Investment Proposal of Franchise - PDF

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					1.0   General Facts About Malaysia and the Investment Climate

      ‫مل ي س ا‬
      ‫ي‬               Malaysia



      Motto: Bersekutu Bertambah Mutu
      (English: Unity Is Strength)
      Anthem: "Negaraku"

      Capital Kuala Lumpur:            2°30′N 112°30′E
      Largest city:                    Kuala Lumpur
      Official language:               Malay
      Government:                      Federal constitutional monarchy
      - Paramount Ruler                Tuanku Syed Sirajuddin Jamalullail
      - Prime Minister                 Abdullah Ahmad Badawi
      - From the UK (Malaya only) August 31, 1957
      - Federation (with Sabah, Sarawak and Singapore) September 16, 1963
      - Total:        329,847 km² (67th)
                      127,355 sq mi
      - Water (%): 0.3
      - 2006 est. 26,857,600 (45th)
      - 2000 census 23,953,136
      - Density       77/km² (115th)
                      199/sq mi
GDP (PPP) 2005 estimate
- Total $290.7 billion (33rd)
- Per capita $11,201 (61st)
HDI (2003)        0.796 (61st) – medium
Currency:         Ringgit (RM) (MYR)
Time zone:        MST (UTC+8)
- Summer (DST)              Not observed (UTC+8)
Internet TLD .my
Calling code +60
**Putrajaya is the primary seat of government

The Malay Peninsula and indeed Southeast Asia has been a center for trade for
centuries. Various items such as porcelain and spice were actively traded even
before Malacca and Singapore rose to prominence.

In the 17th century, large deposits of tin were found in several Malay states.
Later, as the British started to take over as administrators of Malaya, rubber and
palm oil trees were introduced for commercial purposes. Over time, Malaya
                     ds a                             n                         m    l
b e ca m e th e w o rl ’ l rg e st p ro d u ce r o f ti , ru b b e r, a n d p a l o i. T h e se th re e
commodities along with other raw materials firmly set Malaysia’ e co n o m i           s              c
tempo well into the mid-20th century.

During the 1970s, Malaysia followed the footsteps of the original four Asian
Tigers and committed itself to transition from reliance on mining and agriculture
                                  s                s    sta            n        e
to manufacturing. With Japan’ a n d th e W e st' a ssi n ce , h e a vy i d u stri s
flourished and in a matter of years, Malaysian exports became the country's
primary growth engine. Malaysia consistently achieved more than 7% GDP
growth along with low inflation in the 1980s and the 1990s.

Current GDP per capita grew 31% in the Sixties and an amazing 358% in the
Seventies but this proved unsustainable and growth scaled back sharply to 36%
in the Eighties rising again to 59% in the Nineties led primarily by export-oriented

Macro-economic trend
This is a chart of trend of gross domestic product of Malaysia at market prices
estimated by the International Monetary Fund with figures in millions of
Malaysian Ringgit.

Economy of Malaysia
Currency:            1 Ringgit = 100 sen
Fiscal year:         Calendar year
Trade organizations: APEC, ASEAN, WTO
GDP ranking:      33rd
GDP:              $290bn (2005)
GDP growth:       7.4% (2004)
GDP per capita:   $11,160 (2005)
GDP by sector:    Agriculture (7.3%), industry (33.5%), services (59.1%) (2004)
Inflation:        3.5% (2005)

Pop below poverty line:     8% (1998)
Labour force:               10.26m (2004)
Labour force by occupation: Manufacturing 27%, agriculture, forestry, and
fisheries 16%, local trade and tourism 17%, services 15%, government 10%,
construction 9% (1999)

Unemployment: 3.8% (2005)
Main industries: Peninsular Malaysia - rubber and palm oil processing and
manufacturing, light manufacturing industry, electronics, tin mining and smelting,
logging and processing timber
Sabah - logging, petroleum production
Sarawak - agriculture processing, petroleum production and refining, logging

Trading Partners
Exports:         $140bn (2005)

Main partners:  United States 19.6%, Singapore 15.7%, Japan 10.7%, China
6.5%, Hong Kong 6.5%, Thailand 4.4% (2003)

Imports:          $110bn (2005)

Main Partners:   Japan 17.3%, United States 15.5%, Singapore 11.9%, China
8.8%, South Korea 5.5%, Taiwan 5%, Germany 4.7%, Thailand 4.6% (2003)

Public finances
Public debt:      $104bn (45.5% of GDP)
Revenues:         $22.95bn (2004)
Expenses:         $27.75bn (2004)

For purchasing power parity comparisons, the US Dollar is exchanged at 1.70
Ringgit only.

From 1988 to 1997, the economy experienced a period of broad diversification
and sustained rapid growth averaging 9% annually.

By 1999, nominal per capita GDP had reached $3,238. New foreign and
domestic investment played a significant role in the transformation of Malaysia's
economy. Manufacturing grew from 13.9% of GDP in 1970 to 30% in 1999, while
agriculture and mining which together had accounted for 42.7% of GDP in 1970,
dropped to 9.3% and 7.3%, respectively, in 1999. Manufacturing accounted for
30% of GDP (1999). Major products include electronic components -- Malaysia is
one of the world's largest exporters of semiconductor devices -- electrical goods
and appliances.

