Market taste is what counts for fast food franchises

Amir Karamoy is the man who many businesses turn to when deciding whether entering a franchise business is a sensible thing to do. The franchise consultant talked to The Jakarta Post's Bruce Emond about fast food franchises, many of which battled to stay in business when the economic crisis hit.

Question: What is the background to the development of the franchise business in the country, including your involvement?

Answer: I began as a franchise consultant in 1990. At the time we wanted to join up with an American franchise consultant, but because franchises were not really developed we postponed the plan. Then, in 1995, two years before the crisis, the franchise business took off in Indonesia, and I as a franchise consultant got a lot of business. The market opened up and clients started using our services. From then on, franchise consultant services started to grow.

Q: At that time were most of the franchises in fast food?

A: Generally, most of the them entering Indonesia at the time were food-related, either fast food or table service (restaurants). They were dominant at the time, especially in major cities.

In Indonesia, food businesses, particularly fast food, have been at the forefront in the franchise business. I think one of the first was Pioneer Chicken, which was a franchise from America that went bankrupt, the owners told me, and it became California Fried Chicken here. That was in the early 1980s, about 1983 or 1984, but actually Kentucky Fried Chicken was here already.

But franchises really became better known at the beginning of the 1990s, when McDonald's opened its first outlet at the Sarinah building. It became very well-known, and many fast food restaurants entered the market, like Arby's, Texas Fried Chicken and many other American franchises. Not all of them were successful, but various were.

Then, when the crisis hit in 1997, the franchises which were really hard hit were the foreign franchises, because most of their raw materials were imported. The exchange rate of the dollar rose, their revenue was in rupiah, and it became totally infeasible for them. Their prices became high, and the public was unable to afford them ...

In 1991, there were 21 local and six foreign franchises, and most of them were in food. By 1996, there were 32 local and 119 foreign franchises, so for the latter it was an increase of about 417 percent over the period. And about 80 percent of that number were in food.

What we have seen with the passing of the crisis, is the development of local and foreign franchises which are not in the restaurant business; most of the foreign ones are from education institutions.

It doesn't mean the number of restaurant franchises has dropped drastically, they have maintained a presence, but the number of franchises from other sectors has increased.

Q: So it was a process of natural selection, separating those firms which had a market in Indonesia from those which did not?

A: I would prefer to use the term market selection -- it's the market which selected. For instance, Mrs. Fields (which closed its stores in the country in late 1998), found it very difficult to expand in Indonesia. That was because Indonesians who like cookies, cakes, things like that, in my opinion, are still a very small market. Another thing for Mrs. Fields was that most of the products were imported ...

But Indonesians are chicken eaters. That's for sure. That's why Kentucky Fried Chicken, or whatever has to do with chicken, will do very well ... Now the trend is fish, not chicken. Manadonese restaurants selling fish are doing great business.

Q: What is the situation like now?

A: Well, it's relative. McDonald's and KFC have about 80 percent of the market. So if a company wants to enter Indonesia, they have to consider the presence of these two, because they are very, very dominant in the market.

If there are companies wanting to come into the market, I would not advise them to go into chicken, for instance, because they would be coming into direct competition with these two fast food giants. Perhaps they must find a new way, a new menu, whether it's fish, or whatever, a product which is interesting to Indonesians ...

For the new companies which would like to enter Indonesia, as a consultant I would like to suggest they should learn, at least study, the Indonesian "behavior", their eating habits and tastes.

Q: But times and tastes change -- would a Mrs. Fields have a place in today's market?

A: Well, if it was at a cheaper price it would do better. In my opinion, apart from the taste, it was the issue of price. And they would have to totally change their system ...

Have you seen the Oh La La restaurants in Pondok Indah Mall, Plaza Indonesia? It is incredible, they are hugely successful. They are full from 10 a.m. to 10 p.m. All they are selling are croissants, bread, things like that. Now, Mrs. Fields' concept was; they sell the cookies and people buy them to take home.

But I think that concept would have to change because people now like things like in Paris -- let's sit together, have a drink, something light to eat, the cafe concept. This is the changing trend of the middle class, mostly in the big cities and metropolitan Jakarta ...

This indicates that the market has to be monitored, because, like you said, Indonesians have started to change, especially the young...

Q: So with the country recovering from the crisis, is the potential now for foreign fast food franchises to enter the market, or for local ones?

A: Through contact with my colleagues in the States, I found that it's true that there would be a very small, perhaps even nonexistent, number of foreign firms intending to set up food franchises in Indonesia ...

Maybe the market is good for local firms ... especially for ethnic food, such as Padang food, Sundanese, Manadonese food and Makassar. Their potential is very good. There is already the Sederhana chain, and Kuring ... however, Indonesian food is very difficult to be franchised because there are so many items. If you look at American fast food, it's easy to be franchised because the menu is very compact. I've also been a consultant for Indonesian food franchises, and it's so difficult. To make one recipe you need chilies, various vegetables, it's so difficult.

I always say to them why don't you reduce your menu and just specialize in four or five meals? But sometimes it's their attitude and culture -- "We must be proud of our ethnic foods". Ah, forget it. It leaves me a bit skeptical ...

If Indonesians want to have a franchise, my advice is make it fast food style. If it's table service, you tend to have so many items on the menu, so it isn't efficient in the franchise system. Because what you want to be able to do is transfer your knowledge or technology to the franchisees. Don't make things complicated. If you have about 15 items on the menu, why not reduce it to four or five items on the menu? What are your great strengths? ... Everything has to be practical, compact ...

And if we want to franchise our business, first of all we have to have a profitable business. If our business is not profitable, how can we franchise? It's ridiculous. This is the requirement ... To my clients, I always tell them, if you want to franchise your business, then first of all you have to prove to the public your business is solid, the system is proven, you have a proven concept and you are a profitable business ... If the business is not running at a profit, how can you franchise it?

But in Indonesia we don't have the regulations which exist in the United States regarding franchises, where they have to follow certain steps. That is why we have many firms which sell their franchise, in fast food and other industries, which leaves the buyers suffering losses ... In America and other countries, franchised businesses are sold under regulations which are quite strict. But in Indonesia they are not ...

Q: So what are the prospects for fast food franchises in 2001?

A: Very good, both for foreign and local franchises. But once more for the foreign franchises I want to emphasize that they must study the local market. The middle class, especially in Jakarta, has an orientation to the international, the global market.

Q: And outside Jakarta?

A: I think it's what you call the demonstration effect of globalization, whereby the low-class people attempt to imitate the middle-class people in the big cities. I am talking from business, strictly business, not culture or values. So, accompanying the consumerism, there will be benefits to some parties... (Bruce Emond)