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Opportunity Malaysia. US Mission to Malaysia.



 

Franchising Market

SUMMARY

Franchising in Malaysia is still in the early stages, with growth really starting only in1992 when the 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.  This has been quite effective, as bumiputras now represents at least 40% of franchise owners in Malaysia, up from less than 10% ten years ago.

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.

Overall, strong government support assisted the growth of the industry which has been registering a healthy 10% growth over the past few years.  There are over 2,500 franchising outlets in the country representing more than 240 products.  The local industry is estimated to be worth more than $2.6 billion and should continue to grow with continuing government's support.

Around 40% of franchises operating in the country are foreign franchises, with U.S. franchises accounting for 70%.  U.S. franchises are very popular here and their target market segment will continue to grow with rising disposable income and increasing Western-influenced young adults.

Although the government has been trying to encourage and promote the home-grown franchise industry, it is still at its infancy stage.  The government plans to establish around 50 new franchises in the country over 2001-2005 under the 8th Malaysian Plan.  Since it takes at least two years to create a successful home-grown franchise, the fastest way of establishing new franchises is to purchase foreign franchises.  Therefore, U.S. franchises with proven business systems and track records are encouraged to operate here.

There appears to be tremendous growth potential in the local industry since franchising contributes only 5% of total retail sales in Malaysia compared to more than 40% in the U.S.  Best prospects identified for the franchising sector in Malaysia include :

  • Casual fast-food outlets and restaurants;
  • Education and training products/programs for English, life sciences, leadership, child development, and other adult training programs;
  • Services, such as pharmacy, healthcare, nursing, senior care, printing, cleaning, plumbing,
  • car servicing & maintenance;
  • Information technology, such as computer services;
  • Gift and souvenir shops;
  • Franchise consultancy.

A.  MARKET OVERVIEW

Background

Franchising in Malaysia has come a long way since the introduction of the Singer sewing machine stores in 1948.  These were later followed by Bata shoe outlets, automobile and gas station dealerships, and soft drink production by local bottlers.  Although the first fast food franchise (A&W) was established in 1967, it wasn’t until the 90's that franchising really took-off in Malaysia.

 

Recognizing that franchising was one of the fastest ways to create entrepreneurs and increase the numbers of middle class bumiputras, the Prime Minister’s office established a franchise development division in 1992 which administers the Franchise Development Program with the objective of :

  • increasing the number of entrepreneurs as franchisors, master franchisees and franchisees; and
  • developing home-grown products and services into franchise businesses.

The franchise development division was later transferred to the Ministry of Entrepreneur Development in 1995.  Malaysia's stable political and economic environment and strong government support has contributed to the growth of the sector.

In 1994, the government established the Malaysian Franchise Association (MFA) as a self-regulating body for the franchising industry, to assist the government develop and promote its franchising program.  Working closely with the Ministry of Entrepreneur Development, MFA provides recommendations, formulates strategies, fosters training, development, and strategic planning for the industry.  Together with the Ministry, MFA also organizes Franchise International Malaysia (FIM), the annual franchising exhibition and conference in Malaysia.  With over 80 members, MFA is actively providing training and seminars to its members and aspiring franchisees.  The Ministry also sponsors trade delegations to international franchise expos.

In 1998, the Franchise Act was introduced to regulate the franchise industry in Malaysia. Its purpose is to track the growth of franchising and regulate and protect both franchisors and franchisees.   According to the Act, all franchisors that are selling their franchises in Malaysia are required to register with the Registrar of Franchise (ROF), which is under the Ministry of Entrepreneur Development.

Strong Government Support

Under the 8th Malaysian Plan (8MP), the country's economic development plan for 2001-2005, 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 franchisors (and hopefully, building 1,000 entrepreneurs) over the five-year period. 

Although FDP encourages the development of homegrown 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.

Perbadanan Nasional Berhad (PNS), formerly known as PERNAS, was re-operationalized by the Malaysian Government after a management buy-out of PERNAS at the end of 1997.  PNS was given the mandate to develop and increase the number of middle-class bumiputra entrepreneurs in the country, using the management buy-out proceeds of $197.3 million (RM750 million).  Franchising was one of the strategies PNS was using to groom new bumiputra entrepreneurs.  To date, it has invested $157.9 million (RM600 million) in 127 companies and is responsible for creating 186 new entrepreneurs, many of these through franchising.