During the same period, the government tried to eradicate poverty with a
controversial race-conscious positive discrimination program called New
Economic Policy (NEP). First established in 1971 after race riot known as the
May 13 Incident occurred, it sought to eradicate poverty and end the
identification of economic function with ethnicity. In particular, it was designed to
enhance the economic standing of ethnic Malays and other indigenous peoples
(collectively known as bumiputras in Malay. The NEP ostensibly ended in 1991;
however the policies persist in the form of other programmes such as the
National Developmnent Policy. The policies are enforced overtly through race-
based quotas for low-cost housing units, university placement, business equity
ownership, etc.

Rapid growth was achieved partly through privatisation of inefficient state owned
enterprises, thus subjecting them to commercial pressures and forcing them to
better utilise their resources. Mostly deals were done behind closed doors and
put through rather quickly. In one example Khazanah Nasional alienated shares
in DRB Hicom to Mega Consolidated. This led to such deals being labelled mega
Foreign funds were attracted to invest making the local money market and
bourse liquid. This created opportunity for local businesses to raise capital on the
KLSE, and carry out infrastructure development in areas like
telecommunications, highways and power generation to meet bottlenecks caused
by rapid industrialization. An intense labor shortage created employment for
millions of foreign workers. Subsequent events show that more than 50% were

The influx of foreign investment led to the KLSE Composite index trading above
1,300 in 1994 and the Ringgit trading above 2.5 in 1997. At various times the
KLSE was the most active exchange in the world, with trading volume exceeding
even the NYSE.
Some of the more visible projects from that period are Putrajaya, a new
international airport (Kuala Lumpur International Airport), a hydroelectric dam
(Bakun dam), the Petronas Towers and the Multimedia Super Corridor.
Proposals that were eventually cancelled include the 95km Sumatra-Malaysia
bridge (would have been world's longest), the Mega International Sea and Air
port on reclaimed land in Kedah (would have been worlds biggest) and the KL
  n         ty       d                     d a                l            d s rst ty     l
L i e a r C i (w o u l h a ve b e e n w o rl s l rg e st m a l. A n d w o rl ’ fi ci b u it o ve r
a river)

Concerns were raised during the time about the sustainability of the rapid growth
and the ballooning current account. The mainstream opinion prevalent at that
time was that the deficit was temporary and would reverse once imported
equipment started producing for export. In spite of that, measures were taken to
moderate growth especially when it threatened to overheat into the double digits.
The main target was asset prices, and restrictions were further tightened on
foreign ownership of local assets. Exposure of local banks to real estate loans
were also capped at 20%.
As was widely expected, the current account deficit did narrow steadily, year to
year, from 9% to 5% of GDP.

Malaysia has the largest operational stock of industrial robots in the Muslim

Asian financial crisis and subsequent recovery
   Further information: Asian financial crisis

The year 1997 saw the drastic changes in local scenarios. Foreign direct
investment fell at an alarming rate and Ringgit depreciated substantially from
MYR 2.50 per USD to much levels lower (up to MYR 4.80 per USD at its bottom)
as capital flowed out. The Kuala Lumpur Stock Exchange’ co mposite index fell
from approximately 1300 to nearly merely 400 points in a few short weeks. In
response, the Malaysian government imposed capital controls and pegged the
Malaysian Ringgit at 3.80 to a US dollar while refusing economic aid from
International Monetary Fund (IMF) which came with austere lending conditions.
By refusing aid and thus the conditions attached thereof from the IMF, Malaysia
was not affected to the same degree in the Asian Financial Crisis as Indonesia,
Thailand and the Philippines.
Regardless, the GDP suffered a sharp 7.5% contraction in 1998. It however
rebounded to grow by 5.6% in 1999. The Government of Malaysia predicted
5.8% real GDP growth in the year 2000, but most analysts predicted growth will
exceed 8% for the year.

In order to rejuvenate the economy, massive government spending was made
and Malaysia continuously recorded budget deficits in the years that followed.
Economic recovery has been led by strong growth in exports, particularly of
electronics and electrical products, to the United States, Malaysia's principal
trade and investment partner. Inflationary pressures remained benign, and, as a
result, Bank Negara Malaysia, the central bank, had been able to follow a low
interest rate policy. Later, the country enjoyed faster economic recovery
compared to its neighbors though in many ways, the level of pre-1997 affluence
has yet to be achieved.

The fixed exchange rate regime was abandoned in July 2005 in favor of
managed floating system within an hour of China's announcing of the same
move. In the same week, Ringgit strengthened a percent against various major
currencies and was expected to appreciate further. As of December 2005, there
has been no further appreciation of the ringgit. In spite of the large positive
current account surplus, foreign reserves have started to fall at a rapid rate.
Official statistics released in March 2006, confirmed capital flight of more than
USD 10 billion.


Malaysia is an important trading partner for the United States. In 1999, two-way
bilateral trade between the U.S. and Malaysia totaled U.S. $30.5 billion, with U.S.
exports to Malaysia totaling U.S.$9.1 billion and U.S. imports from Malaysia
increasing to U.S.$21.4 billion. Malaysia was the United States' 12th-largest
trading partner and its 17th-largest export market. During the first half of 2000,
        U.S. exports totaled U.S.$5 billion, while U.S. imports from Malaysia reached
        U.S.$11.6 billion.

        The Malaysian Government encourages Foreign Direct Investment (FDI).
        According to Malaysian statistics, in 1999, the U.S. ranked first among all
        countries in approved FDI in Malaysia's manufacturing sector with approved new
        manufacturing investments totaling RM5.2 billion (US$1.37 billion). Principal U.S.
        investment approved by the Malaysian Investment Development Authority
        (MIDA) was concentrated in the chemicals, electronics, and electrical sectors.
        The cumulative value of U.S. private investment in Malaysia exceeded $10
        billion, 60% of which is in the oil and gas and petrochemical sectors with the rest
        in manufacturing, especially semiconductors and other electronic products.

