Jurisdiction - Indonesia
Reports and Analysis
Indonesia – What Is In Store For The Franchise Business?

23 May, 2013

 

 

Indonesia’s franchise sector has experienced rapid growth in the past decade, riding the wave of the country’s economic expansion and the rise of its middle class. In response to this growth the Minister of Trade (“MOT”) issued new rules to shape the future direction of the business.

 

Minister of Trade Regulation No. 53/M-DAG/PER/8/2012 (“Current Franchise Regulation”) was issued on August 24, 2012, to replace Minister of Trade Regulation No. 31/M-DAG/PER/2008 regarding the Organization of Franchises (“Previous Franchise Regulation”). The Current Franchise Regulation provides a more comprehensive regulatory framework for the franchising business than the Previous Franchise Regulation, as well as placing new limitations and requirements on franchisors and franchisees, including:

 

  • Restriction on the Appointment of a Franchisee: A franchisor is not allowed to appoint a franchisee having a controlling relationship with the franchisor, either directly or indirectly. As informed by MOT officials, “having a controlling relationship” means an “ownership relationship” or “having the same management decisions.” As a result, a foreign or Indonesian parent company as a franchisor may not appoint its subsidiary as its franchisee. Failure to comply with this rule means a foreign company will not be allowed to establish a foreign capital investment (Penanaman Modal Asing orPMA) company in which to engage in the franchising business in Indonesia. The Current Franchise Regulation does not provide any sanctions for Indonesian parent companies that fail to comply with this rule. However, the application for obtaining a franchise registration (Surat Pendaftaran Waralaba or STPW), either from the franchisor or the franchisee, could be rejected by the MOT. This provision, according to the MOT, is aimed at ending monopolies by franchisors.
  • Use of Domestic Products: The new regulation requires franchisees and franchisors to use at least 80% local content for raw materials and machinery in their franchise businesses. They can receive a waiver on the 80% local content requirement with a recommendation from an evaluation team to be formed by the Directorate General of Domestic Trade at the MOT. 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.
  • Limitation on Business Activity: Franchisors and franchisees are allowed to engage only in the specific business activities provided in their business licenses. They may sell supporting goods related to their main business, however, this is limited to a maximum 10% of the total amount of all goods sold. This limitation is meant to regulate convenience store chains such as 7-Eleven, which is a fast-food restaurant doubling as minimarket.
  • Termination and Clean Break:  If a franchisor unilaterally termi­nates a franchise agreement early, it can only appoint a new franchisee for the affected outlets/stores after settling all problems resulting from the termination of the agreement, as set forth in a “clean-break joint statement” or a “permanent legally binding court decision.” Previously, a franchisor only had to wait six months to appoint a new franchisee.
  • Cooperation with Small and Medium-Scale Businesses: A franchisor is required to give preference to small and medium businesses in the selection of franchisees and suppliers of goods and services, provided they fulfill the standard and quality as stipulated in writing by the franchisor.

 

Limitations on Outlets

 

Following the issuance of the Current Franchise Regulation, the MOT issued two regulations limiting the number of franchise outlets that may be owned by franchisors and franchisees. MOT Regulation No. 68/M-DAG/PER/10/2012 (“MOT 68/2012″), dated October 29, 2012, places limits on modern stores, including minimarkets, supermarkets, department stores and hypermarkets. MOT Regulation No. 07/M-DAG/PER/2013 (“MOT 07/2013″), dated February 11, 2013, limits the number of outlets for food and beverage service businesses, including restaurants, bistros, bars and taverns, and cafés.

 

MOT 68/2012 limits modern stores to 150 outlets, to be owned and managed by the franchisor and the franchisee themselves. If they want to add more outlets, such additional outlets must be franchised to another local franchisee partner, in particular a small or medium enterprise, and with the condition that at least 40% of the additional outlets are owned by such local franchisee partners. These requirements apply to (i) modern minimarkets with 400 square meters or less of outlet space; (ii) modern supermarkets with 1,200 square meters or less of outlet space; and (iii) modern department stores with 2,000 square meters or less of outlet space. It seems that the above requirement shall not be applied to PMA companies engaging in the business of modern stores since the stores of such PMA companies are required to have more outlet space than specified above.

 

MOT 07/2013 limits food and beverage service businesses to 250 outlets, to be owned and managed by the franchisor and the franchisee themselves. If they want to open additional outlets, such outlets must be franchised to another local franchisee partner, a small or medium enterprise, or a capital participation partner can be found. For more details, see our article on the Minister of Trade regulation on the development of partnerships for food and beverage franchises.

 

Franchisors and franchisees that already own more than 150 modern store outlets or 250 food and beverage outlets have five years to comply with the above regulations.

 

Outlook

 

The government has said that the aim of these new rules is to end monopolies by franchisors. However, the impact may be to slow the development of the franchise sector in Indonesia. With the new regulations limiting the controlling relationship with franchisees, franchisors, especially foreign franchisors, might reconsider their investment in Indonesia through a franchise arrangement since they have to find local franchisee partners. In addition, the 80% local content requirement could be difficult for foreign franchisors to meet since they have their own standards for the products they use in their outlets.

 

For more on the franchise business, see:

 

New Franchise Rules in Indonesia Raise Questions

 

SSEK

 

For further information, please contact:

 

Deni Sri Anjayani, Soewito Suhardiman Eddymurthy Kardono
denianjayani@ssek.com  
 

 

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