It's high time to learn and win

Since the arrival of the very first player in this business here in 1991, foreign-based franchises are still stealing the hearts of local consumers.

Their number grows three or fourfold every year, while homegrown franchises trail along at 10 percent per annum. In line with the mounting hopes for a brand new Indonesia, experts believe that more overseas players will try to market their goods and services in this country, home to over 200 million people, through franchising deals.

The Jakarta Post's reporter K. Basrie has more details.

JAKARTA (JP): For years, economists and franchising consultants kept on saying that local franchises would "soon" outshine their foreign rivals.

Noted marketing expert, Hermawan Kertajaya from Mark Plus Indonesia, once said local franchisors would soon take over the big role of their foreign competitors, who are struggling hard to survive particularly due to the weakening of the rupiah which boosted the cost of their imported materials and shrank the buying power of customers.

"Moreover, the local partners of foreign-based franchisors also have to pay expatriate staff in U.S. dollars," he said.

Amir Karamoy, a veteran franchising consultant, also projected positive growth.

Following the severe economic crisis, many foreign-based franchising business, mainly in food and retailing, closed their outlets. The misfortune faced by the foreign franchises earlier served as a blessing for some local firms.

But it's already almost a decade since the franchising business was first introduced to the market here, and the country can still only boast of a very few local players having gotten involved.

Like many other analysts, Hermawan and Karamoy would not apportion blame.

Perhaps, it's just the country's unfavorable political and economic environments that make local franchisors and entrepreneurs alike unwilling to expand, even though Indonesia's population make it a market with great potential.

"Out of our country's population of 210 million, 15 or 17 percent belong to the middle-class. That means that there is a potential market for franchisees of some 35 million consumers, which is very big," Anang Sukandar, chairman of the Indonesian Franchise Association, said during an interview on Friday.

Should the existing homegrown franchises or those who are keen to offer their goods and services through such arrangements be to slow to take action, the market here will be soon be conquered by overseas competitors, he said.

"We have no choice. Our entrepreneurs will have to start now and there are so many business that could be developed under franchises."

According to Anang, a franchising consultant himself, the homegrown franchises in Indonesia should focus seriously on their domestic businesses.

"Forget about the overseas market. There's a potential market at home and there are whole classes of goods and services that could be offered for franchising," he pointed out.

Analysts said that the belated growth of local franchises is primarily due to problems such as lack of entrepreneurship, innovation, responsibility, promotion and marketing.

Amir said that local franchise operators lack the commitment and the ability to develop their businesses properly. They just take the fees from the holders of their licenses but do nothing to assist them in developing their businesses.

"Many of the local franchisers are known to sell their licenses to the franchisees and just leave them to take care of the business themselves," he said.

They only pursue short-term profits in the form of the franchise fee instead of the longer-term benefits that can accrue from royalties.

"As a franchiser, a company must be a consultant and an auditor as well," Amir said.

Anang said that many people refused to enter the business, fearful of being cheated.

"We regularly hold free-of-charge workshops for local companies discussing which goods and services have the potential to be franchised. Sadly to say, the firms are only represented by their staff," Anang said.

"Thus, there's no doubt that we could view many local franchises here simply as instant franchises," he went on.

Currently, the franchisors registered with the Indonesian Franchise Association consist of 230 foreign-based firms and 42 local firms, most of which are involved in restaurants, cafes, bakeries, retailing, laundry and dry cleaning services, cleaning services, education, courier services, printing, photography, furniture, training and consultancy, beauty and hair salons, health and fitness centers, entertainment, car rental and real estate.

But others say that the number of local franchisors currently amounts to some 80 companies.

Some of the leading names in the industry include Es Teler 77, Alfa, California Fried Chicken, Indomart, Bizlink, Global Teleshop, Soto Ambengan, Warung Nasi and Soto Bangkong.

Their foreign competitors include McDonalds, Country Style, the Canadian donut and sandwich vendor, TGI Friday, Front Row Sports Grill and Italiannis, V-Kool, John Robert Powers, KFC, Wendy's, and Texas.

According to Anang, on the worldwide scale there are some 75 sectors where franchising arrangements are made.

"So, there so many goods and services that could be developed for franchising in Indonesia," he said, citing a leading Padang restaurant, for example, which has yet to offer a franchise.

Experts have also repeatedly asked the government to review Regulation No. 16/1997 on franchises and Ministry of Trade and Industry Decree No. 259/1997, which they say hampers the development of local franchises through complicated bureaucratic procedures.

Amir urged the government to provide a credit scheme with subsidized interest rates to help develop the local franchise industry.

But it would be, of course, unfair if were only to pray for a boom in local franchises, given that we are now living in the free trade era.

By comparison, in the land where franchises originated, the domestic sales of franchises in the U.S. surpassed the $1 trillion mark last year, according to the International Franchise Association, the world's oldest and largest organization representing the sector.

Based on the responses of 386 U.S. franchisors who already have overseas chains, a recent study by Arthur Andersen LLP noted that if given the choice, 98 percent of those surveyed would make the decision to establish an international franchise system again. What's more, 95 percent said they're planning to expand the number of their international units.

Further, U.S. franchisors are expanding their operations into many countries previously excluded from consideration, both developed and developing. These include countries in Asia, South America and Central America.

Now, the important thing for local entrepreneurs is how to pick a professional and reliable local or foreign-based franchisor, or whether your goods and services are already qualified to be franchised.

According to Anang, the answer to both questions is in the hands of consultants.

"A major local company here which once wanted to franchise its services hired a world-class consultant for which they paid US$60,000. I'm not sure whether the company is already franchising its services or not, but the fee for a local consultant for the same project would cost only one third the amount," he said.

But the price for similar consulting services for a middle- sized firm could be around Rp 165 million.

Then, to open an outlet for a laundry and dry cleaning franchisor, for example, one would need some Rp 50 million.

And deciding whether or not to go into business is a very crucial step in the business start-up process for new and potential small business owners.

Although the success rate for franchise-owned businesses is significantly better than the success rate for many independent businesses, there is no formula to guarantee success.

One of the biggest mistakes one can make is to be in a hurry to get into business. That's why it's important to understand the reasons for going into this business.

Remember, franchising is based on mutual trust between the franchisor and franchisee.

The franchisor provides the business expertise (i.e., marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee.

The franchisee brings to the franchise operation the entrepreneurial spirit and drive necessary to make the franchise a success.

Robert L. Purvin, a senior member of the American Association of Franchisees & Dealers (AAFD) said: "The AAFD has identified eight criteria for selecting a franchise business. The most important to me are choosing a franchise with a strong owners (franchisee) association and 'negotiated' franchise agreement (one with the input of a franchisee coalition); available data that confirms the profit potential of the business; and reasonable provisions to renew or terminate the agreement."

Remember, however, that hard work, dedication and sacrifice are key elements in the success of any business venture, including franchising.