2.0     Franchising in Malaysia

        As untimely as in the 1940s, Malaysia has observed franchise concepts making
        inroads into the retail vertical. Mainly, it covers 4 areas of retail activities as
        shown below:

            1)   Retail outlets for shoes planned by Bata shoes dealership;
            2)   Petrol station dealership – sales of petroleum products;
            3)   Soft drinks production for local bottlers; and
            4)   Automobile dealership – distribution of passenger cars.

             a as             si       n          s       l     n
        M a l ysi ’ fra n ch i n g i d u stry i stil a t i fa n cy sta g e b u t its participation
        performance has been increasing steadily. One of the pioneers who started
        franchise business in Malaysia is believed to be Singer Sewing Machines.
        However, this novel concept of business expansion and distribution is only
        obvious when fast food restaurants e.g. Kentucky Fried Chicken (KFC), A&W,
                         ds                 r           o     n     a a n                             y
        a n d M cD o n a l ’ b e g a n th e i o p e ra ti n s i M a l ysi i th e 1 9 7 0 s a n d e a rl

        Becoming master franchisees or franchisees to foreign franchises proved to be
        the fastest way to enter the franchise industry as they offer well-known brands,
        tested business models with strong growth opportunities. Most of the local
        players who are active in the foreign franchising sector are large multinational
        companies such as KFC Holdings Bhd, Berjaya Group, KUB Holdings Bhd, Eden
        Group and TT Resources Bhd and several wealthy individual investors. Usually,
        these conglomerates use franchising as a strategy for regional expansion and
        therefore, hold master franchisee rights to a number of other countries in the
        region. At present, foreign franchisees take up 40% of all franchising and US
        franchising alone dominates 70% of this figure.

        In 2003, franchising represented 4% of retail outlets in Malaysia and 5% of total
        retail sales. Fast food dominated the franchising sector, with sales exceeding
        RM1.3 billion yearly2. The total retail sales in 2003 marked RM56.6 billion.

 US and Foreign Commercial Services and U.S. Department of State, 2004
 Innovation Associates Analysis; US & Foreign Commercial Services and US Dept of State 2004; Malaysian
Economic Report
The Ministry of Entrepreneur Development has identified various industries that
have the potential to be franchised and best suited franchise concepts. They are
as listed below:

       Food industry – developing local dishes into fast food business
       Laundry business – catering for the needs of customers in urban areas
       Building maintenance – such as general cleaning and janitorial services
       Construction industry – for the supply of building materials

                The Retail Sector By Value of Sales
               (Amount are quoted in current prices)

       TOTAL RETAIL                                         Clothing, textile, linen, towels,
       SALES IN 2003:                                       blankets and footwear
       RM56.6 BILLION
                              4.70%                         Petrol, diesel, lubricants and
                                       11.90%               others

                                                            Household and personal goods

          49%                                               Food, drinks and tobacco

                                                            Industrial, agricultural,
                                                            business equipment and
                                                            Motor trading and motor
                                5.00%                       accessories stores

                Source: Innovation Associates Analysis; US & Foreign
                        Commercial Services and US Dept of State 2004;
                        Malaysian Economic Report
Total Registered Franchisor and Master Franchisees from
 Different Sectors of the Economy as at 31st March 2005

                                                      Furniture and Landscaping

                  7%     2% 3%                        IT & Telecommunication
                                      8%              Health Care Centres & Products

                                                      Supermarket / Minimarket

    31%                                    12%
                                                      Education Centres &
                                                      Clothes & Apparels

                                                      Services & Maintenances

          Source: RoF, Ministry of Entrepreneur and Cooperative
                  Development, 31 March 2005

    Wholesale & Retail Trade Companies Shareholdings
                       (at par value)

                                                   Nominee Companies
      44.20%                                       Foreigners
                                                   Other Malaysians
                                                   Malaysian Indian
            1.70%                                  Malaysian Chinese


          Source: Innovation Associates Analysis
Monitoring the growth of franchise business through franchise unites gives a
good indication of how successful are the franchisors in growing the business
and the Malaysia’ franchising growth. However, the success of Franchise
Development Programme (FDP) in grooming Bumiputera entrepreneurs is a
challenge that needs to be critically deliberated and studied. It may be that the
entry cost to operate as a franchisee is higher than the entry cost for a typical
retail self-own business.

The characteristics of each retail model make them suitable for differing
situations and needs. Therefore, when a single store decides to expand, or a
new start-up, is planned, business owners must evaluate their needs and
objectives and identify the optimal retail model for their business.

Investment and revenue structure is one of the key considerations in selecting
the retail model for a business to adopt. A company that has a successful
product does not wish to invest in the infrastructure to distribute or deliver the
product to a potentially widely dispersed customer base may opt to adopt a
dealership model or a franchising model, where as a company that is willing to
take on the financial commitment of expanding may do so through chain stores.
Joint ventures or subsidiaries may be a compromise for companies wishing to
maintain equity in their business while still drawing on external funding.

