Collective Brands targets Indonesia

US footwear group Collective Brands (Xetra: A0MVD0 - news) , which owns the Payless shoe stores chain, will open 15 franchised stores in Indonesia next year and is shifting a chunk of production away from China to south-east Asia's largest economy, executives said.

The stores are part of a big push by foreign companies, including Unilever (UNLNF.PK - news) , Nestl and Toyota, to target Indonesia's burgeoninggrowing middle class, while the expansion of production reflects the strong rebound of the manufacturing sector after a decade of decline.

Collective Brands has begun sourcing from Indonesian producers to reduce dependence on China, where costs are rising. Matt Rubel, chief executive, said the company expected steadily to raise output from subcontractors in Indonesia to about 12m pairs a year by 2015. "The utopia for one-stop sourcing for quality and low price has been China ... but utopias never last," Mr Rubel told the Financial Times in an interview. "Today we have to do more work in redeploying to wherever we can."

With China's share of output at about 80 per cent, Mr Rubel said he expected that to fall to about 70 per cent over the next two years, and then to about 60 per cent. Collective Brands sold nearly 170m pairs of shoes in 2009, with revenues of $3.3bn.

Nike, the world's largest shoe brand company, has divided production among China, Vietnam and Indonesia since the 1990s. But China's share has also edged down over the past three years, with Vietnam now accounting for 37 per cent of its sales, China 34 per cent and Indonesia 21 per cent.

New Balance and Adidas (59053.EX - news) also source millions of pairs of shoes from Indonesia every year. Moves such as Collective Brands' could help the country surpass Vietnam this year as the world's second-largest shoe manufacturer after China.

Collective Brands, which operates 4,500 Payless stores in the US, reached a franchise agreement with PT Mitra Adiperkasa (PMDKF.PK - news) in October. The first Indonesian businesses will open in the second quarter of 2011 in Jakarta and Denpasar, Bali, according to Fetty Kwartati, corporate secretary. Stores are also planned in Malaysia and Singapore.

After being virtually wiped out by the 1997-98 Asian financial crisis, Indonesia's manufacturers are bouncing back, with the economy growing at 6 per cent. Shoe production is back at pre-crisis levels. In 2010, Indonesia is expected to make 300m pairs worth $2bn-$2.5bn, said Gita Wirjawan, head of the investment co-ordination board.

But Indonesia's production surge is not limited to shoes. Leading food and household product makers are aggressively ramping up in the country. Unilever, the Anglo-Dutch consumer products group, will invest more than $400m by 2013.

Nestl of Switzerland is pouring $200m into Indonesian facilities this year.

Astra International, which has roughly 50 per cent of the domestic car and motorbike market, is set to spend approximately $200m in 2010 and 2011.