1 1. CHAPTER I INTRODUCTION 1.1 Background The Indonesian beverage market, particularly the bubble tea segment, has seen remarkable growth over the past few years, driven by increasing consumer demand for trendy and affordable drinks. In 2021, the value of the bubble tea market in Indonesia reached USD 1.6 billion, contributing nearly 44% of the total bubble tea market in Southeast Asia which reached $3.66 billion (GoodStats, 2024) as shown on Figure 1-1 Market Value of Boba Drink in South Asia. More than 268 million registered consumers in Indonesia, make it become the largest customer base in the region, indicating that around 97% of the population has consumed this drink. Figure 1-1 Market Value of Boba Drink in South Asia The boba drink originated in Taiwan and has been around since the 1980s as a beverage urban area of Taiwan. It was created by adding white tapioca balls to tea, forming what is known as zhen zhu nai cha, which means pearl milk in Indonesian or better known as boba milk tea or bubble tea (Veronica & Ilmi, 2020). This boba drink has become popular internationally and was first introduced to Indonesia by the multinational drink brand Quickly in 2001 subsequently adopted by others. 2 This boba drink has developed for more than (a) decade and reached its peak in Indonesia in 2018. However, the COVID-19 pandemic in 2019 and 2020 posed challenges for businesses, leading to decline in sales. Despite experiencing very rapid and significant changes in trends, interest in the Boba drink remains stable and is even predicted to continue growing. Figure 1-2 Annual Indonesia Market Size of Boba Figure 1-2 shows that Indonesia market size of new-age tea & boba reached USD 1.6 billion in 2021 and projected to be around 2,5 billion in 2026 (Mordor Intelligence, 2021). This significant growth highlights the increasing popularity of tea-based beverages, including new-age tea and boba, among Indonesian consumers. The market expansion is driven by shifting consumer preferences towards innovative flavours, the influence of social media in promoting these beverages as lifestyle products, and the rapid proliferation of boba and tea chains across the country. As disposable income continues to rise in Indonesia and urbanization progresses, the tea and boba market is poised for sustained growth, creating opportunities for new entrants while challenges for existing players to maintain relevance in a dynamic market. 3 The graph below on figure 1-3, illustrates the growth of the number of boba drink outlets over a 10-years periode (2012 - 2022) compared to other types of drinks where the boba drinks outlet remain stable and tend to grow. Figure 1-3 Population Graph of Number of Outlet In addition, a report from Statista shows that drinking trends in Indonesia are strongly influenced by young demographics, where 64% of the population is under 35 years old (Figure 1-4). This group tends to have greater purchasing power for products that are visually appealing and have a strong presence on social media (Statista, 2023). Figure 1-4 Population by Generation and Largest Cities 4 Based on data from Badan Pusat Statistik (BPS) Indonesia (2023), the distribution of Indonesia's population by age group is dominated by Gen Y (millennials) and Gen Z (Figure 1-5). Gen Y contributes around 31% of total Indonesian population and the Gen Z contributes around 24% of total Indonesia population, meaning that together, these two generations make up more than 50% of total Indonesia population. Figure 1-5 Indonesian Population by Generation A similar demographic distribution is observed in Jakarta province, which serves as the primary location and main market for these boba beverages, as well as the location where TEGUK outlets operate. Gen Y and Gen Z account for 55% of the total population (Figure 1-6), reinforcing their significance as the core market for boba drinks. Figure 1-6 DKI Population by Generation 5 Generation Y, or what is known as Millennials, was born between 1981 and 1996. They are a generation that grew up in the era of digital transition, where the internet and social media began to develop rapidly. Their shopping behavior is greatly influenced by technology. Millennials are more likely to make purchases online via e-commerce platforms because of the convenience and speed offered (Siti, 2021). Apart from that, they also prioritize shopping experiences and prefer products or services that offer added value, such as ease of access, flexibility