Retail sales in developed markets are more concentrated in the non-food sector
where as emerging countries such as China and India with their huge population
are concentrated on the food sector. Malaysia has been experiencing an
increasing growth in its non-food sector since 1999.
      Comparison of retail markets in Asia

                    China                India               Malaysia         Saudi Arabia
Retail         Ranked first in      Expanding at        7.3% of            Retail sales
Industry        Asia market           a rate of 7%         population is       are
               Fragmented            p.a.                 employed in         proportion of
                industry and         Retail sales         the retail          consumer
                low ROE               as a                 market              expenditure
               Retail sales as       proportion of       Retail sales in     is high,
                a proportion of       consumer             proportion of       hovering in
                consumer              spending is          consumer            the 50%
                spending is           high reaching        expenditure is      range
                high reaching         50%                  29.2%              Trend is
                85%                  Growth in           Retail sales by     towards non-
               Food retail           food retail is       food was 27%        food
                sector is             high                 and 73% non-        products and
                growing              Forecasted           food in 2003        growth rate
                                      growth is           Number of           is 16.5% p.a.
                                      8.3% in 2008         food and non-
                                                           food retailers
                                                           are 10,839
                                                           and 35,121
                                                           respectively in
                                                          Retail sales
                                                           forecasted to
                                                           reach RM67.4
                                                           billion in 2008

Drivers      Emergence of         Foreign             Increasing           High
              middle class          investment           income                proportion of
              families             Affluent            Consumer              young people
             Entry to WTO          middle class         confidence           High level of
             Increasing                                                       disposable
              population                                                       income
              growth                                                          Construction
             Technology                                                       and property
             Foreign                                                          boom
              investment                                                      Foreign

Evolution    Wholesalers            Shopkeepers  Dominated by              Supermarkets
             Traditional            Supermarkets   small                    Hypermarkets
              markets                Hypermarkets   traditional              Food chains
             Supermarkets           Departmental   convenience &            Landmark
             Hypermarkets            stores         neighborhood              malls
             Shopping malls                         stores                   Shopping city
                                                    Supermarkets,
                                                       Hypermarkets
                                                        are    entering
                                                        the market at a
                                                        fast pace

      Comparison of retail markets in Asia

                  Japan                Australia            Malaysia         South Korea
Retail       Retail sales as       Retail sales        7.3% of            Retail sales
Industry      a proportion of        as a                 population is       as a
              consumer               proportion of        employed in         proportion of
              expenditure is         consumer             the retail          consumer
              46%                    expenditure is       market              expenditure
             Non-food retail        39%                 Retail sales in     is 39%
              dominates the         Retail trends        proportion of      Non-food
              total retail sales     is growing in        consumer            retail is at
              at 70%                 the non-food         expenditure is      61% of total
                                     retail sector        29.2%               retail sales
                                                         Retail sales by
                                                          food was 27%
                                                          and 73% non-
                                                          food in 2003
                                                         Number of
                                                          food and non-
                                                          fod retailers
                                                          are 10,839
                                                          and 35,121
                                                          respectively in
                                                         Retail sales
                                                          forecasted to
                                                          reach RM67.4
                                                          billion in 2008

Drivers      Demographic           Demographic       Increasing           Demographic
              trends                 trends             income                trends
             Technology            Low interest      Consumer             Technology
                                     rates              confidence
                                    Low
                                    Retail
                                    Technology

Evolution    Traditional           Traditional       Dominated by         Traditional
              retail markets         retail markets     small                 retail markets
             Convenience           Non-               traditional          Non-
  stores            traditional        convenience       traditional
 Vending           retail markets     and               retail markets
  machines                             neighborhood
 Non-traditional                      stores
  retail markets                      Supermarkets,
                                      Hypermarkets
                                       are entering
                                       the market at a
                                       fast pace
                                              y                    se   vi o         m      n ste s
           In 1 9 9 1 , th e re w a s a n e w l se t u p F ra n ch i D i si n o f P ri e M i i r’
           Department identified 6 types of business models – before the enactment of the
           Franchise Act – that have adopted franchising concept as part of their marketing
           and distribution system. The business models are summarized as below:

             Purest Form                    Similarity to Franchise System                        Least Similar

 Franchisor/             Business              Product             Dealership          Trademark/               Promoter
    Master                 Format           Distribution           Franchise           Brand Name            Franchisee acts
  Franchisee            Franchise/           Franchise/           Franchisee             License             as promoter to
 Franchisor
           v                Local            Licensing             requires to         Franchisee            franchisor.
  (international        Authorized          Franchisee            market               licensed to          Stocks are
  company)              Franchise            obtains                        so s
                                                                   fra n ch i r’        make                  solely supplied
  gives license           Holders            license to            products and                  so s
                                                                                        fra n ch i r’         to franchisor.
  to master            Master               produce and           services in a        products and         Franchisor
  franchisee to         franchisee           distribute            specific             maybe                 involves in
  produce and           acts as              products              geographical         various.              providing
  market its            match-maker          according to          area.               E.g. Walt             resources:
  products.             giving                        so s
                                             fra n ch i r’        E.g. EON,            Disney                capital, raw,
 E.g. Burger           licenses             formula and           Petrol Kiosk         cartoon               material and
  King                  received             methods.                                   character             management
                        from                E.g. Coca-                                                      E.g. PERNAS
                        franchisor to        cola                                                             EDAR (G-Mart
                        appoint local                                                                         stores)
                       E.g.
                        M cD o n a l s,
                        Pizza Hut, 7-

           Source:         Franchise System: A Strategy towards Creating Bumiputera
                 Commercial and Industrial Community. July 1991, page 5-8. Prepared by
                           se   vi o       m     n ste s                              o          a
                 F ra n ch i D i si n , P ri e M i i r’ D e p a rtm e n t; In n o va ti n A sso ci te s

           However, after the enactment of the Act, not all of the alluded business models
                                      se              se         n              ve
           are recognized as fra n ch i s. “F ra n ch i ” h a s si ce b e e n g i n a sta tu to ry
           definition under the Act.

