3 March, 2013

 

 

The Indonesian Ministry of Trade ("MOT") has now published its long awaited regulation on Expansion of Partnership through Franchise for Food and Drink Businesses which took effect on 11 February 2013 ("New Restaurant Franchise Regulation"). This has been expected for some time since the MOT issued the New Franchise Implementation Regulation on 24 August 2012 and the New Modern Stores Franchise Regulation on 28 October 2012 – please click here for an article on these regulations. As had been anticipated in the press for some months, the New Restaurant Franchise Regulation introduces a cap of 250 "company owned" outlets/stores on a franchisor or, as the case may be, a franchisee of restaurants, eating houses, bars/drinking houses and cafés.

The key provisions of the New Restaurant Franchise Regulation are as follows:

 

Scope

 

1. The New Restaurant Franchise Regulation applies to:

 

(a) Restaurants (which is defined as a business relating to the provision of food and drink including the preparation of the same, and which is fitted with the equipment and tools for the process of storing and serving the same, at one permanent location);

 

(b) Eating Houses (which is defined as a business relating to the provision of food and drink fitted with the equipment and tools for the process of storing and serving the same, at one permanent location);

 

(c) Bars/Drinking Houses (which is defined as a business relating to the provision of alcoholic and non-alcoholic drinks fitted with the equipment and tools for the process of preparing, storing and/or serving the same, at one permanent location); and

 

(d) Cafés (which is defined as a business relating to the provision of snacks and soft drinks fitted with the equipment and tools for the process of preparing, storing and/or serving the same, at one permanent location).

 

Company Owned, Franchised or Equity Partnership

 

2. The franchisor and franchisee of Restaurants, Eating Houses, Bars/Drinking Houses and Cafés may expand their business by setting up outlets/stores which are:

 

(a) owned and managed by itself ("company owned outlet")

 

(b) franchised; and/or 

 

(c) under equity participation cooperation arrangements (which is defined as cooperation in the development of franchised outlets/stores relating to food and drink business at a certain percentage). The required percentage equity perception is discussed in paragraph 6 below.

 

Limit on "Company Owned" Outlets

 

3. The franchisor or franchisee of Restaurants, Eating Houses, Bars/Drinking Houses and Cafés may set up at most 250 "company owned" outlets/stores in Indonesia.

 

4. In the event that the franchisor or franchisee of Restaurants, Eating Houses, Bars/Drinking Houses and Cafés already owns 250 outlets/stores and is going to undertake a further increase of outlets/stores, the establishment of further outlets/stores must be:

 

(a) franchised; and/or

 

(b) undertaken by way of equity participation cooperation arrangements.

 

5. The franchisor or franchisee of Restaurants, Eating Houses, Bars/Drinking Houses and Cafés which already has more than 250 outlets/stores must adjust to the provision regarding the increase of outlets/stores as set out in paragraph 4 above within five years of the New Restaurant Franchise Regulation becoming effective (i.e. by 11 February 2018). Adjustments for franchise businesses undertaken to comply with this requirement must be reported annually to the Director General of Domestic Trade.

 

Equity Participation Cooperation

 

6. If the franchisor or franchisee undertakes an expansion of outlets/stores through equity participation cooperation arrangements, the percentage of the total equity participation under such arrangements shall be as follows:

 

(a) for an "investment value" in a sub-franchise store/outlet which is less than or equal to Rupiah 10,000,000,000 (c.US$1 million), the equity participation of the other party must be at least 40%; or

 

(b) for an "investment value" in a sub-franchise store/outlet which is more than Rupiah 10,000,000,000(c.US$1 million), the equity participation of the other party must be at least 30%.

 

For this purpose, "investment value" is defined as the total initial capital invested for land and building (for the sub-franchise outlet/store) whether owned or leased, including equipment required to undertake the business.

 

SMEs

 

7. In this regard, the franchisor or franchisee must prioritise local, small and medium sized enterprises at the relevant location in selecting the franchisee and/or equity participant, so long as they satisfy the requirements determined by the franshisor.

 

Local Content

 

8. The franchisor or franchisee of Restaurants, Eating Houses, Bars/Drinking Houses and Cafés must use at least 80% local raw materials and locally manufactured equipment. In certain circumstances, the Minister may relax this requirement after taking into consideration the recommendation of the "monitoring team" (formed by the Director General of Domestic Trade).

