Franchising in Indonesia - Term Paper Example

Franchising in Indonesia: Analysis of the Process and the Market The term franchising may be defined as a business process where an established business (known as franchiser) licenses its trademarks for products and services with tried and proven methods of doing business to a franchisee (generally an aspiring entrepreneur) in exchange for a recurring payment, and usually a percentage of gross sales or gross profits and in most cases a fixed annual fees. Indonesian Government Regulation 16 defines franchising as “an agreement where a party (Franchisee) is granted a right to utilize and/or to make use of intellectual property rights or inventions or special characteristics of a business owned by the other party (Franchisor) based on payment as determined by the Franchisor for supplying or marketing certain products and/or services. The Franchisor and the Franchisee can be entities or individuals”. Research Objectives The objective of this research is to analyze business scenario in Indonesia and how may it help a franchising business. This paper will examine food & beverages and saloon franchising business in Indonesia and will try to clarify the process and the market scenario in Indonesia. It will try to answer the question that which one of the franchise (food & beverages or saloon) would be more workable in Indonesian market. In particular, this paper will study McDonald’s food & beverages and Tony & Guy’s saloon franchising business model and their suitability to Indonesian market. Background of the company (McDonalds and Tony&guy) McDonald's is the world's largest chain of fast-food restaurants. Hamburgers, chicken, French fries, milkshakes and soft drinks are main items that a McDonald’s offers. More recently, it has also added salads, fruit, snack wraps, and carrot sticks to its menu. McDonald’s franchising model McDonald's Corporation has developed a unique franchise business model. In addition to ordinary franchise fees, supplies, and percentage of sales, McDonald's also collects rent, partially linked to sales. As a condition of the franchise agreement, the Corporation owns the properties on which most McDonald's franchises are located (www.mcdonalds.com). TONI&GUY TONI&GUY is considered as the most powerful hairdressing brand in the world. The company is constantly evolving artistically and commercially. It offers the best education on the planet and boasts fabulous product ranges and a dynamic and modern image. Moreover, TONI&GUY is the only hairdressing company to be awarded 'Superbrand' status and they truly represent the catwalk-to-client philosophy (www.toniguy.com). TONI&GUY offer a lifestyle choice, not just a hairdressing appointment. Within the salons, clients do not just experience a great haircut; they can also watch TONI&GUY.TV, read the TONI&GUY Magazine, enjoy extended consultation time and take away samples of luxury brands exclusive to the TONI&GUY experience. Toni&guy’s Franchising model TONI&GUY’s reputation has been built on an impeccable pedigree, fashion nous, and friendly, professional service. TONI&GUY aims to acknowledge the importance of local, customer-led service while avoiding the pitfalls of parochialism and fragmentation by promoting an authoritative, cohesive and – most importantly – inspiring voice. The Toni & Guy franchise model assumes that nobody can operate more than one franchise simultaneously. However, a franchise holder can take a minority stake in another Toni & Guy. The difference between franchising in saloon and Food and beverage The basic philosophy behind saloon and food and beverage franchising is similar, the only difference is on the account of implementation. Food and beverage are fast moving consumables that require a better supply chain support whereas saloon business needs no such arrangements. This makes saloon franchising easier but on the other hand saloon business offers exclusive services and requires specifically trained man power whereas it is easier to train man power for food and beverage industry. Macro and Micro Economic Environment of Indonesia All macro economic indicators of Indonesian economy are positive, and indicate a brighter future. Gross Domestic Product growth of the country is touching 5.6 percent while inflation on average lesser than most of Southeast Asian countries is pegged at 5.32 percent for a while. These factors have enabled Indonesian banks to maintain a highly consistent and competitive interest rate and safeguard the Indonesian rupiah from any sign of instability. Though Indonesia’s GDP growth rate of about 5.6 percent is slightly lower than some of other Asian countries, it can be considered a great achievement since Indonesia faced a much more challenging economic environment from last year to the middle of this year. Following are some of the statistical economic environment indicators: GDP in 2006: $935 billion GDP by sector agriculture (16.6%), industry (43.6%), services (39.9%) Annual growth rate (2006): 5.4% Per capita income (Purchasing Power Parity) in 2006: $3,800 Per capita income (Purchasing Power Parity) in 2001: 687 Budget: Income: $35 Billion Expenditure: $35 Billion Main industries petroleum and natural gas; textiles, apparel, and footwear; mining, cement, chemical fertilizers, plywood; rubber; food; tourism Population in mid 2006: 245,452,739 Age structure: 0-14 years: 28.8% (male 35,995,919/female 34,749,582) 15-64 years: 65.8% (male 80,796,794/female 80,754,238) 65 years and over: 5.4% (male 5,737,473/female 7,418,733) (2006 est.) Unemployment: 12.5% Average annual growth 1991-97 Population (%): 1.7 Labor force (%): 2.8 Total Area: 735,268 sq. miles Urban population (% of total population): 37 Life expectancy at birth (years): 66 Infant mortality (per 1,000 live births): 47 Child malnutrition (% of children under 5): 34 Access to safe water (% of population): 64 Illiteracy (% of population aged 15+): 15 National GNP Indonesia is a government directed market-based economy. Government plays a significant role in shaping market and economy of the country. There are more than 164 state-owned enterprises which administers prices of several basic goods, including fuel, rice, and electricity. According to various rating agencies, Indonesia's economic outlook is more positive. Standard & Poor’s rate Indonesian economy as stable. Economic growth accelerated to 5.1% in 2004 and reached 5.6% in 2005. Real per capita income has reached pre-crisis levels. Indonesian GDP growth is driven primarily by domestic consumption, which accounts for roughly three-fourths of Indonesia's gross domestic product. The Jakarta Stock Exchange was the best performing market in Asia in 2004, up some 42%. Strength of Indonesian Economy Resilience is a major strength of Indonesian economy. Recovery of Indonesian economy after 1997-1998 Asian economic crisis was surprisingly fast instead of requires too tight IMF fiscal and monetary policies. Economic Growth Rates Weaknesses of Indonesian Economy Indonesian economy still faces several economic development issues due to varied internal problems. Indonesia includes several thousands islands. Secessionist and separatist movements in several islands have been a major hurdle in growth of Indonesian economy. Low level of security perception in provincial regions negatively affects the economic environment of country. Political policies have been unstable after the economic crisis and subsequent step down of Suharto. Performance of different economic indicators is again complicated due to lack of reliable legal recourse in contract disputes, bureaucratic red tape, widespread corruption, and weaknesses in the banking system, and strained relations with the International Monetary Fund. The confidence of investors is still low, which is reflected by low foreign direct investments in country. Indonesia needs to stress the need of internal reforms to attract foreign investments and get international monetary organizations support. Business Opportunities in Indonesia Indonesia is one of the most attractive destinations as an investment center and a land of unexplored possibilities due to its vast natural resources, its landmass, and availability of relatively cheap labor. After general elections of 2004, new reformist government has taken several steps in the direction of deregulation of economy. Reduction in bureaucratic redtapism and revival of economy has made investments and business in Indonesia much more convenient than in the past. New regulations even allow 100 percent foreign ownership in certain sectors. Indonesia does not impose any restrictions on the transfer of foreign exchange and offers attractive tax incentives for several sectors. New government in Indonesia is actively promoting investments in country that create job opportunities for its citizens, brings in capital, technology and management skills that are currently lacking in the country. There are many opportunities in agribusiness industries, which include processed food and dairy products. Threats to Business in Indonesia There are number of threats that a business need to face in a comparatively politically unstable Indonesia. Indonesia needs to adopt itself to the changing security environments to protect its interests. Major threats to business in Indonesia include political and economic instability, a history of civil unrest, separatist movements, religious conflict and the threat posed by Islamic extremist groups. A poor regulatory environment, lack of transparency, an ineffective and corrupt legal system and an increasingly militant labor force, with labor laws heavily in favor of the workforce are some of the factors that need to be considered before establishing a venture in Indonesia. Political Environment of Indonesia Indonesia is a secular