           According to the Innovation Associates Analysis, under Section 4 of the Act, it
                n               se                                                th                      m i
           d e fi e s “fra n ch i ” a s a co n tra ct o r a n a g re e m e n t, e i e r e xp re sse d o r i p le d ,
           whether oral or written, between 2 or more persons of which3:

           1. The franchisor grants to the franchisee the right to operate a business
              according to the franchise system and term determined by the franchisor;
           2. The franchisor grants to the franchisee the right to use a mark, trade secret,
              confidential information or intellectual property owned by the franchisor, and

    Franchise Act 1998 (Malaysia), Section 4
                includes a situation where the franchisor (either a registered user or is
                licensed by another person to use any intellectual property) grants the right
                (that he possesses from another person) to the franchisee to use the
                intellectual property;
           3.   The franchisor possesses the right to administer continuous control during
                              se                           se s       n                o     n
                th e fra n ch i te rm o ve r th e fra n ch i e ’ b u si e ss o p e ra ti n s i a cco rd a n ce
                with the franchise system;
           4.   The franchisor has the responsibility to provide assistance to the franchisee
                to operate hi business including such assistance as the provision or supply of
                materials and services, training, marketing and business or technical
           5.   In return of the grant of rights, the franchisee may be required to pay a fee or
                other form of consideration; and
           6.   The franchisee operates the business separately from the franchisor, and the
                relationship of the franchisee with the franchisor shall not at anytime be
                regarded as a partnership of the franchisee with the franchisor shall not at
                anytime be regarded as a partnership, service contract or agency.

           The condition of franchising in Malaysia reached a certain level of significance
           with the enactment of the Franchise Act 1998. Then, the setting up of a franchise
                  o               t                   m     n ste s    ce          a        th
           d e ve l p m e n t u n i u n d e r th e P ri e M i i r’ o ffi ta ke s p l ce . W i th e n e w
           legislation came the Registrar of Franchise and the formation of industry level
           organizations such as the Malaysian Franchise Association.

           In fact, franchise activities and business opportunities in Malaysia have been
           highly encouraged by the Government of Malaysia. According to the Ninth
           Malaysian Plan, increased emphasis is given to the promotion of the franchise
           industry, as it presented viable opportunities for entrepreneurs to participate in
           structured and well-established business with relatively lower risks and a greater
           probability of success. The brand name, standard operational procedures,
           systematic training and support from the franchisors were among the critical
           factors that contributed to widespread franchised business especially in the food,
           cosmetics and consumer goods segments. While the franchise industry nurtured
           many new and existing businesses for homegrown products and services, there
           remained vast untapped opportunities. During the Ninth Malaysian Plan period, it
           was found that the number of franchisors increased from 90 in 2000 to 204 in

           In the Ninth Malaysian Plan, in order to enhance coordination in the management
           of franchise development as well as increase participation, the Government of
           Malaysia has assigned the Perbadanan Nasional Berhad (PNS) – M a l ysi ’ a as
           National Body – to give the mandate in June 2004 to be the sole agency
           implementing the Franchise Development Programme (FDP). Some of the
           activities implemented under the FDP include product development, franchise
           investment and financing schemes, education and training, promotion and
           marketing as well as research and development to develop homegrown franchise

    Ninth Malaysian Plan 2006 - 2010

Malaysia Franchise Act 1998

The enforcement of the Malaysia Franchise Act 1998 is aimed at creating a
systematic registration system to oversee a well-managed and healthy growth of
the Franchise business in Malaysia.

The existence of the Franchise Act has evoked different reactions from both local
and foreigner supporters of the franchise industry for the implementation and
enforcement of the Act. However, judging by the background of the industry in
Malaysia, the existence and enforcement of the law is something that is highly
essential based on the following:

       The Act, in its force is hoped that future franchisors, master franchisees
        or franchisees have guidance on basic matters that must be analyzed and
        addressed before getting involved into the business.
       The Act can prevent or deter attempts at fraud, deception and
        discrimination in the offer of franchise business sales and prevent the
        distribution of disclosure documents that contain confusing and
        inaccurate information or that exclude important information to the future
       The Act encourages good business practices such as the responsibility to
        be cautious and fiduciary, besides protecting the system and the
                 so           g
        fra n ch i rs’ co p yri h t fro m b e ing duplicated.
       The Act will assist the Government of Malaysia to supervise and monitor
        the growth of the industry through the implementation of the Franchise
        Development Programme.

Other related laws

   1. Contract Act 1950
   2. Trademark Act 1976
   3. Copyright Act 1987
   4. Patent Act 1983
   5. Other regulations – Company Act 1965, Sales of Goods Act 1957, The
      National Land Code/Law 1965 and Crime Act
   6. Common Law

Franchise Agreement

This document draws together the whole transaction and should accurately
reflect the promises made, whilst ensuring that there are sufficient controls to
protect the integrity of the system. It is an insurance policy for both parties if
things go wrong.

Features include:
The establishment and identification of the franchisors proprietary interest.
This deals with the franchisor's business system and know how, his trade marks,
trading names and copyright material.

The nature and extent of the rights granted to the franchisee. This deals the
the operation of the franchise, the right to use copyright material, trade marks,

The period of agreement. This deals with the franchisees legal position in the
tied supply of products for a period of time, normally five years. Most agreements
allow for the franchisee to exercise their right to renew after this period of time.

