commercials for its "Nutrilon" milk powder brand in English even though few Indonesians speak the language, as it tries to associate itself with the kind of educated sophistication that it hopes will appeal to parents.
"Most people are aware that milk is good for health and for their children. They have bought the concept. The question now is which brand will they choose," said Elwin Mok, managing creative director at Celsius, an advertising agency in Jakarta that has Danone and Unilever among its clients.
The market for disposable diapers was just $400 million in 2011, although annual growth has averaged 35 percent since 2006, data from Indonesia's industry ministry shows. Working parents increasingly favor them over traditional cloth diapers and can now afford a product previously seen as a luxury.
P&G is investing more than $100 million to build a plant for its baby care division and is expected to start producing its "Pampers" brand diapers locally by 2014.
"We are committed to bringing winning brand innovations to meet the needs of all economic segments in Indonesia - from the very affluent to the aspiring," P&G said in an emailed response to questions from Reuters on the company's Indonesia strategy.
The company said it had recorded three consecutive years of "double digit" growth in Indonesia, although it declined to provide specific figures.
Unicharm, Indonesia's largest diaper producer, has two factories and expects to start operations at a third in eastern Java next year.
"We recognize disposable diaper use won't continue rising at the current rate," said Ichiro Oba, a Unicharm spokesman, adding that the sustainable annual percentage growth rate was probably in the teens.
(Additional reporting by Fathiya Dahrul and Andjarsari Paramaditha in JAKARTA, James Topham in TOKYO, and Jessica Wohl in CHICAGO; Editing by Emily Kaiser)