THE NEW FRANCHISE REGULATIONS IN INDONESIA

Of the two proposed regulations on franchising, one has been issued, namely the Minister of Trade Decree no. 53 year 2012 concerning the “Implementation of Franchising”. This regulation was recently published (last August this year). This new regulation replaces the previous rule no. 31 year 2008.

The essence of this trade ministerial regulation is matters in using and selling domestic product (should be at least 80%) and financial statements of each franchisor/master franchise that should be audited by a public accountant.  And each franchise companies should put a special logo. Which (according the Ministry of Trade) will enable to distinguish between a franchise and non-franchise.

In addition, independent teams will be formed, namely the Assessment and Supervisory teams.  Those teams will guide and supervise the practices of franchises in the market place. The teams members will consist of businesses franchise communities, Indonesian Chamber of Commerce and Industry (KADIN) and WALI  (The Indonesian Franchising and Licensing Society).

The second franchise regulation is not published yet, it is about modern shops, restaurants, and café/coffee or tea shops. This regulation will set the limitation on the increase of company owned outlets   that owned and operated by the franchisor or master franchise.  It is planned that franchisor/master Franchise are permitted to have only 150 - 200 company owned outlets. The remaining (modern stores/restaurants/cafés) should be franchised.

However, the amount of 150 - 200 (especially modern retail shops) still being discussed. The Government has proposed 150 while the retail community at the most 200 owned stores.

The policy to limit the amount growth of modern shops owned units is to avoid a dominant position by one or two company (ies) that can potentially dictate the market as well as inclining anti-competition. Therefore, violating the law on prohibiting unfair competition and monopoly.  I heard that the transfer of owned outlets to franchise will be made within a certain period of time, say 2 years or 3 years. Meaning, if a franchisor who have already 500 owned stores, then as many as 300 or 350 must be converted into franchised outlets, who are owned by public or independent entrepreneurs / local companies within 2 – 3 years.

However, I’ve proposed that the above regulation should not be applied retroactively. Since, if the new regulation applies retroactively, it would potentially disturb the performance of franchisors that have already, say 300 or more owned stores. Why? For example, KFC a public company that offers its shares at the stock exchange, which already operates 300 owned restaurants, suddenly is being asked to sell 150 as many as 200 outlets to franchisees - it is definitely complicated task.   In practice is not easy to have good and professional franchisees, in the sense to find franchisees that have the same vision and mission as well as in line with the franchisor’s corporate culture

In addition, KFC – for example – which has planned to build 100 owned outlets next year, then not permitted to build outlets, that will clearly have a negative impact on its stock price and would harm their business.  Therefore, once again, I propose that the regulation should not be applied retroactively, so there was no need to convert into franchises. But, when the regulation (Permendag) is issued, all franchises must comply to the new rules, namely – I propose – to apply a ratio of 2 to 1. For every two owned outlets establishment, one franchise outlet must be built.

I understand that Indonesia law does not apply retroactive principle.  If the government imposes this rule retroactively, I’m afraid the business community will bring this matter to the Supreme Court for judicial review.  I also believe, when it is applied retroactively it would certainly discourage (foreign) franchise investment in Indonesia. This should be avoided.

However, from the other perspective, based on the following reasons, I agree the restriction of company owned units growth in franchising i.e.: (1) Franchising is essentially the use of brand and a proven business system of the franchisor to the franchise. (2) Franchising is one way to encourage the development of (local) entrepreneurs. (3) Franchising is a method to expand the market in a responsible way by utilizing others capital.

From the definition above, it can be concluded that there are two independent parties involve and cooperate with each other.

So, basically a franchise is a partnership or business cooperation between franchisor with franchisee (or independent businessmen/companies). Therefore, in my opinion when only build company owned units, meaning to run franchise not in the right way and not legal. (If seeing from the perspective of PP no. 42 year 2007 and the new upcoming Permendag)

Jakarta, 2nd October 2012