Indonesia is one of the countries that franchise owners often enquire about when thinking about brand expansion. The close proximity of Jakarta to Singapore and the number of Indonesians that come through Singapore gives Singapore brands a happy unfair advantage in Indonesia. Singapore brands are well received and offer a great balance of International appeal and local familiarity to the Indonesian market. Brands like Fish & Co, Imperial Treasure, Shilin, Seoul Yummy, Eton house, Seriously Addictive Maths, and most recently the much loved Joe & Dough have enjoyed success in Indonesia. We thought it might be useful to share some Indonesia centric information for business owners considering Indonesia as a possible destination for their brand growth.
To begin, entering Indonesia by appointing Master Franchises is a good way to enter this very promising new market. It allows the franchisor to focus on readying the brand for international market whilst leveraging local knowledge for real estate, human resource and navigating local legal requirements. This reduces the risk for both Franchisor and franchisee whilst each focus on what they do best. When implemented well, the brand can increase tremendous growth due to the large market potential of Indonesia. Given that the bottom line can be very attractive when a brand is well executed, Some franchisors owners also use the franchise model to enter into Joint Venture agreements to co build the brands in the country. This format increases the upfront risks, but when well executed, both parties can enjoy the rewards of a profitable partnership.
In this article we will cover the following:
1. Franchise Landscape of Indonesia
2. Considerations when entering the Indonesia Market
3. Legal Framework for Franchising
4. The Franchise Registration Certificate
5. Criteria that triggers Franchise Registration requirements
6. What is the Best Market Entry Strategy into Indonesia?
Franchise Landscape of Indonesia
Indonesia has a relatively young population of 288 million represents both a sizeable workforce and pool of consumers. This is complemented by the country’s steady economic growth of 5.1% in 2017, and 5.1-5.5% expected for 2019. 58% of the population is now living in Jakarta making it the most populated region.
The Franchise (Both local and international Brands) sector has been buoyed by the increased spending power of its growing middle class. In the more populous cities, major International and very creative local franchise brands have been growing exponentially. Brand owners should not disregard the creativity of local Indonesian brands like Jco, Upnormal Coffee Roasters, Kitchenette, Union Tanamera, Pizza&Birra, Social House, DJournal certainly offer lifestyle concepts that can rival international brands. In order to compete with the local brands, franchisors need to be aware that in Indonesia, although the market is still developing, and likely to be exponentially bigger than home country, they need to put in conscious effort to localise their brands, be conscious of the lifestyle factor and be well priced to reflect the value.
According to Ministry of Trade, there are 1,000 legal franchise in Indonesia; 540 of it are Indonesian companies and 460 foreign franchise companies. The franchise industry led by Food and Beverages companies for 62.4% and Education companies for 18.1%. The rest of it is contain of retail (14.9%) and service (4.6%). Allegedly there are 1,400 other non-franchise businesses that cover Indonesia franchise sector. In 2016, International Trade Administration projects that there will be 8% increase in local franchise, and 14% in foreign franchise each year F&B Industry in franchising is the biggest compares to the other sectors, in 2017 it has 624 franchise brands which 317 of it International brands and 307 domestic brands.
Not surprisingly, of the International franchise brands in Indonesia, almost 40% of the brands are from the US followed by a strong presence of Made in Singapore Brands. F&B remains the MOST sought after franchise category.
This finding is in line with Ministry of Industry report indicating the continued growth of F&B industry at an estimated 9% in 2019. As a whole, the F&B sector now contributes up to 34.33% of the countries non Oil& Gas GDP. The Indonesian government encourages the growth of this sector as most of the owners of F&B businesses are Micro and small Businesses, a driving force behind the increase of earning power equality.
International brands that have performed well in Indonesia are KFC, Mc Donalds, Wingstop, Bread Talk, Canele, Killiney, Lawson, Mothercare, Snap fitness, Charles & Keith, On the whole, rentals and manpower work very favorably for brands that come from countries with very high real estate prices and man power scarcity. As a result, franchises thrive in these markets because the net profit margins are very comfortable, even after paying the franchise royalties.