The initial and continuing obligations of the franchisees. This deals with the
financial burden of setting-up in compliance with the franchisor's requirements,
undertaking to comply with operating, accounting and administrative systems to
ensure essential information is available to both parties.

The operational controls imposed upon the franchisee. This ensures that
operational standards are properly controlled - failure to maintain standards in
one unit can harm the whole network.

Sale of the business. If a franchisor is highly selective when considering
applications for new franchises, there is every reason for him to be equally
selective about those who want to join by buying a business from an established

Death of the franchisee. In order to give the franchisee peace of min, provision
should be made to demonstrate that the franchisor will provide assistance to
enable the business to be preserved as an asset to be realised.

Arbitration. This deals with the appointing of a private arbitrator. This will prove
advantageous to both parties when things go wrong.

Termination and its consequences. Invariably, there will be express provision
for the termination of the agreement in the event of a default by the franchisee.

Franchise Associations

   1. The Malaysian Franchise Association

       The Malaysia Franchise Association (MFA) was founded on 18 January
       1994, by 44 founding members. Most are franchisors, master franchisees,
       franchisees and supporting institutions included the FDP organized by the
        m e            o                  n o          t             m     n ste s
       i p l m e n ta ti n a n d C o o rd i a ti n U n i o f th e P ri e M i i r’ D e p a rtm e n t
       at that time.

       The official launch of MFA took place simultaneously with the launch of
       the FDP and the International Franchise Conference and Exhibition, co-
       organized by the Coordination and Implementation Unit, MFA, and the
       International Franchise Association (IFA). MFA was then registered under
       the Association Act 1966 on 30 August 1994.
The objectives for the formation of MFA are:

                                n e               n      rn
     To unite the members’ i vi w o f p ro te cti g th e i i te re st
    To cultivate and protect the image of franchising and encourage
     ethical business practice
   T o su p p o rt th e g o ve rn m e n t’ e ffo rts i e n co u ra g i g th e
                                           s           n              n
           p         s
     B u m i u te ra ’ direct and active involvement in franchising
Meanwhile the main functions of MFA are:
   To set and enforce a code of professional business ethics
     amongst members
   To set as a registry of information pertaining to franchise business
     operating or intending to operate within the country
   To coordinate and offer training programs, seminars and
     exhibitions specially oriented to franchising matter
   To undertake promotional activities to promote franchising as a
     successful marketing business concept
   To provide input and liaise with government departments and/or
     agencies on matters concerning franchising and its application
   To serve a forum for exchange of experience and expertise
     amongst members
   To establish and maintain affiliations with counterpart
     organizations globally
   To develop and maintain affiliations with local industry trade
     organizations representing distributors, retailers and service
     industry generally
   To sponsor franchise trade and investment missions to other
   To host international franchise trade and investment missions ad
     assist foreign players of the industry in familiarizing with the
     potentials of franchise business in Malaysia

MFA cooperates with Kota Francais Sdn Bhd and the Malaysian
Resources Corporation Bhd to develop and promote the concept of
           se C i
“F ra n ch i                   se C i i a b u si e ss d e v elopment centre
                ty”. F ra n ch i    ty s       n
concept, including shopping centre, that groups most franchise
businesses in one location and under one roof. The first Franchise City
was opened in Shah Alam in mid 1999.

As a self-regulatory body, MFA also acts as a mediator to resolve
conflicts among members, besides offering a special programme for the
franchise selection process to make the franchisor-franchisee marriage

MFA is also one of the founding member of the World Franchise Council
(WFC), the highest franchise body that affiliate franchise associations in
33 countries in the world – South Africa, United States of America,
Argentina, Australia, Austria, Holland, Belgium, Brazil, United Kingdom,
Canada, Czechoslovakia, Denmark, Equador, Philippines, Finland,
Greece, Hong Kong, Hungary, Italy, Japan, Germany, Malaysia, Mexico,
   New Zealand, France, Poland, Portugal, Spain, Singapore, Sweden,
   Switzerland, and Yugoslavia and a federation, that is the European
   Franchise Federation (EFF).

   Apart from the above, MFA has taken the lead to initiate the formulation
   of the Asia-Pacific Franchise Confederation (APFC), in which the pro-tem
   members are the franchise associations from Australia, Philippines, Hong
   Kong, Indonesia, Malaysia and New-Zealand. At its inaugural meeting on
   24 September 1998 in Kuala Lumpur it was the consensus to appoint
   MFA as the first secretariat.

2. The World Franchise Council

   The World Franchise Council (WFC) was founded in 1994, a result of a
         si            n              o
   d e ci o n m a d e i th e N a ti n a l F ra n ch i             a o
                                                     se A sso ci ti n s’ E xe cu tives
   meeting held on 14 February 1994, simultaneously with the IFA
   Convention in Las Vegas, US. The WFC was established based on:
         To recognize and determine related matters with regard to the
            information, experiences and know-how of the franchise business
            for sharing internationally and to provide the necessary
            mechanism to realize the purpose.
         To act as a franchise information resource centre internationally
            and to represent the consensus of opinions of the affiliated
            franchise organizations to other international bodies including the
            United Nations and the International Chamber of Commerce.
   WFC membership is open to franchise associations from all over the
        d     s a                  a o       e y                            o ty    ts
   w o rl . It’ l w s a n d re g u l ti n s cl a rl sta te th a t th e m a j ri o f i
   members are companies that run franchise businesses. Only one
   franchise association can be accepted as a WFC member from a country.
   (However the exception is Hong Kong)