and innovative features (IMARC Group, 2020). Not only that, Generation Y is highly influenced by online reviews and testimonials from other users before making purchasing decisions (Hamidin, Sari, & Hadi, 2022) Social media has become their primary channel for discovering products and engaging with brands. Meanwhile, Generation Z–born between 1997 and 2012–is a digital native generation who grew up with technology since childhood. They are very familiar with smartphones, applications, and social media such as TikTok and Instagram (IMARC Group, 2020). Generation Z tends to seek information instantly and prioritizes speed and convenience in transactions. They prefer products that reflect personal identity and social values, such as sustainability and social justice (Nadiyah, Sudaryono, & Kartika, 2022). In addition, Generation Z is highly influenced by trends and interesting visual content, so marketing strategies that use short videos or creative content tend to be more effective in reaching them (Kelly, 2024). 6 While these consumer insights are important, they must be analyzed in the context of Indonesia’s economic conditions in 2024. The country experienced five consecutive months of deflation, starting in May (2024) and continuing through September, when the deflation rate reached 0.12%. The middle-class population also dropped by 17.13%, from 57.73 million people in 2019 to 47.85 million people in 2024 (Badan Pusat Statistik (BPS), 2023). Despite these economic challenges, the Indonesian government, in its press release on Siaran Pers HM.4.6/393/SET.M.EKON.3/11/2014 stated that national economy grew by 4.95% (year-on-year) in Q3 2024 and 1.5% (quarter-to-quarter), with expectations of exceeding 5% growth by the end of 2024,, According to Finance Minister Sri Mulyani, this indicates that the purchasing power of the Indonesian people is still maintained (Tumbuh 4,95% (yoy) di Q3-2024, Pemerintah Optimis Ekonomi Indonesia Mampu Tumbuh diatas 5% Sepanjang Tahun 2024, 2024). The growth of Indonesia’s boba drink industry is driven by a combination of evolving consumer preferences, rapid urbanization, and the strong purchasing power of younger generations who prioritize convenience, digital engagement, and lifestyle-oriented products. However, external factors such as economic fluctuations, declining middle- class purchasing power, and inflationary pressures present challenges that may impact consumer spending and business sustainability. As the market becomes increasingly competitive, businesses like TEGUK must adopt well-defined market segmentation strategies and effective marketing tactics to remain relevant. This research aims to explore the key factors contributing to TEGUK's declining revenue and profit margins, assess the most suitable segmentation approach, and propose strategic marketing initiatives to enhance sales performance and long-term growth. 7 1.2 Company Profile TEGUK Indonesia was established with the mission of making high-quality, made-to- order beverages accessible to the masses at affordable prices. The company started with a single outlet in 2018 and has since grown to operate over 150 outlets across Jakarta, Banten, and West Java. TEGUK’s product portfolio includes popular beverages such as boba tea, palm sugar coffee, and a recent addition of ice cream under the Es Grim brand, in partnership with AICE Group. This strategic collaboration has helped TEGUK expand its product offerings and tap into new revenue streams from the ice cream market. By carrying the tagline “Temani Harimu dalam Tiap Rasa” or “Accompany Your Day in Every Taste,” TEGUK received a positive market response in its early years. The company achieved significant financial success, with revenue reaching IDR 132 billion in 2023. Moreover, TEGUK successfully listed its name on the Indonesian Stock Exchange, and became the first small and medium enterprise (SME) to enter the public company category (Figure 1-7). Figure 1-7 TEGUK Milestone 8 TEGUK’s operations are supported by an efficient in-house supply chain, with distribution hubs in Tangerang, East Jakarta, and Bandung. This infrastructure enables the company to implement a strong cost-management approach, ensuring competitive pricing while delivering quality products. Additionally, TEGUK collaborates with major FMCG brands like Ovaltine, Milo, KitKat, Nestea, Frisian Flag, and others to secure premium ingredients at lower costs, further enhancing its price competitiveness.