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Indonesia: New Law on Franchises

(Nov. 2, 2012) On October 30, 2012, Indonesia’s Ministry of Trade issued a new regulation on franchised businesses in the country. The regulation limits the number of company-owned stores in a chain to 150; any additional outlets must be franchised. (Peraturan Menteri Perdagangan Republik Indonesia Nomor: 68/M-DAG/PER/10/2012, Tentang Waralaba Untuk Jenis Usaha Toko Modern [Regulation of the Ministry of Trade of the Republic of Indonesia Number: 68/M-DAG/PER/10/2012 Concerning Franchises for Modern Business Stores] (hereinafter the Regulation), arts. 3 & 4 ¶ (1), Ministry of Trade website (last visited Nov. 1, 2012); Andjarsari Paramaditha, Shares in Indonesian Retailers Dropped After the Government Announced a New Trade Franchise Law on Tuesday, REUTERS (Oct. 31, 2012).)

“Modern stores” are defined in the regulation as “stores with self-service systems, selling various kinds of goods at retail, in the form of minimarkets, supermarkets, department stores, or hypermarkets or as grocers selling wholesale.” (The Regulation, art. 1, ¶ 4.)

The requirement for franchising applies to stores of a certain size: for mini-marts, they must be less than or equal to 400 square meters; for supermarkets, less than or equal to 1,200 square meters; and for department stores, less than or equal to 2,000 square meters. (Id. art. 4 ¶ 3.)

The Ministry noted that the purpose of the new regulation is to prevent monopolies in the retail franchising sector. According to Gunaryo, the Ministry’s Director-General for Domestic Trade, “[w]e don’t intend to restrict ownership of modern stores, but hope that along with the growth of their company-owned outlets, they can also broaden their partnerships with other parties that could largely benefit from their proven business systems and brands.” (Linda Yulisman, New Retail Franchising Rule Will Help Prevent Monopoly, Says Govt, THE JAKARTA POST (Nov. 1, 2012).)

The Regulation applies to stores registered as franchised businesses; those operating with regular business permits will be exempt. (Id.) The adoption of the new Regulation follows that of an August 2012 Regulation centralizing the process of applying for franchise permits and requiring foreign franchisors to grant more than one franchise to a local business. (Id.; Peraturan Menteri Perdagangan Republik Indonesia Nomor: 53/M-DAG/PER/8/2012 Tentang Penyelenggaraan Waralaba [Regulation of the Ministry of Trade of the Republic of Indonesia Number: 53/M-DAG/PER/8/2012 Concerning the Organization of Franchises], Ministry of Trade website (last visited Nov. 1, 2012).)

Following the announcement of the new rules, the value of the shares of some companies, including the parent company of the convenience store chain 7-Eleven, dropped. The Jakarta Composite Index of stock values fell 0.68% (Paramaditha, supra), while overall Indonesian stocks ended the day of October 30 down 0.33%. (Indonesian Stocks Fall as Ministry Unveils New Franchise Law, JAKARTA GLOBE (Oct. 31, 2012).)

The new regulation has been unpopular with some professional organizations, including the Indonesian Committee for Franchises and Licenses, whose chairman, Amir Karamoy, stated that the regulation would discourage franchisors. He added that,”[t]o endorse the growth of modern stores, the government should offer incentives so they are willing to transfer their business model to franchisees, especially to areas outside Greater Jakarta, Java and Bali.” (Yulisman, supra.)

Criticism of the regulation was also expressed by the Indonesian Retailers Association. Satria Hamid, the Deputy Secretary-General of the Association, said that it would be difficult to implement regionally. (Id.)