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.