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Indonesia’s restaurant and food franchise sector is still undergoing robust expansion despite economic slowdown due to the sluggish household spending in the first semester of 2017 (See Indonesia’s Second Semester Economic Outlook: Focusing on Investments). Head of Creative Economy Agency Mr Triawan Munaf revealed that the culinary sector remains the largest contributor to Indonesia’s gross domestic product (GDP) among all the creative economy sectors. Technology advancement, especially social media and online-based food delivery services, has helped drive the growth of this sector by increasing consumer demand and expanding its reach as well as customer base (See Indonesia’s FMCG Sector; Marred by Low Confidence but Boosted by Modern Retail).
Growing strong
Since 2014, the Indonesian restaurant and food franchise sector (See Thirst Quenching: Indonesia’s Food & Beverage Industry) has consistently recorded tremendous growth supported by the country’s increased per capita income and the advancement of technology which has underpinned changes in lifestyles. According to the Jakarta Dining Index researched by Qraved.com, the number of high-end restaurants has grown 250% from 2009 to 2014. In 2013 alone, Jakarta residents visited restaurants 380 million times and spent $1.5 billion USD on eating out.
The research revealed that eating out has become part of regular social activities among Indonesians whereby they socialise and gather with families, friends, co-workers, and business partners to foster relationships. This trend is predicted to continue to go up by 30% in the short and medium term.
Other lifestyle changes supporting the growth of Indonesia’s restaurant and food franchise businesses is the growing trend among workers in big cities to work long hours either due to obligation or simply to avoid traffic jams. For these people, the only practical option when feeling hungry during the night is to order food from restaurants. As a result, Indonesia’s middle-class are eating less in their homes and eating out more. This trend has been confirmed by further research; a study by Nielsen showed that 11% of Indonesian citizens eat out at least once a day. This is higher than the global average of 9%.
It is therefore no wonder that based on data from the Ministry of Trade, the Indonesian culinary sector grew by 8.16% in 2015. Together with the fashion and handicraft industries, the culinary sector accounted for 50% of the creative economy sector’s contribution to the nation’s GDP (See Indonesia's Creative Economy & Heritage Products – A Wealth of Opportunities).
In addition, the number of franchisors in the country, where the food sector constitutes the majority, also soared to 698 units with the total number of outlets reaching 24,400 units. Most of these outlets are located in Java, especially in Jakarta, West Java, and East Java provinces.
Of these franchises, 400 are foreign franchisors, while the rest are local ones. The annual sales turnover of the franchise sector, according to the Trade Ministry, reached 172 trillion IDR. However, not all franchisors in Indonesia are registered with the Trade Ministry so this data is not a complete reflection of the sector’s performance. Only 360 franchisors, of which 308 are foreign ones, hold the Franchise Registration Certificate or STPW (See Franchise Law in Indonesia).
According to Mr Hariyadi Sukamdani, chairman of the Indonesian Hotel and Restaurant Association (PHRI), the culinary sector in Indonesia has bright prospects because, culturally speaking, Indonesian people are naturally inclined to eat out. Its huge population of 255 million with a large number of young, middle-class consumers has made the sector even more attractive.
Source: Databoks, Katadata
Other aspects that increase the attractiveness of this sector in Indonesia are the high profit margins of 15-30% and high volume of daily sales turnover. That is why more and more investors, including those from outside the restaurant and food franchise sector, are investing directly into the industry. This is also underpinned by the strong performance of restaurant and food franchise sector companies that are listed on the Indonesian Stock Exchange (See Indonesia’s Capital Market: Growing Beyond Expectations).
MAP, for instance, the franchisee of Starbucks, Burger King, Domino’s Pizza, Krispy Creme, and various other brands, is predicted to record an increase in EBIT margin by 7% in 2017, up from that of the previous year of 6.1%. Mandiri Sekuritas research team estimated that the company’s net profit in the first half of 2017 grew by 200% versus the same period of the previous year. This accounts for 41% of the company’s annual growth target in 2017.
PT Indoritel Makmur Internasional Tbk, a subsidiary of PT Indofood Sukses Makmur whose main business is in the fiber optic rental sector but now holds 35.8% shares of PT Fast Food Indonesia Tbk, the franchisee of Kentucky Fried Chicken (KFC) also reported the same. The company announced that KFC sales grew 12.7% in the second semester of 2017 to 2.61 trillion IDR.
