Worldwide, over 3.6 billion people lack access to clean, safe and affordable energy. These emerging consumers aspire to move from regressive fuel usage (fuel usage that creates negative impact on health, is unsafe or damages the environment) to progressive energy solutions. To provide a better life for the Emerging Consumers who are still using regressive fuel, BP has developed an alternative energy solution. BP found out that this is huge market opportunity and BP started in September 2004 in India to explore this opportunity. The company goal is to develop a material and profitable business that provides cleaner, safer, accessible, and affordable energy solutions (starting with cooking) to fulfill this unmet consumer demand, leveraging local resources.



Because of the above mentioned reason, BP wants to expand the market by introducing in another country. The countries among them choose is Indonesia. Despite the successful launching in India, BP had never had through experience in launching this program in Indonesia by franchising scheme. Proceeding with the initiative, BP is about to set up its master franchise agreements with Mercy Corps Indonesia, a well known multi-national Non- Government Organization (NGO) in Indonesia.

One of the essential components to be prepared in the agreement is regarding the franchising cost component (i.e. initial franchise fee and royalty fee). This study has been conducted to facilitate by BP and Mercy Corps to grab the whole picture of this unique scheme and applying those facts and findings to gauge understanding of franchising scenario in using daily energy for cooking activity among rural area in Indonesia. To generate a better recommendation, the IPMI's GFP team had develop the methodology on how to setup the franchising cost components for the BP Master Franchisee Agreement in Indonesia.

We have discussed several major issues prior to the decision making. First of all we construct study of the project. Launching of this stove is a big opportunity for BP to penetrate and expand the existing market to the huge potential low class segment. Not only the launching of this product would make BP as a pioneer in this segment, but also make PB able to create a more sustainable basis for the company's future revenue and profit's stream.



BP stove and its bio fuel is a new product not only in term of model but also in term of product characteristic. The stove is made different with LPG and Kerosene stove. The fuel is made from agriculture residue. The important consideration to launch this unique product is how to introduce the product to consumers.

In distribution aspect, the main consideration is using Mercy Corps as a distributor or appoint third party to become distributor. Looking experience of Mercy Corps it is better to use third party as the distributor. In addition to this strategy, Mercy Corps should maintain and build better relationship with the distributor as major sourcing goods for most retailers.

In order to have a successful launching of this product, we suggest some expansion plan. When we choose area for expansion, it should be based on density of that area.

After ward we use financial approach such as break even analysis, net present value, payback period and internal rate of return. The objective of break even analysis is to determine the break even quantity of output by studying the relationships among the firm's cost structure, volume of output, and profit. The payback period is the number of years needed to recover the initial cash outlay. As this criterion measures how quickly the project will return its original investment, it deals with free cash flows, which measure the true timing of the benefits, rather than accounting profits. The net present value of an investment proposal is equal to the present value of its annual after-tax net cash flows less the investment's initial outlay. The internal rate of return (IRR) calculate the rate of return the project earn.

From the analysis of break even point and payback period, we recommend master franchise agreement to be set within 10 years period to reach win-win solution between BP as a franchisor and Mercy Corps as a franchisee.

Due to gross margin for the first two years still negative, we recommend that franchise fee which is normally to be paid up front, should be pending until the years gross margin become positive. Otherwise franchisee will have a problem in managing its cash flow.

Government is currently pushing for conversion to LPG and this will impact current conditions. This conversion has been pushed by the provision of free LPG stoves and distributing LPG in small 3-kg cylinders, supported by quite heavy above-the-line communication. At the same time, there is currently a plan to eliminate kerosene subsidies in Jakarta. Although currently the focus is on Jakarta area, chances are that these efforts will likely to spread to other regions as well. The use of LPG might increase in the future and it might become a strong competitor for any new fuel aside from kerosene and wood fuels. Therefore a thorough study and analysis should be made to avoid unnecessary loss in the future.

We hope that our recommendation will not only be useful for Mercy Corps and BP, but also be meaningful for the whole. All of this project result would be beneficial for the company as part of the inputs to penetrate and expand market into the huge low class segment in Indonesia.





Research Location : BP ECM