At the end of 2001, under the previous management which was a very strong promoter of franchising, PNS signed agreements with two American franchise groups, Dwyer and El Torito (see table below) to enable them to operate as master franchisees in Southeast Asia, with the intention of eventually awarding sub-franchises to bumiputra entrepreneurs. 

U.S. Franchiser Brief Profile
 Dwyer group Provides a diverse array of specialty services, including maintenance of electrical, heating and air-conditioning units, carpet dyeing and cleaning, maintenance of glass windows in buildings.
 El Torito Operates full-service Mexican restaurants and cantinas (bars)

PNS was negotiating with Service Master (U.S.) which provides service in ground landscaping and maintenance, housekeeping, pest control but this has been put on hold.

The new PNS management that came on board in early 2003 is apparently placing less emphasis on franchising and has created a new fully-owned subsidiary, PNS Francais Sdn Bhd to handle its franchising business.  Nevertheless, PNS will still continue to provide financial assistance in the form of loans to aspiring franchisors and franchisees.

Financial Support

Many financial assistance programs and facilities have been 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.   Programs include:

  • Credit Guarantee Corporation:  guarantees up to 80%-100%  of commercial loans obtained by franchise companies.
  • The Franchise Development Assistance Scheme:  financial assistance up to a maximum of US$26,316 (RM100,000) or 90% of the total development cost, whichever is lower.
  • Permodalan Usahawan Nasional Berhad (PUNB): loans in return for equity holding.
  • Perbadanan Nasional Berhad (PNS):  soft loans.

Foreign franchisors can benefit from the above programs if the local partner, or franchisee is incorporated in Malaysia.

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 centers, tire services), clothes and fashion, computer & internet services, beauty and health, hotels and tourism agencies, cleaning services, pharmacy, souvenirs, jewelry, printing, photo-shops, etc.  As of September 2002,  348 franchises have applied for registration with ROF.  Of these, 239 have been approved.  Approximately 40% of the approved applications are for foreign franchises, which the U.S. dominates.

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.  

The local franchising industry, estimated to be worth more than $2.6 billion (RM10 billion) has more than 240 products at present compared to 125 products in 1995. 

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).  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.

B.  COMPETITION

Foreign Franchise

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 neighboring low-cost labor markets, Malaysian manufacturers are beginning to look towards services and franchising as a way to diversify their operations, often in very different sectors.

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.

The top performers in the fast food segment are KFC, followed by McDonald’s, and Pizza Hut.  Since a large portion of the population is muslim and does not eat pork, chicken is very popular and KFC is one of the major contributors to the KFC Asia Pacific‘s revenues.

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.

There are still relatively few U.S. franchises appearing in sectors other than food & beverage.  These include Levis (Apparel), 7-Eleven (convenience stores), IB Your Office (business center), Global Travel Network (travel agency),  Chem-Dry (cleaning service), and recently Mail Boxes Etc.

Major U.S. Franchises in Malaysia:

Franchise Local Franchise

Holder

No. of Outlets Year

Established

Territorial

Rights

1.  Kentucky Fried Chicken

2.  Pizza Hut

3.  Seattle's Best Coffee

KFC Holdings Bhd 300

98

3

1973

1984

2001

Malaysia, Singapore, Brunei

Malaysia, Singapore

Malaysia, Singapore, Brunei

4.  Kenny Rogers Roasters

5.  Roadhouse Grill

6.  Starbucks Coffee

7.  7-Eleven

Berjaya Group

 

34

3

24

188

1994

1994

1998

1984

36 countries in Asia Pacific

36 countries in Asia Pacific

Malaysia

Malaysia

8.   A & W KUB Holdings Bhd 33 1967 Malaysia, Singapore, Brunei, Thailand, Hongkong, Korea, Philippines
9. Gloria Jean's Coffee TT Resources Bhd 15 1999 Malaysia, Singapore, Brunei, Thailand
10.  Dunkin Donuts Golden Donuts Sdn Bhd

(individual investors)

25 1986 Malaysia
11. Baskin Robbins Golden Scoops Sdn Bhd

(individual investors)