nation with a large Muslim majority. It is fourth most populous country with a vibrant democracy. The democratic political structure of Indonesia has achieved remarkable economic development success over the past decade. Until the 1997-1998 Asian economic crises, Indonesia was among the best performing East Asian economies. The legal agreement between franchisor and franchisee Franchising business in Indonesia is governed Government Regulation No. 16/1997, which was, again, supplemented by the Minister of Industry and Trade Decree No. 259/MPP/Kep/7/1997. According to this law, franchisee and franchiser are bound to furnish various information to Minister of Industry and Trade such as original franchise agreement and other details such as a profit and loss statement for the past two years, experience and details of past and current arrangements, details of proposed technical assistance, intellectual property rights and evidence of the identity of the franchisor. Several other requirements and guidelines need to be adhered in addition to above requirements. Following are some of basic point as required by Indonesian franchisee law: The franchise agreement has to be in the Indonesian language. An English translation of the franchise agreement can be attached but it is compulsory to register the Indonesian language version the minimum duration of the franchise agreement is 5 years franchisor has to give financial, bookkeeping and marketing assistance to the franchisee Franchise Agreement According to the Indonesian Government Regulation No. 16/1997, a franchise agreement should include all issues related to following legal frameworks: Employment law (including where appropriate, standard employment contracts incorporating provisions to protect the franchisor's business system) Terms and conditions for the supply of products and services Data protection compliance Health and safety legislation The franchisee and franchiser has to be governed by Indonesian law. The department of Industry and commerce has ultimate authority in relation to the registration and deregistration of franchises. Various licenses and certificates need to be obtained from different local government agencies. Law also restrains franchise business in some provisions to protect local business interests. In general, medium and large-scale franchises can be established in almost all major Indonesian cities, with the approval of the Minister or other authorized official. Foreign franchisers need to meet legal requirements of their country and submit the relevant documents related to legalities of their countries to Indonesian consulate for approval and attestation. Franchise Business Registration Certificate known as the Surat Tanda Pendaftaran Usaha Waralaba (STPUW) is issued after submission of franchise agreement and other relevant documents by the Minister of Industry and Trade for local franchisor and by Director General of Domestic Trade in case of a foreign franchisor. The franchisor and franchisee need to get registration certificate within 30 days of a franchisor-franchisee agreement. Best Franchise Prospects in Indonesia According to ISA Customer Satisfaction Survey Report by U.S. Department of Commerce, following sectors in Indonesia offer better opportunities for franchise business: 1. Food and Beverages 2. Educational Products and Services including children services 3. Retail including Convenience and Specialty Stores 4. Real Estate Services 5. Laundry and Dry Cleaning Taxes Indonesian franchise law requires payment of a withholding tax along with the royalty payable by a franchisee to its franchisors (PPH Article 26). The rate of the withholding tax depend upon the franchisor’s country, if the country has entered in dual tax avoidance agreement tax liabilities be lesser or nil in accordance with the agreement and if the franchisor's country does not have the double taxation arrangement with Indonesia withholds 20% of the royalty paid by a franchisee. In addition, franchisee needs to pay the Value Added Tax (VAT). Value of research The findings of above research provide an insight in Indonesian franchise market. This research paper acts as a good reference base for enterprises that want to expand their franchise business to Indonesia. This document will help in creating appropriate and effective future market entry strategies. Conclusion This research hints that food and beverages franchise have a slightly better chances in Indonesia than a Saloon franchise. Though it is not categorically stated, Indonesian government’s emphasis on development of agribusiness and processed food sector and rising per capita income favors a food & beverages franchise. Reference: 1. Bank Indonesia website, http://www.bi.go.id/web/ 2. Asian Development Website, http://www.adb.org/Indonesia/ 3. TONI & GUY website, www.toniguy.com/ 4. McDonalds official website, www.mcdonalds.com Read More