Considerations when entering the Indonesia Market
In order to capture the market, brands entering Indonesia need to recognize that a fair amount of localization is required in order for the franchisee to enjoy a successful market entry. If a brand insists on franchisees implementing the brand exactly as its home country, it exposes the brand to a high amount of uncertainty as to brand acceptability. Brands like Joe & Dough entered Indonesia successfully invested a fair amount of time and research to understand local consumer habits, lifestyle, competitor offerings to develop a final market specific strategy.
Legal Framework for Franchising
In order to protect the Indonesian franchisees from Unscrupulous and Fraudulent Franchisors, Indonesia has a franchise regulatory regime aimed at controlling the activities of franchises. Franchisors are required to register for a franchise Registration Certificate also known locally as the Surat Tanda Pendaftaran Waralaba-STPW.
The Franchise Registration Certificate
The franchisor and the franchisee each must file for, and obtain, an STPW. Each STPW is valid for five years and may be renewed each time for five years. In addition, an annual report must be filed with the Ministry of Trade.
The franchisor must apply for, and obtain, its STPW before the franchise agreement may be signed. The following are required for the STPW submission by the franchisor:
• The disclosure document in the Indonesian language (and a legalized disclosure document if prepared in another language) the minimum content of which is explained above
• A copy of the passport of the franchisor’s representative
• Legal documents of the franchised business, i.e., technical business permits or the license issued in the franchisor’s home country
• Statement Letter/Reference Letter issued by the Trade Attaché of Indonesian Consulate in the franchisor’s home country
• The franchisor’s Indonesian trademark registration certificates
• The local content statement
• A list of manpower to be employed for the operation of a typical outlet
A copy of the draft franchise agreement in the Indonesian language (translated by a sworn Indonesian translator)
For foreign franchisors, there are pre-contract disclosure requirements that need to be legalized. The documents are:
• The franchisor proof of identity and the legal documents of the franchise business
• Franchisor’s business history
• Franchisor’s organizational structure
• Audited balance sheets for the last two years (for medium and macro businesses)
• The number of franchise business
• A list of franchisees
• The rights and obligations of the franchisor and franchisee
The franchisee must apply for its STPW following execution of the franchise agreement and must also file an annual report. Its STPW submission must include:
• The franchisor’s Disclosure Document in the Indonesian language
• Copies of the signed agreements in the Indonesian language
• The local content statement
• A list of manpower to be employed at the typical outlet
• The franchisor’s Indonesian trademark registration certificates
• The franchisor’s STPW
• The franchisee’s Deed of Incorporation/Articles of Association with its approval from the competent government authority
Criteria that triggers Franchise Registration requirements
Business are required to be registered as a franchise if it triggers the following criteria:
• Having specific business characteristic or Unique selling proposition;
• Franchisor must have approximately three to five years’ experience in business.
• Have written SOP and a description of the proposed goods and service provided
• Minimum 10-year term for a master franchise
• A Replicable system (easily applied and taught)
• Giving continuous support
• Registered or Have Applied their Intellectual Property Rights (IPR) to Directorate General.
• Ongoing Support.
• Have a system that is easy to learn and apply
What is the Best Market Entry Strategy into Indonesia?
Depending on the area of business your franchise exists in, you need to make sure you enter the market with the right mindset. There is no magic formula for success but we have found that companies that followed a broad foundational market entry strategy usually find more success than others. Some of the areas these successful franchisors invested time in are:
1. Conduct Due Diligence on the market, including research on the existing competitive landscape, pricing of the competition’s product of service, Cost of products or service and identify targeted audience
2. Spend time to find a like-minded franchisee or JV partner who will willingly handle the local operations and allow you to build on the brand.
3. Get the brand positioning and brand communication right. Here franchisors should ensure the franchisee invests in both effective off-line and Digital marketing so that the Go-To Market Strategy is well executed.
4. Invest in technology to ensure that you as a franchisor gets access to real time information.
5. Ensure training and on-going audits are conducted to ensure sustainability.
About Astreem Consulting
Astreem Consulting was founded in 2005 for the purpose of building Franchises across Asia. Over the last 14 years, Astreem has been steadily building the Franchise brands across the region from Singapore, Malaysia, Indonesia, Thailand, Philippines and Australia.
Through in depth franchise development plans to well executed market entry strategies, and localised Market research, Astreem is confident in bringing effective and result oriented solutions for brand growth.
For more information on taking your business to Indonesia, contact [email protected] or +65 6732 0803.