Despite crisis, local franchise market still growing

The Jakarta Post, Jakarta

Despite the economic crisis, the local franchise business grew by an average 13.2 percent over the past six years, while the foreign franchise business contracted by an average 3.6 percent during the same period, a consultant said.

"This ... creates optimism that the local franchise business will be able to steadily grow and significantly control the domestic market," franchise consultant Amir Karamoy of Ak & Partners said in the firm's year-end review made available to The Jakarta Post on Friday.

It noted, however, that despite the growth, about 70 percent of local franchisors had yet to have an "established concept of business or a proven system of business operation."

"This is shown by the fact that many of their franchisees have stopped operating," Amir said, adding that the number of outlets carrying the brands of local franchises had dropped to 237 today from about 400 in 1999.

This indicated that many local firms were not yet fully prepared to enter the franchise business, he said.

According to Amir, the success rate of local franchise businesses averaged 30 percent, compared to 92 percent in developed countries.

Investors should be extra-careful in selecting local franchise brands, while local firms should establish a good business system before offering their brands to potential franchisees, Amir explained.

He said that the franchise business in Indonesia had been pioneered by foreign franchisors. This was then imitated by local firms, including state-owned companies such as securities firm PT Danareksa, mail carrier PT Pos Indonesia and oil and gas company PT Pertamina.

The entry of state-owned companies into the franchise business had support the development of the business in Indonesia as they were able to set a good example for local private sector firms who also wanted to enter the business, Amir said.

Given the continued uncertainties in the country's social and political life, Amir predicted that foreign investors would continue to be reluctant to set up the business in the country next year, but they might be interested in entering the country's franchise market as the risks were lower in this sector.

He noted that the number of foreign franchisors, which contracted by 40 percent at the peak of economic crisis between 1997 and 1999, grew 10.9 percent between 1999 and 2002, when the economic crisis had abated somewhat.

"This is already close to the growth rate of local franchisors. It is thus projected that in 2003, foreign franchisors will grow as fast as local franchisors," he said.