Oct 31, 2012

Indonesia - Diversify or Shut Down, Jakarta Tells Retail Franchisors

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Major retail brands such as Alfamart will be forced to diversify the holding of franchises under a new regulation the government claims will support small- and medium business-owners.

Under the ruling, issued on Monday in Jakarta and taking effect immediately, privately owned companies are only allowed to establish a maximum of 150 franchise outlets, giving them little choice but to issue franchises to other entrepreneurs if they wish to grow beyond the threshold.

The regulation, however, provides several exceptions. “Companies that have yet to generate any profit after opening up 150 outlets ... are allowed to open more branches,” one provision said.

Furthermore, private companies can also open more than 150 outlets should the franchise holders try but fail to find local partners, the regulation said.

The regulation also states that locally-made products should account for at least 80 percent of types and volumes of goods being sold at franchise outlets.

Companies will be given five years to comply with the new regulation, with companies that fail to comply facing the potential loss of their business license.

The new regulation is likely to hurt many retailers. One possible loser is Sumber Alfaria Trijaya, which operates thousands of Alfamart minimarket outlets. Of 6,000 Alfamart outlets across the country, only 2,000 are owned by non-affiliated investors under a franchise agreement.

Hendrik Adrianto, head of external communications at Carrefour Indonesia, said the supermarket chain expects to have little trouble complying with the local production regulation. “Locally-made products already account for 90 percent of our inventories,” Hendrik said.

He said there are only 84 Carrefour outlets across the country, meaning the new regulation left it room to grow.

According to the Indonesian Franchise Association, there are at least 80,000 franchise outlets, including restaurants and retailers, across Indonesia.

Last month, the Indonesia Franchising and Licensing Society (WALI) warned of the dangers of the mooted regulation. Amir Karamoy, chairman of the group’s advisory board, said potential franchisors had become more cautious about setting up operations in Indonesia due to the policy.

The local product requirement comes just two weeks after President Susilo Bambang Yudhoyono told a conference in Jakarta: “If we want to achieve robust global trade ... we must tackle [non-tariff trade barriers].”

Tito Summa Siahaan

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