Cross-border consumer forces

Juliana Evans and Gita Gutawa are the pulse of Southeast Asian popular culture. The 21-year-old Malaysian actress and model and 18-year-old Indonesian songwriter are just two of regional celebrities that Malaysian cosmetics label Silky Girl counts among its the brand ambassadors. What each of them has in common is their popularity in both Malaysia and Indonesia - a factor which became important when Navis Capital Partners bought Silky's parent company Alliance Cosmetics in 2010.

"People from these countries listen to the same music," explains Navis Managing Partner Rodney Muse. "When you can take the brand ambassadors, and the relationship between them and the brand you've created, to Indonesia, it's quite seamless."

Navis began expanding the previously Malaysia, Singapore and Brunei-focused brand into Indonesia last year. Silky Girl is an ideal candidate for cross-border organic growth for several reasons: its halal ingredients are appropriate for Indonesia's Muslim population, the makeup caters for similar skin tones, and local teens share the same dressing behavior.

Navis set up an Indonesian headquarters for the brand with sales, marketing and distribution capabilities, as well as establishing regional sub-distributors to roll out products nationwide. It had previously pursued a similar strategy with diaper manufacturer Drypers Asia, which it expanded throughout the ASEAN region, including Indonesia, before exiting to Sweden's SCA in 2004.

Risky business

It shouldn't seem odd that Navis has chosen to expand its Malaysian brands organically rather than acquiring consumer companies indigenous to Indonesia. Though it is undoubtedly a newfound favorite of Asian private equity, the country is still seen by many as too risky a proposition for direct investment.

Issues surrounding the lack of transparency, corruption, and the rule of law are often cited, while a recent report produced by the Emerging Markets Private Equity Association found that 23% of LPs regard local political risk factors as a deterrent to investing. Navis' Muse admits that organic expansion is a lower risk means of accessing Indonesian consumers.

The high valuations in Indonesia compared to those in contiguous markets are another reason for favoring market access through the trade route. "It's because the valuation's extremely inexpensive in one country, yet more expensive in Indonesia, and they can overcome the export or expansion hurdle," says Andy Ho, managing director and head of investment at Vietnam-focused fund manager VinaCapital.

If valuations are causing firms to keep their distance, then, and the risk-reward profile is better from the organic expansion approach, will Navis' Silky Girl strategy be replicated by other PE-backed consumer brands? "My immediate response would be yes," says Muse, "and that's because ASEAN is becoming a single economic block with fewer and fewer barriers between the different countries."

Turbulence ahead

Following in Navis' footsteps is probably more difficult than it appears on the surface though. One of the complexities is the need to flood the market with a large supply of products, without knowing which ones will succeed and in what quantities. This process is then refined over time, but it can take around two years to establish how the inventory is performing.

Another complexity arises from the persistence of trade barriers. Although the ASEAN Free Trade Agreement saw cross-border tariffs gradually removed between 1993-2001 - benefiting countries that produce less expensive goods - getting products registered in Indonesia has proved a lengthy and challenging process for exporters. "There's a massive backlog of people applying for brand registration," maintains Muse.

And while the region's governments have also dabbled with currency valuations over the years to make their exports more competitive, going up against the likes of Unilever and Proctor & Gamble isn't a prospect that appeals to many country brands in Southeast Asia. VinaCapital's Ho cites the strength of international players in Indonesia as the reason why his firm prefers to trade with the likes of Cambodia, Myanmar, Laos and Southern China: "These companies might not outperform the local products, or might not be able to compete with the international brands. It seems really difficult."

Because you're worth it

However, in Indonesian cosmetics, according to Muse, global brands like L'Oreal and Maybelline curry favor among wealthier consumers, while local brands target the budget buyer. Where Navis' Silky Girl sits - in the mid-market - brand rivalry isn't yet an issue.

Of course, whether or not regional brands start to make gains in Indonesia - and Muse thinks this is most likely to happen in the sphere of high-quality food - it's arguable whether private equity firms themselves will have a big part to play in increasing the success rate of these exports. Aside from the complexities detailed above, this will broadly come down to two factors: the capabilities of the private equity firm, and the strength of the brand itself.

"A PE firm won't necessarily help an entry strategy into Indonesia, but I think to the extent that you have the people, the resources and the capability that we do, you can de-risk the entry and maximize it," says Muse. "If you haven't got a very strong brand in your core market, though, there's probably little point in going much further."

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• Topics
• Consumer
• Southeast Asia
• Expansion
• Indonesia
• Consumer
• Growth capital
• Navis Management
• VinaCapital