3. The International Franchise Association

   The IFA was founded in 1960 in the US. The IFA now has about 700
   members among franchisors (representing 70% of all franchisor
   companies in the US) and more than 29,000 franchisees and suppliers.
            a                                                                       g
   A t th e l u n ch o f th e IF A 1 9 9 8 “M e m b e r-Get-A-M e m b e r” ca m p a i n o n 8
   March 1998 in Las Vegas, then IFA Chairman, Jeffrey T. Williams,
   targeted 1,000 franchisor memberships for 2000.
3.0        Reasons to venture into Malaysia

           Support from the Government of Malaysia

           During the Ninth Malaysian Plan period, franchise development programmes will
           be further strengthened to provide for more effective franchisor-franchisee
           matching, product development and training. To enable more entrepreneurs to
           participate, increased emphasis will be given to identifying and promoting
           franchises that require a relatively lower capital base. PNS will devise new
           approaches to promote local franchise product development. Moreover, existing
           financing schemes will also be reviewed and procedures simplified to improve
           access to funding. In addition, co-operatives will be encouraged to leverage on
           their extensive networks and large membership base to develop franchises. An
           integrated database on franchising will be established to provide for better
           planning, monitoring and collaboration among domestic and foreign franchise
           entrepreneurs. The more successful homegrown franchisors will be encouraged
           to expand overseas and seize opportunities presented by regional and
           multilateral arrangements such as the ASEAN Free Trade Areas (AFTA) and
           Free Trade Agreements (FTAs)5.

           The Government of Malaysia has allocated RM600mil for Franchisepreneur
           Development Programme and Franchise Investment and Financing Scheme by
           PNS, said Entrepreneur and Cooperatives Development Minister Datuk
           Mohamed Khaled Nordin.

           PNS had restructured its organisation by establishing a Franchise Division and
           mobilised PNS Francais Sdn Bhd as a PNS investment company in franchise
           business field.

           According to Mohamed Khaled, the programme was aimed to open more
           opportunities and space to develop franchise entrepreneurs apart from providing
           for investment and financing facilities.

                  n                                          se
           “P N S i tro d u ce d th e n e w te rm `F ra n ch i p re n e u r’ to re p re se n t fra n ch isors,
           franchisees including franchisee areas, unit and multi-units.

                                        d      fi n                   se                                 o
           “A m o n g p ro g ra m m e s i e n ti e d i th e F ra n ch i P ro g ra m m e s a re E d u ca ti n a n d
           Training Programme, Local and Overseas Promotions, Franchise Right of
           Purchase, Product Development, Database, Franchisor Credential Programme
                           se            n        vi        d                    e
           a n d F ra n ch i e M a tch i g A cti ty,” sa i M o h a m e d K h a l d .

    Ninth Malaysian Plan 2006 - 2010
Franchise business is promoted in Malaysia
By Ronnie Lim, Managing Director of Deloitte KassimChan Tax Services Sdn

Being a food haven, Malaysia offers many opportunities for franchising food
products. Further, production of goods such as batik and rattan products may
also be franchised.

Franchising is a method of doing business by which a franchisee is granted the
right to offer, sell or distribute goods or services under a marketing plan or
system prescribed by a franchisor. This includes:
     A manufacturing franchise – manufacture and sale under licence of
        proprietary products;
     A product franchise – distributorship agreements; and
     Business format franchising – an arrangement allowing a person (the
        franchisee) to carry on a business under the trade name and using
        methods developed by another (the franchisor).

The Franchise Agreement

In a typical agreement, the franchisor provides the trademarks, know-how and
training, grants various rights, and supplies a number of goods and services to
the franchisee in return for payment. The franchise agreement may provide to the
franchisee the right to operate a franchise for a period (often five or 10 years);
initial services such as advice on site selection and lease negotiation, training,
recruitment and assistance with management; shop fittings, tools and any
equipment necessary for the business; ongoing services, such as marketing,
advertising and updating of the franchise; and stock-in-trade.
The types of franchise fees payable under franchising agreements vary
depending on the structure of the franchise and the rights granted to the

          so s            ti
F ra n ch i r’ T a x P o si o n

In most instances, income from the exploitation of a business idea and the
provision of services derived by a franchisor will be subject to corporate tax.

To the extent that the initial payment is attributable to goods and services
provided by the franchisor, it will undoubtedly be a trading receipt. However, a
substantial element of the consideration will usually represent the cost of entry to
the franchise system, including consideration for the grant of the franchise or

          se s             ti
F ra n ch i e ’ T a x P o si o n

The initial large lump sum franchise fee is usually regarded as a capital payment
and not deductible for tax purposes. Recurring franchise payments such as
royalty and service support fee are tax deductible.

Presently, there are specific orders issued by the Finance Ministry that provide
for double deduction of expenses incurred on Malaysian brand-name goods.
      A manufacturing company that incurs cost of acquisition of proprietary rights is
      given a tax deduction of the cost of acquisition of the rights over a period of five

4.0   Brands Operating in Malaysia and Its Success Stories

      SINMA - Making Every Business Venture Grow...

      SINMA has been adorning beautiful fashion jewellery on satisfied consumers for
      almost two decades. Still, SINMA a do not intend to stop there. With a time-
      proven business model, we have grown into a highly successful retail chain.
      However, SINMA believe that the opportunity for SINMA to grow is not something
      they should keep to themselves. It is also something they want to build and share
      with the rest of the world. SINMA have already set everything in motion for
      SINMA's global future.