    22 1988 Malaysia
12. Haagen Daz

13. Hard Rock Café

14. Planet Hollywood

HPL Group (Spore) 12

1

1

1993

1988

1999

Malaysia, Singapore

13 countries in Asia

Malaysia and Guam

15.  TGI Friday's Melewar Group

(Negeri Sembilan Royalty)

4 1994 Malaysia, Thailand, Singapore, Indonesia
16. Chili's Restaurant T.A.S. Group (Pahang Royalty) 4 1994 Malaysia
17.  McDonalds Golden Arches Restaurants Sdn Bhd

(McDonald's Corp, US owns 49%)

167 1982 Malaysia
18.  Burger King Cosmo Restaurants Sdn Bhd (individual investors) 9 1997 Malaysia
19.  Domino's Pizza Dommal Food Services Sdn Bhd (individual investors) 20 1997 Malaysia
20.   Shakey's Pizza Shakey Restaurants Sdn Bhd (individual investors) 27 1988 Malaysia

(holds the trade mark for Shakey's in Malaysia, independent of Shakeys in U.S.)

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.  Homegrown 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 established in 1986 to distribute Malaysia's national car, "Proton".  EON has over 250 franchised outlets with annual sales of $1 billion, making it the country's largest franchise.

Although the Malaysian government is encouraging the development of homegrown 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 homegrown 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.

SALES PROSPECTS

There are many opportunities for U.S. franchisors in the Malaysian market, especially for those willing to structure their franchising fees reasonably and emphasize training.

Franchising has excellent growth potential here due to:

  • the government's strong promotion and support for the franchising industry;
  • popularity of U.S. franchises;
  • franchising only accounts for 5% of Malaysia’s annual retail sales  (compared to 40% in U.S.);
  • relatively high purchasing power  (per capita Purchasing Power Parity of almost $9,000  and per capita income of $3,800), Malaysia recorded 8.3% GDP growth in 2000 and was one of the countries most successful in bouncing back from the 1997 financial crisis which swept southeast Asia.

Best prospects identified for the franchising sector in Malaysia include :

  • Casual fast-food outlets and restaurants.
  • Education and training products/programs for English, life sciences, leadership,  child development, and other adult training programs.
  • Services, such as pharmacy, healthcare, nursing, senior care, printing, cleaning, plumbing, car servicing & maintenance.
  • Information technology, such as computer services.
  • Gift and souvenir shops.
  • Franchise consultancy

C.  MARKET ACCESS

Registration with Registrar of Franchise

According to Franchise Act 1998, all franchisors that are selling their franchises in Malaysia are required to register with the Registrar of Franchise (ROF) which is under the Ministry of Entrepreneur Development.  Exemptions are granted to franchises that have been in operation in Malaysia prior to 1998.

Therefore, U.S. franchisors that are selling their franchises in Malaysia will have to register with ROF first.   They have to submit the following documents to ROF to get approval for registration :

  • Letter of Intent
  • Company profile
  • Sample of franchise agreement
  • Copy of latest audited accounts

Officially, it takes one month to get an approval from ROF but normally it takes at least three months.  It is usually easier for foreign franchises to get approval for registration with ROF compared to local franchises.  However, there are incidences in which applications from foreign franchises had been rejected.  When an application has been rejected, the franchisors can appeal. 

There are cases where ROF does not provide the reasons for their rejection.  Therefore, it is recommended that a U.S. franchisor use its local partner (master franchisee or franchisee) to help submit  its application to ROF for registration.  This way the local partner can follow-up with ROF from time to time which may help to smooth and expedite the application process.  Once registration with ROF is approved for the U.S. franchisor, its master franchisee that intends to sub-franchise in Malaysia will also need to obtain registration with ROF.

Therefore, there are some foreign franchisors that opt for licensing agreements instead of franchising agreements to bypass the Act.

Cultural and Religious Issues

Franchises operating in Malaysia must adhere to Malaysian commercial and contract laws, procedures, and local norms.  For instance, pork must not be served at fast food outlets and chicken, lamb, and beef must be slaughtered according to Islamic rites.

Although an existing handful of non-fast food franchised restaurants serve pork, new non-fast food franchised restaurants with pork on the menu may face difficulties in obtaining approval.

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