Franchise Opportunities amid the Pandemic
Within a short time of the Covid-19 pandemic, a number of foreign franchises have closed their outlets in Indonesia. What is the fate of local franchise companies?
Visitors attend the annual franchise exhibition incorporating the Franchise & License Expo Indonesia (FLEI), the Retail & Solution Expo Indonesia (RSEI), and the Cafe & Brasserie Expo Indonesia (CBI) on 13 Sept. 2019 at Hall B of the Jakarta Convention Center in Central Jakarta. The industry expo offered more than 350 franchise brands and saw visitors from 20 countries.
As one of the ways to conduct business, franchises still have great opportunity for growth in Indonesia despite the Covid-19 pandemic. However, the opportunity is for the having only if investors can learn comprehensively about the business’ positive and negative aspects before starting.
Such preparation is needed because many franchise companies have suffered great losses or have even gone out of business as a result of the Covid-19 pandemic. A number of major franchise companies have closed many of their outlets in the country, including PT Fast Food Indonesia Tbk., the Indonesian franchise holder of the American fast food chain Kentucky Fried Chicken (KFC).
KFC, famed for its fried chicken, closed 115 outlets in the two months since March, when Covid-19 emerged in Indonesia. The information was in a public disclosure from the company posted on the Indonesia Stock Exchange website.
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Not just in Indonesia, and franchisees in a number of countries are also experiencing the same thing. On 1 July 2020, NPC International Inc., which held the franchise rights to the Pizza Hut and Wendy\'s brands filed for chapter 11 bankruptcy at a court in the American state of Texas.
The company with nearly 40,000 employees and 1,700 outlets across 27 US states suffered losses of almost US$1 billion due to the Covid-19 pandemic. Referring to the United States Courts website, chapter 11 allows a company to propose “a plan of reorganization to keep its business alive and pay creditors over time”.
South Korean franchising chain Lotteria is also facing grim circumstances. The fast food chain that operated for nine years in closed its nine Indonesian outlets on 29 June 2020.
Not just in Indonesia, and franchisees in a number of countries are also experiencing the same thing
Visitors seek information on Korean food franchises on 13 Sept. 2019 at the annual franchise business exhibition incorporating the Franchise & License Expo Indonesia (FLEI), the Retail & Solution Expo Indonesia (RSEI), and the Cafe & Brasserie Expo Indonesia (CBI) at Hall B of the Jakarta Convention Center in Central Jakarta.
Opportunity
The good news is that the outlet closures have occurred only among foreign franchise chains, which offers more opportunities for local franchisees to expand their business.
However, the sluggish global economy has hampered the franchise industry the world over, with global consumption growth showing a slowing trend.
World Bank reports show a slowing growth trend around the globe in household consumption and nonprofit institutions serving households (NPISH), which entails the spending of social, community, professional and nongovernmental organizations.
Consumption growth recorded in these two sectors was only 1.81 percent in 2011 and 1.52 percent in 2015. In 2016 and 2017, the global consumption growth in the two sectors was respectively 1.6 percent and 2.2 percent, but the figure declined again in 2018 to 1.95 percent.
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Foreign direct investment (FDI) is facing the same fate, also showing a downward trend. Capital flows was 3.15 percent of global gross domestic product (GDP) in 2011 and just 2.38 percent in 2014.
In 2015, capital flows increased to 3.56 percent of global GDP. However, in 2019, the figure fell back to 1.62 percent, far below 2.33 percent during the global crisis in 2009.
The condition is becoming increasingly unfavorable for business, considering that the Covid-19 pandemic has severely impacted the global economy. However, Indonesia’s franchise market is still believed to offer a good opportunity.
Data from the International Franchise Attractiveness Index of the University of New Hampshire (UNH) in the US point to this opportunity. With a population of 267 million people, Indonesia ranks fourth out of 131 countries in the UNH index.
Indonesia is also in the top third on the franchise attractiveness index of an American company.
YIWU, CHINA - SEPTEMBER 18: Representatives from companies hold signs advertising job opportunities inside a local employment center on September 18, 2015 in Yiwu, Zhejiang Province, China. A slowdown in manufacturing and exports in China is causing global concern that the world\'s second largest economy is running out of steam.
Trends
The condition of the global economy corresponds with the ups and downs of Indonesian franchise companies in 2011-2019. Franchises in Indonesia continued to decline from 1,256 brands in 2011 to 698 brands in 2015, and then shrank further to 600 brands last year.
