Tighter government regulation of the fast-growing franchising sector would reduce messy failures, an official from the Indonesian Chamber of Commerce and Industry said on Thursday.
“In franchising, I strongly suggest that investors investigate before investing,” said Amir Karamoy, a member of the franchising and licensing committee of the chamber, also known as Kadin, ahead of next week’s Franchise & License Indonesia Expo 2009.
The nationwide franchising sector has grown 15 percent this year. Total sales volume rose from Rp 2.6 trillion ($273 million) in 2007 to Rp 3 trillion in 2008, and is projected to grow again this year.
However, lax laws governing the sector resulted in far more business failures than there should be, Amir said. He warned that many shady operators still looked to take advantage of inexperienced investors.
“In the United States, only about 3 percent of franchises fail every year because the monitoring system is solid and investors aren’t left alone in running the franchises - the brands support them. So the system runs well,” he said.
In Indonesia, he said, the number of failures is much higher because about 60 percent of people running franchises didn’t fully understand their business.
One big problem was that current government regulations on franchising did not state a minimum number of outlets a brand had to have to become a franchise, or a minimum operating period, he said.
Levita Supit, the chairwoman of the Indonesia Franchising and Licensing Society (WALI), spelled out the requirements for a brand to be listed with the society.
“It has to be in operation for at least five years, have a minimum of three branches and its financial condition has to be clearly audited,” she said, adding that many people still cannot ascertain brands worth investing in.
“Out of the 800 brands that sell their licenses in Indonesia, only 10 percent are big, solid, running companies. More than 60 percent are troubled enterprises, and only 200 are listed in my society,” Levita said.
Nevertheless, she said she has faith in the sector’s promising future, “especially those that deal in food and beverages, and services, such as hair salons.”
The economic crisis actually propelled growth in the number of franchises in the last year, she said.
“Workers are being laid off and given early pensions, which are used to start their franchising businesses using a brand already familiar to customers,” she said.
Levita said local brands were benefitting as the US dollar weakens and foreign brands grew reluctant to enter the market due to higher operating costs.
“Around 80 percent of the brands listed in the society are local brands,” she said.
However, both foreign and local brands are still drawn to Indonesia because of its huge population, she said.
Amir urged big state-owned companies to increase the number of owner-operated firms.
“The franchising business can drive the growth of small and medium-sized enterprises,” he said.