Indonesia's Trade Ministry Limits the Amount of Outlets with New Franchise Law

A number of matters form the basis of the ministry's newly issued rules. Firstly, the business potential in Indonesia's food and beverage industries is large. This potential can be seen from the increasing number of middle-class people, and which is expected to continue its growth. This implies that more and more Indonesians have higher purchasing power.

The Ministry of Trade stated that Indonesia's gross domestic product (GDP) could reach US $60 trillion in 20 years. In 2012, this number is still at US $1 trillion. Domestic consumption's share of Indonesia's GDP is currently large - in fact a main driver of the economy - as it accounts for about two-thirds of the country's economic growth.

According to the Indonesian Franchise Association (Asosiasi Franchise Indonesia), earnings of the franchise industry, as a whole, is increasing from year to year. In 2010, earnings reached about IDR 114 trillion. In 2011, it rose to IDR 120 trillion. The Indonesian government now wants this profitable type of business to be enjoyed - not by one franchise holder only - but by other entrepreneurs as well, including Indonesia's small and medium-sized enterprises (SMEs).

Secondly, the new rule has been set as more and more foreign franchises are coming into Indonesia's domestic market. This development can be seen from the increasing presence of various international brands in the food and beverage landscape, particularly in the shopping centers.

Both these conditions are attempted to be 'repaired' through Permendag No. 7. There are some important notes in this new regulatory framework, namely, first, the provisions contained in Article 4 state that the franchisor or the franchisee (in the restaurant, bar or tea-house, and cafe industries) is limited to establish a total of 250 outlets (owned or managed).

Furthermore, it is mentioned in Article 5 that, if the franchisor or franchisee already has established 250 outlets in Indonesia and wants to increase this number, ownership of these additional outlets is mandatory to be shared. Regarding this equity sharing, the ministry has set the percentages of equity capital. For an investment of less than or equal to IDR 10 billion (US $1 million), at least 40 percent of the ownership needs to be divested. For an investment of more than IDR 10 billion, at least 30 percent of the ownership needs to be divested.

Apart from the issue of limited number of outlets, Indonesia's Trade ministry also regulates the use of domestic products by the franchise holders. In Article 7 it is stated that the franchisor or franchisee is obliged to use at least 80 percent of business equipment and raw materials that are domestically produced. This minimum percentage could be altered taking into consideration the recommendation of the 'franchise assessment team'.

Franchisors or franchisees that already have 250 outlets are given a period of five years to conform to the above mentioned provisions.

This new regulatory framework is not well received by the country's franchise entrepreneurs. The Association of Indonesian Retailers (Asosiasi Pengusaha Ritel Indonesia) believes that these new rules can hurt entrepreneurs that started business activities recently in Indonesia. In fact, this Permendag Nomor 7 is considered blocking the nation's retail industry to grow double digits in 2013. The country's Franchising and Licensing Association of Indonesia (Perhimpunan Waralaba dan Lisensi Indonesia) also thinks that the new rules are in conflict with the basic principles of the franchise industry.

Ester Meryana is a research journalist at Majalah SWA.

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