 

Training

 

9. The franchisor of Restaurants, Eating Houses, Bars/Drinking Houses and Cafés must provide training to the franchisee and/or equity participant in the form of training and guidance on the management of the franchise business.

 

Reporting

 

10. The franchisor or franchisee of Restaurants, Eating Houses, Bars/Drinking Houses and Cafés must report any changes to the total number of outlets/stores which are owned and managed by itself (i.e. "company owned outlets"), franchised and/or under equity partnership cooperation arrangements, to the Director General of Domestic Trade.

 

Sanctions

 

11. Breach of the requirements in paragraphs 3, 4, 8 and 9 above may attract the following incremental administrative sanctions:

 

(a) up to three written warnings;

 

(b) temporary suspension of the Franchise Registration (more commonly known by its Indonesian abbreviation "STPW") for up to two months (if the party fails to comply with the directions in the written warnings);

 

(c) cancellation of the STPW (if the party fails to comply with the relevant requirement at the expiry of the two month temporary suspension period).

 

Observations

 

12. The key policy drivers identified in our e-bulletin of November 2012 – in relation to the New Franchise Implementation Regulation issued on 24 August 2012 (which regulates all franchise arrangements generally) and the New Modern Stores Franchise Regulation issued on 28 October 2012 (which regulates certain categories of mini markets, supermarkets and department stores) – are again reflected in, and inform, the New Restaurant Franchise Regulation. They are as follows:

 

(a) increasing the participation of local SMEs in the retail sector and, in particular, the franchise business sector; and

 

(b) promoting the use of Indonesian local content by franchise businesses.

13. There are, however, a number of significant differences in the way these broad policy objectives are implemented in the New Restaurant Franchise Regulation compared to the previous regulations:

 

(a) Under the New Modern Stores Franchise Regulation (applicable to certain categories of mini markets, supermarkets and department stores) the limit on "company owned outlets" is in the first instance150 outlets. A portion of further outlets must be franchised to local SMEs, such that the percentage of the total number of such further outlets which are franchised to local SMEs is at least 40% of the total number of further outlets opened. This suggests that once the 150 "company owned outlets" limit is reached for modern store franchises, for every 10 new stores opened, four must be franchised to third party local SMEs. In contrast, under the New Restaurant Franchise Regulation, the limit on the number of "company owned outlets" is simply set at 250 outlets, and any further outlets must be either franchised or undertaken by way of equity participation cooperation, in each case prioritising local SMEs.

 

(b) Note, however, that the New Restaurant Franchise Regulation has instead introduced a different concept to deal with additional outlets/stores above the permitted cap, namely "equity participation cooperation" – which requires at least 40% or, as the case may be, 30% of equity in a sub-franchise store/outlet to be owned by an SME – as a variation to the straight franchise model. This is not contained in the New Modern Stores Franchise Regulation. It remains to be seen how this equity participation cooperation arrangement will be applied in practice as it may (depending on how the structure is implemented) potentially be in conflict with the New Franchise Implementation Regulation issued on 24 August 2012 (which is of general application for all franchise arrangements), as that Regulation provides that a franchisor is prohibited from appointing a franchisee which is controlled by the franchisor, whether directly or indirectly.

 

(c) The New Modern Stores Franchise Regulation requires a franchisor or, as the case may be, a franchisee who has already exceeded the "company owned outlets" cap to take steps to comply with the relevant cap within five years of the Regulation being introduced, by relinquishing each year at least 20% of the total number of outlets/stores which should have been franchised. The wording in this regard in the New Restaurant Franchise Regulation is less clear cut, and there is ambiguity in the wording as to whether a franchisor or, as the case may be, a franchisee who has already exceeded the 250 cap when the Regulation takes effect is required to franchise or partially divest such excess stores within 5 years of the Regulation taking effect. Note, also, that unlike the New Modern Stores Franchise Regulation where the "company owned outlet" cap is exempted in certain circumstances (i.e. where the franchisor/franchisee already own 150 outlets but have not made a profit, or where a franchisor who is looking to open outlets in the regions is unable to find a local business enterprise which can be the franchisee), the New Restaurant Franchise Regulation does not contain any such exemption.

 

(d) The 80% Indonesian local content requirement in the New Restaurant Franchise Regulation is a repetition of the same requirement, which is of general application, in the New Franchise Implementation Regulation (issued on 24 August 2012).