      "Making every girl pretty" is the motivating factor behind everything they do at
      SINMA. Because they understand the desire of girls of all ages, including little
      girls, teenagers, working executives and mature women, they are able to provide
      products and services to fulfill their every whim. This is the same dedication
      SINMA will put behind our efforts into our business partners by making every
      business venture grow globally. SINMA's simple, smart formula for success
      evolved from years of going against all odds. Founder Mr. Lee Hwa Cheng has
      built the SINMA's business model from the ground up since 1986.

      Today, it is an enviable business that has survived three major recessions and
      become Malaysia's biggest fashion jewellery retail chain.

      Chicken Rice Shop in regional franchising plan

      The Chicken Rice Shop expects to start franchising its business regionally within
      the next two years.

      Indonesia will be the first destination for the restaurant group, followed by
      Australia, Singapore and other Asian countries.

      Indonesia was chosen due to its high population, adding that the company would
      be banking on its halal tagline to attract the Muslim market there.

      As for expansion within Malaysia, the company was planning to open eight more
      outlets throughout Peninsular Malaysia in the next six months.

      To date, there are a total of 24 outlets in the peninsula. The first Chicken Rice
      Shop was opened in June 2000 at USJ, Subang Jaya.

      On the investment for each of its restaurant it was between RM300,000 and
      RM500,000 per outlet, depending on the size.
On sales, the company's 24 outlets registered an average sales of RM30mil per
annum and this was expected to increase with the additional outlets.

Malaysian Marrybrown Fried Chicken Goes International

The husband and wife team of Lawrence Liew and Nancy Chan are the new
names to watch in the international fast food franchising fraternity. Their rapidly
growing Marrybrown Fried Chicken system is the first Malaysian fast food
company to go international via the franchising system.

Liew is the executive chairman and chief executive officer while Chan is the
managing director, and both of them holdsimilar capacities in Marrybrown
International Fast Food. The latter is responsible for the setting up of Marrybrown
Fried Chicken outlets outside Malaysia through appointed master franchisees in
the respective countries.

The Johor, Malaysia-based Company, founded in 1981, now has over 100
company-owned and franchised fast food restaurants in Malaysia, China,
Singapore, Brunei, India and the United Arab Emirates (UAE). There are 95
company-owned and franchised outlets throughout the peninsula. Overseas, it
has 16 franchises in China, seven in southern India, two in Brunei, three in the
UAE and one in Singapore.

The company had also been negotiating with several parties interested in
becoming master franchisees in Afghanistan, Australia, Cambodia, Iran,
Indonesia, Laos, Myanmar, Russia, South Africa, Thailand and Vietnam.
The company has laid a five-year program starting from this year to open
franchised outlets in these places.

Sealing the contract for the master franchisee was not just a matter of getting
money from the licensee but also included help finding the right location,
recruiting frontline staff, logistics, lining up the menu and investigating the
existing players in the market. Wwhenever they were on business trips overseas
they would patronize as many fast food joints as they could, in order to see what
other players were offering to their customers in terms of pricing and serving
portions, and tailor their own offerings accordingly.

Marinating ingredients for chicken and fish as well as sauces for all the outlets
are manufactured in Malaysia to standardize the taste of Marrybrown fried
chicken everywhere. However, the company is quite flexible when it comes to
introducing other menu items popular with locals of the respective countries -thus
an outlet in Dubai may have different offerings than one in China.

The UAE outlets served chicken satay as the dish was similar to kebab. They
also serve loose rice in Arab countries, rather than the sticky rice popular in
Southeast Asia.

The company's first Middle East outlet was set up in late January this year at
Diera, Dubai, whiles the second and third are in Jebel Ali and Sahara Mall.
The balance 100 outlets would be in other Middle Eastern countries, with the
majority in Jeddah, Medina and Mecca in Saudi Arabia, as these are the largest

Over two million Muslims visiting Mecca and Medina for their haj and almost one
million performing umrah outside the haj months, the company could not ignore
the potential. The Middle East region would see about 120 Marrybrown
restaurants within the next five years, of which 20 outlets would be in the Gulf
countries of Abu Dhabi, Oman, Kuwait and Bahrain.

Secret Recipe

Secret Recipe, a lifestyle café chain has become a household name following its
debut in Malaysia since 1997. Secret Recipe has successfully established its
brand name in Malaysia, Singapore, Indonesia and Thailand by virtue of its fine
quality cakes, fusion food and distinctive service.

The company has registered an impressive double digit growth for the past 5
years. In a short period of seven years, Secret Recipe has experienced a rapid
growth of over 100 cafes throughout the region.

Secret Recipe continuously strive to surpass our own commitments and to be
recognized as a leader in our industry. As a testimony of our commitment to
excellence, Secret Recipe has earned numerous accolades; some of the more
prominent ones are:

                         ti
       M o st C o m p e ti ve C o m p a n y A w a rd 2 0 0 3 ”
           a a
       M a l ysi B o o k o f R e co rd 2 0 0 3 ”
      Superbrand of Malaysia 2003-4 ”
                          l
       S M I B ra n d B u id e r o f T h e Y e a r A w a rd 2 0 0 4 ”
              l
       E xce le n t F o o d A w a rd 2 0 0 4 ”
                         l
       P ro d u ct E xce le n ce A w a rd 2 0 0 5 ”
      Most Promising Franchisor of The Year Award 2005-6 ”
           a a                a
       M a l ysi B e st H a l l R e sta u ra n t o f T h e Y e a r 2 0 0 5 ”

In the year 2006, Secret Recipe plans to make its presence in India, China and
West Asia.

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