Jurisdiction - Indonesia
Reports and Analysis
Indonesia – New Franchise Rules Raise Questions.

25 April, 2013

 

 

The Indonesian Ministry of Trade has issued new rules for restaurant franchise holders to limit the number of outlets they operate in the country.

 

While the new rules have elicited concerns in the franchise industry of slowing growth, the Ministry has said the changes are designed to protect and empower small- and medium-sized businesses in the country by giving them the chance to partner with the industry’s dominant players.

 

Minister of Trade Regulation No. 07/M-DAG/PER/2/2013 on the Development of Partnerships for Food and Beverage Franchises (MOT Reg 07) was issued on February 11. The Minister of Trade, Gita Wirjawan, was quoted by Reuters as saying in February, “Retail, wholesale is an area where we would like to see more involvement and empowerment of small and medium enterprises.”

 

How the rules work

 

The new regulation principally limits food and beverage companies, including restaurants, diners, bars and taverns, and cafes to 250 outlets or stores. Franchisors or franchisees that operate more than 250 outlets will have to sell some of those outlets to a partner or investor.

 

The regulation requires sub-franchising arrangements to prioritize Indonesian small- and medium-sized enterprises to the extent that these enterprises meet the requirements set by the franchisor. However, MOT Reg 07 does not provide further explanation on this requirement, leaving a lot of questions about how it might be enforced.

 

Franchisors and franchisees can also choose the capital investment route to expand beyond the 250-outlet limit, whereby a third party may join the ownership of any additional outlets. For outlets requiring start-up capital of up to 10 billion rupiah, a little over US$1 million, franchisors and franchisees owning more than 250 outlets must divest at least 40 percent of their stake. While for outlets requiring more than 10 billion rupiah of start-up capital, franchisors and franchisees are obliged to divest at least 30 percent of their stake.

 

Franchisors or franchisees that operate more than 250 outlets or stores will have five years to come into compliance with the new rules from the date of the regulation’s enactment.

 

Local content rules

 

MOT Reg 07 also requires food and beverage franchises to carry 80 percent local content for raw materials and machinery. Franchises can receive a waiver on the 80 percent local content requirement with a recommendation from an evaluation team to be formed by the Directorate General of Domestic Trade. Failure to comply with this provision may result in administrative sanctions, though no details have been offered. Note, however, that the regulation does not contain any provisions for monitoring compliance with the local content rules.

 

Outlook

 

While many of the details are yet to be worked out, MOT Reg 07 could mean slower growth in Indonesia for fast-food chains, as they are forced to find local partners to operate new outlets and tap into the country’s population of more than 240 million and its growing middle.

 

SSEK

 

For further information, please contact:

 

Tania Drawina​, Soewito Suhardiman Eddymurthy Kardono
taniadrawina@ssek.com 
 

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