The first franchise arrived in 1991 and the local industry peaked in 2011. The rapid growth of Indonesia’s franchise industry began after 2005, when local franchise brands started to increase. In 1992-2003, foreign brands still dominated Indonesia’s franchise industry. This then reversed in 2007, when encouraging trends were seen in the growth of local franchise businesses.
The rapid growth of Indonesia’s franchise industry is inseparable from supporting government regulations. Trade Ministry Regulation No. 57/2014, for example, restricted the number of outlets a franchise chain could own.
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The regulation opened opportunities for industry growth in the country, because a franchisee that already owned the maximum number of outlets allowed must enter into cooperation with other firms to open additional outlets.
Trade Ministry Regulation No. 71/2019 also supports the franchise business. This regulation brought three positive impacts in terms of legal certainty in running a franchise business.
Number of Local and Foreign Franchise Brands
First, the regulation does not limit the number of outlets. It also does not limit the number of master franchisees that can represent a master franchisor.
Second, the 2019 Trade Ministry Regulation relaxes the level of domestic components (TKDN). Trade Ministry Regulation No. 47/2016 obligates a minimum 80 percent of domestic components.
Third, the regulation ensures legal certainty for both franchisors and franchisees, for example by requiring franchisors and franchisees to obtain a registered franchise certificate (STPW).
Prospects
Until last year, at least three franchise business segments that offered lucrative opportunities. Prior to the Covid-19 pandemic, the bollowing three sectors in the franchise industry grew rapidly in line with the rise of Indonesian tourism.
The franchise sectors with the greatest engagement are hotel franchising and food and beverage (F&B) franchising. Of all hotel and F&B businesses, 1.51 percent are franchises, and 2.59 percent of all franchise businesses are run by franchisees.
The next franchise sector covers businesses related to rental services, employment, travel and other related businesses. Included in this franchise sector are tour and travel agencies, booking companies and car rentals.
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The atmosphere at the annual franchise business exhibition incorporating the Franchise & License Expo Indonesia (FLEI), the Retail & Solution Expo Indonesia (RSEI), and the Cafe & Brasserie Expo Indonesia (CBI) at Hall B of the Jakarta Convention Center in Central Jakarta.
The high growth of the tourism industry has also stimulated the growth of other supporting services, namely financial and insurance services. Tourism services that prioritize convenience have also opened opportunities for financial services franchises to support tourism transactions.
It is undeniable that the Covid-19 pandemic has changed the business landscape, including the franchise industry. However, the three franchise sectors above can still be profitable if they are managed with the right strategy and know how.
PT Top Food Indonesia, for example, has adopted a new strategy for the F&B franchise sector amidst the Covid-19 pandemic. The holder of the Es Teler 77 franchise has innovated in light of the pandemic to develop online sales of frozen foods.
Hotel franchises have also adopted a similar strategy. A number of hotels have focused on strengthening their F&B services by incorporating a delivery system. As for other hotels that are not seeing high occupancy, they are offering their rooms for treating Covd-19 patients. A number of hotels are also promoting their rooms as quarantine and isolation facilities by implementing strict health protocols.
Meanwhile, to cope with the pandemic and stay afloat, many car rental companies have switched to logistics transportation services. Other tourism services are also trying to innovate, such as by offering virtual tours.
The financial services and insurance sectors also have bright prospects amid the booming trend in noncash transactions to prevent the spread of Covid-19.
The sales assistant offers food and chili testers at the annual franchise business exhibition, Franchise & License Expo Indonesia, Retail & Solution Expo Indonesia, and Cafe & Brasserie Expo Indonesia in Hall B, Jakarta Convention Center, Central Jakarta, Pusat (13/9/2019).
Apart from these three sectors, franchises dedicated to health and fitness and social activities did not show significant growth according to last year’s data. But these sectors have become more attractive as a result of the pandemic.
However, the decision to run a franchise business should not be based only on potential opportunities and macro data. During the Covid-19 pandemic, the decision to start or to continue a franchise business should take several other considerations into account.
These include funding capacity, human resources, as well as customer and market potentials. The risks associated with Covid-19 have continued to remain high until now, making health issues the most crucial factor in running a business.
In the end, evaluating a business opportunity should be the first priority in starting or maintaining a franchise business, especially during a pandemic.
Many people who already have a franchise business or are thinking about starting a franchise business don’t know the difference between a franchise and conventional business models. Franchises tend to be a safer option in the appropriate context, since all aspects of the business are carefully calculated. Even if it is a local brand, a franchise business is likely to be more feasible during a pandemic. (Kompas R&D)
