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CHINA FRANCHISE UPDATE

Written by: Ed Teixeira

Article Overview: China is the worlds most populace country and emerging as one of the largest consumer markets in the world, soon to led by only the United States. China's increasing middle class has a desire and appetite for western brands and products. A strong component of this dynamic are the products and services provided by U.S. franchisors. The challenge is to match the appeal of foreign franchise brands with the demand of the Chinese consumer. Recent actions by the Chinese Government have raised the price of admission for foreign franchisors.

CHINA FRANCHISE UPDATE



CHINA FRANCHISE UPDATE
By Ed Teixeira

China offers foreign franchisors unbounded opportunities. However, to overcome the many challenges requires a commitment to the market.

CURRENT FRANCHISING CLIMATE

Recently enacted franchise regulations by the Chinese Ministry of Commerce (MOFCOM), which include a requirement, that foreign franchisors to open pilot locations in China have made it more difficult for foreign franchisors to franchise in China. The regulations enacted in February of 2005 include the requirements, that a foreign franchisor must have operated two pilot locations for a minimum of one year before offering franchises in China. Moreover, the foreign franchisor must be registered with the Chinese government.
This change now requires the foreign franchisor to invest in opening and operating pilot locations in China. Of course the alternative would be a hybrid agreement whereby a licensee in China would bear all or a portion of the initial development costs. If the franchise brand is not well known, versus brands such as KFC, Subway, etc. it will be difficult to find a licensee willing to pay an upfront fee. This is because the brand is unproven in China and any fee would be in addition to development costs.
Establishing and operating pilot locations in China requires an investment level typically possessed by larger franchisors. Although the franchising regulations for foreign owned firms could be relaxed in the years ahead there is no definitive evidence of that happening.
In addition to the regulatory restrictions foreign franchisors face its important that preliminary marketing and brand promotions precede the major introduction of foreign franchise concepts in China.

THE CHINA MARKET

As the world’s largest country and fastest growing economy China provides an enormous opportunity for foreign franchisors. The key factor is to be prepared and have the resources to survive in this rapidly growing and highly competitive market.
The concepts and products with the most interest in China include fast food and restaurants, auto-after market, fashion and clothing and children’s products and services. American brands in particular are very popular.
There are four major regions in China. The south which includes Guandong Province, the Pearl River Delta which includes Shanghai, the north which includes Beijing and the western part of China which is still developing.
KFC with over 1,200 locations in China versus 5,400 free standing locations in the U.S. has reported earnings of $200 million which accounts for 50% of the total earnings from all of its international operations. The China strategy, which KFC, McDonalds and other franchisors employed, was to open and operate corporate locations before franchising.
Clearly, China offers unlimited possibilities. The key is having the right product/services and the capability and resources to commit to long-term growth.

For those franchisors that wish to enter China the following are some key steps to follow:

1. Have the experience of operating in another country
Don’t target China as the very first country to enter. You need to have the experience and staff in order to operate in a country like China.

2. Have the financial resources to operate in China
You should conduct a market survey in order to verify that your franchise concept will be accepted and perform in China. This requires some expense. If you think that you’ll sell your franchise rights in China and receive a nice fee for little investment on your part you’re mistaken.

3. Be sure that your marks are registered in China
Intellectual property rights are still a major issue facing foreign firms that enter China. Be sure that your marks and if required your patents are registered in China. You need to pay particular attention to these important matters.


4. Be flexible in terms of your entry strategy
The use of a joint venture may allow a franchisor to enter China with a business relationship that shares the initial development costs. Conversely, to open and operate corporate locations prior to franchising requires a considerable amount of capital.

5. Be willing to adapt
Franchisors who are considering going into China must accept the reality of changing their concept to suit the tastes and vagaries of the country. China is a huge country with significant diversity. Tastes and consumer expectations in one region will differ from another. It’s critical that the franchisor visit China before making a decision. The cost of a trip will be well worth the potential risk from making the wrong decision

6. Temper your expectations
Be prepared for the long haul. Don’t expect to earn large profits in the first few years. Success in China requires commitment and patience. Although the opportunities are great it will take time to implement and establish a successful operation. If there are problems with the China licensee it can add to the delay.

China is a country, which presents foreign franchisors the opportunity to implement a franchise program in the worlds most populace country. However, success in China requires resources, preparation, perseverance and patience. Franchisor’s, which can apply these traits to an existing and successful franchise program, can enjoy great success.

Copyright 2006, FranchiseKnowHow, LLC

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Article Tags: chinese consumer, chinese government, franchise brands



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