A&W was the first fast food company that brought the idea of franchising into Malaysia in 1967. (Layhwa Teh, 2003). However, Franchising were better known and starts to expand gradually in Malaysia after the year 1992 when government began promoting the sector. The government's agenda is to increase the number of
"bumiputra" (ethnic Malays and other indigenous groups) entrepreneurs in the country through franchising by offering them significant financial and training support. The government efforts had been effective, as bumiputras now represents at least 40% of franchise owners in Malaysia, up from less than 10% ten years ago.
(source). Interestingly, more non-bumiputras are entering the industry for they are recognizing franchising as an effective strategy for regional expansion. Furthermore, with increasing competition regionally, local manufacturers are looking towards franchising as a way to diversify their operations.
4.1.2.1 Strong Government support
Under the 9th Malaysian Plan (9MP), the country's economic development plan for 2006-2010, franchising has been identified as one of the growth areas for the structural change and upgrading of the distributive trade industry. The government allocated US$26.3 million (RM100 million) to the Ministry of Entrepreneur Development to promote, market, train, and finance the Franchise Development Program (FDP) with the objective of establishing 1,000 franchisees and 50 new
Although FDP encourages the development of home-grown franchises, foreign franchises that contribute capital, technology transfer, expertise, entrepreneurial development, and human resource development are most welcome. The government recognizes that it has to learn from the developed countries since franchising is relatively new in Malaysia.
The Malaysian government has allocated funds to various federal agencies, including Perbadanan Nasional Berhad (PNS) and Permodalan Usahawan Nasional Berhad (PUNB), to develop and enhance local franchises, acquire master franchises, master licenses and encourage sub-franchises among the bumiputras.
4.1.2.2 Financial Support
Many financial assistance programs and facilities created under the Ministry of Entrepreneur Development to promote franchising among bumiputra middle class entrepreneurs. Although preference is given to bumiputras, others are also allowed to apply.
The Programs that includes are such as Credit Guarantee Corporation where it guarantees up to 80%-100% of commercial loans obtained by franchise companies.
Beside that The Franchise Development Assistance Scheme provide financial assistance up to a maximum of US$26,316 (RM100,000) or 90% of the total development cost, whichever is lower. Further more Permodalan Usahawan Nasional Berhad (PUNB) give out loans in return for equity holding. (Layhwa Teh, 2003).
Further more, foreign franchisors can benefit from the above programs if the local partner or franchisee is incorporated in Malaysia.
4.1.2.3 Market Trends
There are over 2,500 franchising outlets in Malaysia in sectors ranging from food and beverage to automotive related sector (car sales, service centres, tire services), clothes and fashion, computer & internet services, beauty and health, hotels and tourism agencies, cleaning services, pharmacy, souvenirs, jewellery, printing, photo-shops, etc. (refer to appendix 3) As of September 2005, 448 franchises have applied for registration with Registrar of Franchise (ROF). Of these, 339 have been approved. Approximately 40% of the approved applications are for foreign franchises, which the U.S. dominates.
Asmah Zaidani. (2000) mentions that Franchising, which contributes over 12% of the country's GDP, has been growing at a rate of 10% over the past few years. It represents approximately 4% of the retail outlets in Malaysia and accounts for 5% of total retail sales. Comparatively, the local industry has a high potential for growth since the franchising industry in the U.S. contributes more than 40% to its total retail sales. Although the market was impacted by the Asian financial crisis in 1997, it is recovering. It is expected to continue to grow due to the strong support of the government.
Fast foods dominate the franchising sector with estimated annual sales exceeding
$342 million (RM1.3 billion). Asmah Zaidani. (2000). With rising disposable income, growing appetite for fast food (especially among Western-influenced young adults), the market outlook is good. As these young adults raise families of their own, they are likely to take their kids to fast food eateries, thus building a new generation of fast food lovers.
Furthermore, the local industry is currently going through an interesting development phase where it is not only growing in terms of volume but also in terms of product variety. Industry players are now more adventurous to explore non-food based franchise business. An example is PNS' purchase of the Dwyer group franchise.
Halim Hilman Abdullah. (2005).
4.1.3 Competition
4.1.3.1 Foreign Franchises
The U.S. accounts for over 70% of foreign franchise sales in Malaysia, followed by the U.K., Taiwan, Singapore, and Australia. U.S. franchises dominate the fast food and restaurant industry and include the following: Kentucky Fried Chicken (KFC), McDonalds, A & W, Burger King, Starbucks, Seattle's Best Coffee, Dunkin Donuts, Pizza Hut, Domino Pizza, Shakeys Pizza, Kenny Rogers Roasters, Long John Silvers, Dairy Queen, TGIF, Chilis, Hard Rock Cafe, Planet Hollywood, Baskin Robbins, Haagen Dazs, Swensons, Famous Amos, Auntie Annes, Outback Steak House.
Due to the high capital investment required for a foreign franchise, owners of foreign franchises tend to be Malaysian conglomerates and wealthy investors. As more and more manufacturing heads towards China and other neighbouring low-cost labour markets, Malaysian manufacturers are beginning to look towards services and franchising as a way to diversify their operations, often in very different sectors.
Halim Hilman Abdullah. (2005).
Large local conglomerates such as KFC Holdings Bhd, Berjaya Group, KUB Holdings, TT Resources Bhd and HPL Holdings Ltd (based in Singapore) are active players in Malaysia’s franchising market, each holding a number of foreign and local
franchises. Most of these conglomerates use franchising as a strategy for regional expansion and, therefore, also hold master franchisee/licensee rights to a number of other countries in the region.
KFC, which entered the Malaysian market in 1973, is the most successful franchise and dominates the market with 300 outlets and 55% market share. KFC Holdings Bhd, a publicly-listed company in the Kuala Lumpur Stock Exchange (KLSE), also holds the franchise for Pizza Hut and Seattle's Best Coffee. In total, KFC Holdings Bhd controls over 60% of the fast food market in Malaysia.
Berjaya Group, a major conglomerate listed on KLSE, ventured into franchising in 1984 with the establishment of 7-Eleven convenience stores in Malaysia. They have since acquired the rights to Kenny Rogers Roasters, Roadhouse Grill, and Starbucks Coffee, making them one of the major players in the industry. http://
(www.berjaya.com.my)
4.1.3.2 Local Franchises
Since there is no significant presence of other foreign franchises in Malaysia, the U.S. franchises are mainly competing among themselves and with a few successful local franchises. Home-grown food outlets such as San Francisco Coffee, San Francisco Steakhouse, Chinoz and Mississippi Slims have been successful in marketing themselves as western food outlets which is in direct competition with the U.S. food franchises.
The largest local franchise is Edaran Otomobil Nasional (EON) which was
franchised outlets with annual sales of $1 billion, making it the country's largest franchise.
Although the Malaysian government is encouraging the development of home-grown franchises through various programs, it will take time to develop them to a level where they can compete in the global market. A number of home-grown franchise schemes have started penetrating foreign markets. These include Marrybrown Fried Chicken (fast food), England Optical (optical shop), Royal Selangor (crafts/gifts), Nelson's (fast food) and Bonia (shoes & bags). Marrybrown Fried Chicken which was founded in 1981 has over 100 outlets in Malaysia, Singapore, Brunei, China, India and the United Arab Emirates.
Since home-grown franchising is still in its infancy stage, the government recognizes the benefits of learning from foreign franchises with proven business models and track records. Therefore, it encourages leading foreign franchisors to set up operations in Malaysia.