Sriboga Raturaya, the owner of the Pizza Hut franchise and Marugame Udon franchise in Indonesia has also reported healthy expansion in addition to the introduction of a further franchise brand called Boat Noodle in 2017.
Despite various positive sides, the restaurant and food franchise sector in Indonesia still faces a number of constraints. One of these challenges is its high failure rate; especially among those following short-term trends with no sound business plan and substantial capital. It is not uncommon to see a new restaurant was opened, crowded by visitors for a while, and then closed over a span of several months.
Besides increased competition, most restaurant owners and franchisees are lacking capital and business skills to manage their business. That is why, the government’s support is very much needed in providing low-interest loans and business training.
This is crucial because the restaurant and food franchise sector has contributed significantly to the country’s economy. According to the Indonesian Franchise Association (AFI), the sector employs no less than 150,000 workers nationwide and helps drive the national as well as local economies.
The Indonesian government has pledged that it will provide funding and help promote local brands in foreign countries. Currently, five domestic Indonesian franchise brands have expanded overseas such as J.Co, Es Teler 77, and Baba Rafi, among others.
To help take local franchise businesses to the next level, AFI chief Mr Anang Sukandar has proposed that the government implement a micro-franchising concept (See Indonesia's Microfinance Sector Overview: Key Component for Sustainable Growth). Under this approach, the Indonesian government would encourage established local businesses to franchise their products. Within this plan, the franchise fee would be lower to attract more prospective franchisees to help expand the business across Indonesia. This concept is still under review for inclusion in the national franchise roadmap for Indonesia.
Within the restaurant sector, the government’s policy to exclude the sector from the negative investment list (DNI), thus allowing foreign investors to hold 100% ownership, was criticised by some business players (See Indonesia’s New Negative Investment List: What Changes, What Stays the Same?). Chairman of the Indonesian Employers Association (Apindo) Mr Haryadi B Sukamdani said that there are many small and medium players in the restaurant and catering sector. That is why Apindo asked BKPM to issue an implementing regulation which will restrict the minimum amount of foreign investment so as to protect SMEs (See Indonesia SMEs: Increased Government Support to Overcome Challenges).
A further constraint is the process of obtaining a halal certificate that is time-consuming and expensive. President of Indonesian Chef Association (ICA) for 2017-2022, Chef Henry A Bloem said that the government must facilitate restaurant owners in obtaining halal certification by simplifying its procedures and lowering its cost (See The Rise of Halal Tourism in Indonesia).
The development of new, internet-based technology; particularly social media and online food delivery services, has transformed the restaurant and food franchise sector in Indonesia. Social media has redefined and reshaped word of mouth marketing which is a crucially important aspect of consumer marketing in Indonesia (See Indonesia and the Internet; Online & On the Move).
Social media has enabled food business owners in Indonesia to expand their reach and customer base. Other technology advancements are further spurring the growth of restaurants and food franchise businesses, most notably app-based food delivery services (See Disruptive Innovation Challenging Business as Usual in Indonesia). Some early startups offering these services in Indonesia include Klik-Eat, FoodPanda, Raja-Makan, and Pumasera. However, Gojek through its dedicated Gofood service is coming to dominate the market. Various large scale brands, such as KFC, McDonalds, Pizza Hut, and others have offered this service for years. The emergence of online-based food delivery services is now allowing small and medium restaurants to take advantage of this service so as to widen their potential customer base at almost no cost.
Go-Food and the similar offer by Grab under the name GrabFood is greatly benefitting restaurant owners. Their extensive resources of thousands of readily available riders and millions of customers (See Mobile Apps in Indonesia Clicking into Gear) is opening up new growth channels for the restaurant and food franchise industry across Indonesia.
Global Business Guide Indonesia - 2017
Contribution to GDP: 42% (2016)
Sector Growth: ICT 17%, Hospitality 4.53% (yoy, 2016)
Number Employed in the Sector: 54.9 million (February 2015)
Main Areas: Retail, Transportation, Media, Telecommunications, Finance, Hospitality, Tourism.
Government Bodies: Ministry of Trade, Ministry of Tourism, Ministry of Transportation, Ministry of Manpower.
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