Global Business Guide Indonesia

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Business Updates | Franchise Laws & Opportunities in Indonesia

A retail sector heating up with the ongoing emergence of a middle class ready to spend presently has the Indonesian government striving to implement further regulations governing franchising practices in the country. Introduced with the goal of preventing monopolisation in the increasingly attractive mini-mart and fast food chain industries, these recent regulations focus upon introducing a limit to the number of outlets that can be individually owned and operated by a single investor and encourages the increased involvement of local SMEs.

Led by major multinational companies that already exceed the imposed limit on franchise units, foreign reaction to this revised legal framework has largely been one of concern, but the potential of the Indonesian market as a receptive consumer base remains. Despite the challenges now faced by franchisers both local and foreign as a result of tighter regulation, brands already well-established in Indonesia have continued to enjoy substantial growth. Earlier this year, Modern Internasional as master franchisee for 7-Eleven convenience stores in Indonesia reported a 7% increase in profit for Q1 2014 relative to the same period in 2013 and made clear its plans to carry out an expansion strategy that will see it add 200 new outlets to its existing 161 by the end of this year. The persistence of an optimistic outlook is further epitomised by the expected entry of new franchises that range from longstanding US brands to relatively new players from the ASEAN – a trend in keeping with the doubling of franchises operating in Indonesia to upwards of 2,000 between 2010 and 2012.

Spreading Success

At its core, Indonesia’s introduction of new requirements for franchises seeks primarily to spread the success currently enjoyed by a handful of large conglomerates with multiple master franchisee contracts, and ensure that smaller enterprises are afforded with opportunities to grow in concert with their international counterparts.

The first of the collection of policies put forward in quick succession by the Ministry of Trade (MoT) relating to franchise business models in Indonesia was issued on 24th August 2012 and put in place the framework for an increased SME presence by stipulating that all franchises must source at least 80% of raw materials and inputs locally. Failure to abide by this law and comply with subsequent warning letters can result in the revocation of a franchisee’s franchise operating license, as determined by an ‘Assessment Team’ specifically created to enforce and ascertain compliance. Moreover, this regulation (Ministry of Trade Regulation No.53/M-DAG/PER/8/2012) also states that franchisers must prioritise SMEs when appointing franchisees and/or suppliers. That said, exemptions to these requirements can be made available by the MoT on a case by case basis, depending upon whether the necessary inputs are available in Indonesia and taking into consideration the SME's ability as a potential franchisee compared to other third parties.

Via the much debated introduction of a limit on the number of franchise units, the subsequent release of Reg. 68/M-DAG/PER/10/2012 and Reg. 07/M-DAG/PER/2/2013 cemented the move towards creating new opportunities previously inaccessible to smaller local companies. The former restricts the max number of modern stores (mini-marts, supermarkets and department stores) owned by a single entity to 150 outlets. Those looking to exceed this limit must ensure that at least 40% of the total amount of new units opened are owned and managed by a local third party franchisee.

Similarly, Reg. 07/M-DAG/PER/2/2013 limits companies in the food and beverage industry (Indonesian and international) to a maximum ownership of 250 outlets. Master franchisees hoping to expand beyond this limit are permitted to do so, but must appoint a third party franchisee (again giving SMEs priority). Alternatively, parties opening more than 250 franchise units can exceed the threshold via an equity participation scheme whereby new outlets worth up to 10 billion IDR must be at least 40% owned by a local third party and outlets worth more than 10 billion IDR must be 30% owned by a local third party.

Companies already exceeding these limits, such as PT Fastfood Indonesia – master franchisee for KFC and other Yum! Brand companies in Indonesia – are given up to five years to conform to new requirements. 

Challenges Ahead?

With the enactment of new policies, companies in Indonesia planning to expand their network of franchises now have to contend with the challenge of working with a greater number of third party franchisees. Whereas in the past these entities would have been able to directly control the management of all of their outlets, the limit now necessitates that they surrender at the very least a portion of control to another local party. This will make it more difficult to ensure consistency in service and product quality between different store locations, and is likely to necessitate greater spending on training to maintain consistent standards across the board.

The challenge of working with disparate third parties can be mitigated by instead appointing a group of investors with the pooled capital to become franchisees tasked with opening and operating all outlets in a given area/city. This course of action would curb the need to work with an overwhelming amount of local third parties and facilitate a more straight forward monitoring process to guarantee compliance with corporate codes of conduct. Already in place to enable greater coordination between franchisers and franchisees in Indonesia are organisations such as the Indonesian Franchise Association (AFI).

