Franchising businesses set to perform well in 1997

By Christiani SA Tumelap

JAKARTA (JP): The country's franchising businesses performed remarkably well in 1996 and high growth is expected again in 1997.

Amir Karamoy, a local franchising consultant, said earlier this week the number of foreign franchises in Indonesia increased by 18.5 percent in 1996, while the number of local franchises increased by 13 percent.

"The number of foreign franchises operating in Indonesia increased to 141 at the end of 1996, from 119 at the end of 1995. Local franchises rose only to 26 from 23 in the same period," he said.

The increase in foreign franchises grew faster than local franchises', he said, adding the number of foreign franchising firms had an average growth of 445.8 percent a year during the period 1991 to 1995, while local firms grew only by 5.9 percent.

The number of foreign franchises increased to 119 in 1995 from only six in 1991, and local franchises rose to 26 from 21 in the same period, he said.

"For 1997, I project the number of foreign franchises will grow by 18 percent," he said. "The number of local ones is likely to grow more rapidly because at least 12 local franchises will enter the market in 1997," he told The Jakarta Post.

He said in 1996, there were only three new local franchises.

And foreign franchises would still dominate the franchising business in Indonesia, he said.

"In 1997, United States franchises will still dominate the franchising business in the country," he said.

U.S.- based firms topped the foreign franchise list in 1996, despite its declining market share to 64 percent from 76 percent in 1995, he said.

American franchises include the Hard Rock Cafe, McDonald's, Pizza Hut, Wendy's, A&W Family Restaurant, American Hamburger, Dunkin' Donuts, Kentucky Fried Chicken and Texas Fried Chicken.

Australian franchises came second in 1995, followed by Japanese, British, French and Singaporean, he said, adding that in 1997 the number of Australian franchises would at least double the 1996 number of four firms.

"Bigger Indonesian enterprises still prefer to tie up with foreign franchisers than local ones even though they have to pay higher costs."

In addition to management fees, foreign franchises have to pay costs on imported raw materials and equipment, costs on hiring expatriates as well as royalties, Amir said.

The percentage of royalties, he said, varies depending on the business sector.

Royalties in the printing and photography sectors are, for example, around 3 percent, real estate brokerage 4 to 5 percent, retail 4 to 6 percent, laundry 5 to 7 percent, fast food 8 percent, and the highest required by training, management and financial consultancies of 11 to 15 percent, he said.

Foreign franchises dominated the franchising sector in restaurant activities, including fast food.

In the first quarter of 1996, of the 81 franchised restaurants, 68 were foreign franchises and only 13 local franchises.

In 1995, of the 63 franchised restaurants, 51 were foreign and 12 were local franchises, compared to a total of 21 franchised restaurants in 1991 when 14 were foreign and seven were local franchises.

The mushrooming of foreign franchises in Indonesia has concerned the government as it could jostle local franchises and further increase the outflow of foreign exchange.

Minister of Cooperative and Small Enterprises Subiakto Tjakrawerdaya said in October around 90 percent of the profits earned through foreign franchises go to foreign countries.

"This is particularly caused by the fact that the franchisees have to import raw materials and equipment to maintain the quality of their products," Subiakto said.

According to Amir, foreign franchises in Indonesia paid an estimated Rp 500 billion (US$210 million) in royalties in 1996, up from Rp 480 billion in 1995.

"The total amount of royalties to be paid by foreign franchises operating in Indonesia will in 1997 increase by 30 percent," he said, adding that most of them were engaged in the sale of fast food and fresh beverages.

The foreign franchised fast food and beverages firms owned 74.3 percent of the Indonesian franchising business during 1991 to 1996, he said.

Also late in 1996, President Soeharto asked related government institutions to find a way to curb the mushrooming of foreign fast food franchises in the country in a bid to protect the popularity of local foods.

"At least, we could limit the activities of foreign food franchises to big cities. Their activities in towns should be banned to protect local food vendors," the President was quoted by State Minister of Food Ibrahim Hasan as saying.

Despite the minister's alert, a number of foreign restaurants, fast food outlets and retail stores have been opened in Jakarta during the period October to December, including Hartz Chicken Buffet, and the Fashion Cafe, all U.S. franchises.

And two U.S. franchised restaurants, three Australian franchised restaurants and one Australian real estate brokerage are scheduled to be opened here in 1997, not to mention, Amir said, eight more Australian firms which are in the negotiation processes.