Franchising helps small business

Franchising helps small business

By Amir Karamoy

JAKARTA (JP): In the small business development plan act,
which is being discussed by the Indonesian legislative council,
franchising is included in the list of partnership (kemitraan)
schemes. Through this scheme, it is expected that big companies
will recruit and develop small businessmen as their franchisees.

Franchising is believed to be a strategic method for
developing small businesses. Under the franchising scheme, the
franchisor offers management assistance as well as technical
expertise and marketing resources to small business enterprises
with limited capital to help them achieve success.

Many or all of the following services are offered to
franchisees: recognized trade name; advice on location choice;
standardized accounting and operating procedures, store equipment
and inventory; research and development; and continuing
assistance in management, marketing, advertising, tax information
and store design.

Franchisors are able to keep pace with shifting consumer
markets by utilizing market techniques to survey potential
customer demand. A typical arrangement calls for the franchisee
to pay fees and royalties up front or to agree to purchase
equipment and inventory from the franchisor. The relationship
between the franchisor and franchisee is set by the franchise
contract.

Franchising has charisma. It has fascination and an appeal to
the entrepreneurial spirit which remains vibrant in our free
enterprise system. Franchising has been termed the last, best
hope for independent business in an era of growing vertical
integration. It helps small business compete with the giants.

The U.S. Small Business Administration stated: "Franchisees
have a good chance to survive and prosper in highly competitive
society, offering an opportunity to those individuals who have
only a limited amount of capital and experience. It is a system
that offers an economically feasible alternative to the
vertically integrated, centrally owned organizations and one also
that can provide a vehicle for greater minority entry into
business.

"Without franchising, thousands of small businessmen would
never have had the opportunity of owning their own businesses".

A survey conducted by the U.S. Federal Trade Commission
discovered that the success rate in franchising is very high. The
study disclosed the degree of success in franchised business was
95 percent, compared to independent business which was only 10
percent to 35 percent.

Robert E. Bond writes in The Source Book of Franchise
Opportunities (1988) that "after the first year of business,
franchised business success rate is 97 percent. After the fifth
and the 10th years: 92 percent and 90 percent. While independent
businesses gained 62 percent after its first year, but after its
fifth and 10th years remain 23 percent and 18 percent."

Franchising is a strategy for expansion or asset redeployment.
If your company has the proven systems of business but lacks
either the capital, the people, or the time to create a company-
owned growth system, wants to supplement an existing system, or
simply needs to improve performance through tighter or more
motivated management, franchising could be the answer.

Today almost any product or service can be distributed through
franchising. According to the Department of Trade, there are
about 20 types of businesses which have bright prospects in being
developed through franchising in Indonesia. Among them are
restaurants, real estate brokerages, building maintenance and
cleaning services, computer businesses, travel agencies,
printing, convenience stores and others.

I believe that Indonesia has many original products which have
the potential to be developed through franchising. They include
traditional foods -- gado-gado, satay, pempek, Madura soup,
oxtail soup); traditional products and cosmetics -- batik and
jamu (herbal remedies). However, Indonesia is facing crucial
problems in the development of national franchisors. Based on AK
& Partners findings, the growth of Indonesian franchisors are
decreasing. In 1991 they were about 21 national franchisors,
while in 1995 there are only 17 left.

In contrast, the growth of foreign franchise is amazing. In
1991 according to an International Labor Organization study,
there were only six foreign franchises in Indonesia. In mid 1995
it amounts to 103 foreign franchises. Every month two foreign
franchises start operation in Indonesia.

The study discovered that most foreign franchise businesses
are in restaurants, fast-food, cafe and food related products (88
percent). American franchisors dominate the market (75 percent).

The cause of domestic franchisors decline is due to the lack
of information and knowledge about franchising among Indonesian
businessmen. The Indonesian Franchise Association, which was
established in November 1991, has failed to disseminate
information about franchising advantages and to encourage
business communities to "go franchise". The number of local
franchisors have decreased ever since the association was
established in 1991.

When including franchising in the act on small business
development, that the government should stimulate the growth of
national franchises through the establishment of domestic
franchisors.

Some institutions and regulations have to be established and
issued in order to facilitate domestic corporations in
franchising their businesses.

There is a lesson we can learn from Singapore. Its Economic
Development Board has invested S$5 million to set up the
Franchise Development Center which is managed by the National
Productivity Board. This center provides support to Singapore
companies setting up franchises within the country. Apart from
that, the Singapore Trade Development Board runs the Franchise
Development Scheme which helps companies cover part of the costs
of developing and marketing franchises overseas.

Since last year, I have been proposing to the Ministry of
Cooperatives and Small Enterprises to establish a franchise
integrated development center. The activities of the center would
be to provide technical assistance to national corporations to
"go franchise" domestically and overseas. This center should
receive funding from state-owned companies or the conglomerates
who recently met in Jimbaran, Bali.

There is a government regulation which obliges state-owned
companies to set aside one percent to five percent of their
profits for the small business development. The conglomerates
mentioned above also vowed to help small businessmen by sharing
their profits.

I am convinced that the growth of the domestic franchise
industry requires strong government support, greater awareness of
franchising, perfect timing and pure economic survival. The
government has to put its full weight behind franchising.

The writer is chairman of AK & Partners franchise consulting
firm.