As described in the International Journal of Franchising Law, the most worrying aspect of recently revised regulation for foreign franchises is the introduction of an 80% local content requirement. International brands that rely on the import of equipment and raw materials to meet standards associated with their products/services may struggle to obtain comparable inputs. MAP executives as the master franchise contract holder for Burger King in Indonesia voiced this fear in their assertion that their fast food chain would struggle to locally source enough beef for its restaurants. In such cases, the MoT appointed ‘Assessment Team’ should allow for a relaxation of the local content requirement, though it remains to be seen as to whether or not this will hold true.

In adhering to local content regulations, foreign companies managing franchises in Indonesia may in fact benefit from having to appoint local third parties as franchisees for additional outlets, as doing so will allow for access to their existing network of suppliers in Indonesia.

Opportunities to Take Away

Boasting a middle class poised to double to 140 million people by 2020 (Boston Consulting Group), Indonesia presents many different opportunities to foreign investors looking to enter the market through a franchising business model. The most promising of these opportunities are available to master franchise holders for household name F & B industry brands that offer consumers authentic products popularised abroad and now more visible to the Indonesian market via trends featured online and in other media outlets. As demonstrated by the success of brands such as KFC, Burger King, and McDonalds, fast food in particular has considerable potential and the industry should see the entry of additional players in the near future. Sandwich specialist Quiznos, for example, in late 2013 announced its plans to open 100 units in Indonesia over the next ten years. Certainly, room for new players is plentiful; as reported in 2013, Yum! Brands’ saturation of 2-3 stores per million people in Indonesia is poised to rapidly expand to a level closer to the US ratio of 50-60 eateries per million people (Bloomberg).

Rising wheat consumption (See Indonesia’s Growing Appetite for Wheat) should also accelerate the entry of international bakery brands in Indonesia. As a product not traditionally produced in Indonesia, baked goods are less subject to consumer loyalty to local companies and this opens the door to foreign retailers. In practice, foreign outlets are in many cases preferred for their perceived expertise in baking quality breads, cakes and pastries and the industry has already witnessed the successful integration of brands from Japan such as Roppan and South Korea such as Tous Les Jours.

A notable preference for brands established abroad among Indonesian consumers is in fact clear to see in other industries, thereby widening the scope of opportunities to implement a franchise business model and bring in international products. Cosmetics and medical services in particular have been among the most successful in appealing to a local mindset that still associates foreign brands with higher quality (See Indonesia’s Cosmetics Market).

Entering Indonesia as a franchise popularised overseas may entail substantially adapting strategies and product ranges to suit local tastes and consumer patterns of behaviour unique to the market. While international fast food chains have been able to carve out a dominant market share in Indonesia, most have had to move away from their time-tested business model of getting customers in and out the door as quickly as possible. The current lifestyle trend that has Indonesians looking for places to socialise without burning a hole in their pockets is increasingly influencing franchises such as KFC and McDonalds to transform their outlets into places where customers can spend an extended amount of time relaxing with friends. In major cities, this evolution is taken to the next level through the provision of complimentary Wi-Fi access (akin to cafes) and hosting events such as screenings of football matches and even live musical performances. Such is the prevalence of this cultural phenomenon that even convenience stores including 7-Eleven have taken to providing seating and a more comprehensive array of hot foods to be eaten in stores.


Concerns over the impact of recent franchising laws in Indonesia are not without reason; local content rules and a limit to outlets dampen the potential for traditional growth and will necessitate patience in dealing with a government yet to fully clarify as to when exemptions will be granted. However, the government’s motivation behind these directives was not to curb opportunities in one of Indonesia’s most promising areas of business but rather to encourage SME participation and the use of locally manufactured goods. With consumer spending projected to reach 1.1 trillion USD by 2030 (Reuters), Indonesia is of the mind that now is the time to ensure that its local companies are prepared to flourish alongside international brands and benefit from a consumer base open to new products, ready to spend and easily reached via social media. Foreign franchises looking to enter Indonesia can thus interpret recent regulatory developments as a framework – albeit an unconventional one - to cooperate with local investors increasingly in search of avenues to tap into a lively market that only stands to expand in the future. 

Global Business Guide Indonesia - 19th May 2014

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Indonesia Services Snapshot - Retail

Total Retail Sales: $522 billion USD (estimated, 2016)
Sales Growth: 5.4% (yoy, September 2016)
Number Employed in the Sector: 26.65 million (February 2015)
Number of Modern Retail Outlets: ±30,000 (2015)
Main Areas: Hypermarkets, Supermarkets, Department Stores, Minimarkets, Speciality Stores.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List implies that foreign companies may only operate in retail spaces greater than 400 sqm for convenience stores, 1,200 sqm for supermarkets, and 2,000 sqm for department stores.