Indonesia to Big Chains: Share the Wealth; under the new rules, any convenience store or other retailer with more than 150 stores and any restaurant or café with more than 250 outlets will have to bring in additional Indonesian partners

May 12, 2013, 8:39 p.m. ET

Indonesia to Big Chains: Share the Wealth

By ERIC BELLMAN

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JAKARTA, Indonesia—A jump in the number of chain stores in Indonesia has triggered a backlash from regulators and owners of small shops, concerned that homegrown entrepreneurs could get elbowed out of the country’s economic growth. For decades, Torikin did a brisk business selling batteries, cigarettes, cold drinks and instant coffee from his cart in central Jakarta. Then a brightly lighted store sprouted in the vacant lot where he had been setting up shop. He had never heard of 7-Eleven or its Slurpee frozen drinks. But in the past year he has watched almost all of his customers defect to the chain store, with its wide selection and low prices. “There is no way I can compete,” says Mr. Torikin, who, like many Indonesians, uses only one name. “Office workers that bought cigarettes from me for years, now just walk right past me on the way to that store. They say ‘Hello,’ but they don’t buy anything.” Mr. Torikin says his sales plunged to around $5 a day from roughly $100. Now he is looking for a new spot to set up, far from a Western-style convenience store.

Hoping to protect and enrich small-shop owners like Mr. Torikin, Indonesia has been implementing rules to force large chains to share their success. The new rules could change expansion plans for such chains as KFC, Starbucks SBUX +1.18% and 7-Eleven.Generally, each chain has just a single master franchisee here—allowing the foreign company to maintain control over operations. But under the new rules, any convenience store or other retailer with more than 150 stores and any restaurant or café with more than 250 outlets will have to bring in additional Indonesian partners. That can mean signing up more franchisees or having the existing franchisee take on partners. Also, chain stores are required to get 80% of their supplies locally.

As the number of chain stores in Indonesia has more than doubled in the past five years to 40,000, the country’s small-business owners say they need protection—or the opportunity to join the big chains. The number of grocery stores, which tend to be family owned, grew only 10% in the three years to 2012 according to a trade group of Indonesian retailers. The number of convenience stores jumped 82% over the same period.

Indonesia’s Traditional Traders Association, which represents millions of mom-and-pop shops, has been lobbying the government to bring the franchise cap down to 10 stores from 150 and 250. “If the government is really pro-people, then it should spread the wealth to as many people as possible, and give traditional traders the space they need to grow,” says Ngadiran, the secretary-general of the association.

Indonesia—like other fast-track emerging markets—is struggling to balance its appetite for international capital and know-how with the needs of its citizens. Southeast Asia’s largest economy has been attracting record amounts of foreign direct investment in recent years. But economists say Indonesia needs still more if it is going to create jobs and improve infrastructure in the archipelago’s 17,000 islands. Some analysts worry that the surge in investment from abroad has made the country cocky and more likely to slap new restrictions on trade and investment.

Jakarta last year unveiled rules forcing foreign investors to unload stakes in mining companies. The government also announced plans to make mining companies process their yields within the country. And Indonesia has lowered the amount of beef and horticultural goods that can be imported.

Standard & Poor’s earlier this month lowered Indonesia’s ratings outlook from positive to stable, citing worries about economic policy and chances it could get more restrictive as the country heads toward national elections next year.

PT Fast Food IndonesiaFAST.JK 0.00% KFC’s master franchisee here, says its agreement with U.S.-based brand owner Yum Brands Inc. YUM +1.87% doesn’t allow the Indonesian company to bring in partners. The fried-chicken chain is the most popular global name in the country, with more than 440 outlets.

“If it stays as is, then we will have to slow down or even stop expanding,” says Fast Food director J.D. Juwono. The company is trying to negotiate with the government for another way to share its success with other Indonesian companies, he says.

Yum says its plans haven’t changed, and that its franchisee “will continue to work with authorities on the guidelines.”

Henri Honoris, the chief executive of PT Modern Putra Indonesia, says he has yet to reach the limit of 7-Eleven convenience stores but plans to start accepting new small-business owners as franchises in the next year.

“The government urged us to cooperate with small-business owners and to share with local people,” he says. “If we do not create opportunities for small-business owners they could challenge us in the future.”

U.S.-based chain owners 7-Eleven Inc. and Starbucks Corp. didn’t respond to requests for comment.

Indonesia’s trade ministrysays most franchises have agreed to follow the new rules. And some had sought the requirement that 80% of supplies be locally sourced so they wouldn’t be forced to buy expensive imported ingredients from the franchise holders, says Nurlaila Nur Muhammad, the ministry’s director of business development. The ministry predicts that the new rules will speed expansion of international companies as they open up to more partners.

“We would like to encourage them to share with the small and medium-size enterprises without killing them,” she says. “It may not be easy, but they have to do something.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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