KFC Growth Seen Slowing as Indonesia Limits Franchisees

Yum! Brands Inc (YUM)., owner of the KFC and Pizza Hut dining chains, and other fast-food companies may be forced to slow store growth in Indonesia, the world’s fourth- most populous nation, because of government rules to protect small businesses.

As U.S. revenue drops, Yum is focusing on growing overseas, particularly in China and Southeast Asia. A plan taking effect in the next five years to limit restaurant franchise holders to operating 250 outlets in Indonesia, where fast-food sales rose 15 percent in 2011, may crimp openings for Yum and other U.S. food chains as well as encourage similar restrictions in other nations.

“It’s going to probably slow things down a bit,” said Darren Tristano, executive vice president at Chicago-based restaurant researcher Technomic Inc. “This is going to be a bump in the road” for Yum, which already has 700 locations in Indonesia, he said.

Indonesian Trade Minister Gita Wirjawan earlier this month announced the rule, which has certain exceptions, in a bid to protect small- and medium-size businesses. KFC, which sells wraps, spaghetti and chicken porridge in Indonesia, is the top U.S. fast-food chain in the Asian nation with about 32 percent of the market, according to Bloomberg Rankings data from July.

The rule “doesn’t impact Yum’s growth plans,” Virginia Ferguson, a company spokeswoman, said in an e-mail. “Our local franchisee will continue to work with authorities on the guidelines.”

Yum Expansion

Yum’s saturation of two or three stores per million people in Indonesia can expand to that of the U.S., where it has 50 to 60 eateries per million people, Muktesh Pant, chief executive officer of Yum International, said at an investor conference in December.

There is “no fundamental reason why Indonesia will not get there,” he said. In Indonesia, where gross domestic product growth is outpacing that of Brazil, Russia and India, Yum has said it can grow 43 percent to 1,000 stores by 2015.

“Indonesia is a very attractive market because of the extremely fast-growing middle class with discretionary income,” Bill Edwards, CEO of Irvine, California-based Edwards Global Services Inc., which advises retailers and restaurants, including Denny’s Corp (DENN)., in opening stores overseas.

While Yum says its growth won’t be affected by the rule, it’s harder to keep the brand and food quality consistent with different and smaller store owners, Edwards said.

“What if one operator does a bad job?” he said. More franchisees will require more supervision from the parent company, he said.

Yum fell 1.1 percent to $64.73 at the close in New York. The Louisville, Kentucky-based company has dropped 2.5 percent this year, while the Standard & Poor’s 500 Restaurants Index gained 4.2 percent.

‘Still Evaluating’

The regulation affects companies such as PT Fastfood Indonesia, which operates more than 400 KFC restaurants in Indonesia. The rule applies to all food-mart franchisers and franchisees, including public companies, Wirjawan said.

“We are still evaluating and calculating the potential impact of the new rule,” Justinus D. Juwono, director of PT Fastfood, said in a telephone interview. “We haven’t changed or revised our investment plan or target yet. But, we’ll closely look into it, when we get our evaluation and calculation done in two or three weeks.”

Companies in Indonesia are allowed to operate 250 or more outlets either by selling partnership stakes or agreeing to open them in certain remote locations to be determined later, Wirjawan said at a press briefing in Jakarta on Feb. 15. They will have five years to comply, he said.

Indonesia Population

Indonesia is the fourth-most populous country in the world with about 248.6 million people, according to a July estimate from the U.S. Central Intelligence Agency World Factbook. China is the biggest country by population, followed by India and then the U.S., with 313.8 million people, the data show. Indonesia’s economic growth was about 6 percent in 2012. The nation had the world’s largest Muslim population as of 2010, according to the Pew Forum on Religion & Public Life.

Photographer: Nelson Ching/Bloomberg

Customers eat at a Yum! Brands Inc. KFC restaurant in Beijing. Yum, based in Louisville, Kentucky, has dropped 1.4 percent this year, while the Standard & Poor’s 500 Restaurants Index has gained 4.5 percent. Close

Customers eat at a Yum! Brands Inc. KFC restaurant in Beijing. Yum, based in... Read More

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Photographer: Nelson Ching/Bloomberg

Customers eat at a Yum! Brands Inc. KFC restaurant in Beijing. Yum, based in Louisville, Kentucky, has dropped 1.4 percent this year, while the Standard & Poor’s 500 Restaurants Index has gained 4.5 percent.

Fast-food sales in Indonesia climbed 15 percent to $1.54 billion in 2011, compared with an increase of 9.6 percent globally and 3.6 percent in the U.S., according to data from Euromonitor International.

Dunkin’ Brands Group Inc (DNKN)., owner of the Dunkin’ Donuts and Baskin-Robbins dining chains, has about 600 stores in Indonesia, all of which are franchised. The company has been remodeling its Baskin-Robbins ice cream stores there.

“We are currently reviewing the regulation, and it is too early to determine possible impact,” Michelle King, a spokeswoman for Canton, Massachusetts-based Dunkin’ said in an e-mail. “We remain committed to the market.”

Me Too

McDonald’s Corp. (MCD), the world’s largest restaurant chain by sales, has about 130 stores in Indonesia, all of which are franchised. Becca Hary, a spokeswoman for the Oak Brook, Illinois-based company, declined to comment on the rule.

Indonesia may be the first of nations to impose restrictions on retail operators as other markets take on a “me-too” approach, Edwards said.

“This is one of the things we’re worried about in the franchise community,” he said. “This may set a precedent for other countries -- the ’me too’ does happen.”

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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