Franchise China: She is Ready, Are You?

 

By Ye-Sho Chen

 

Consider the following headlines recently published on ChinaOnline (www.chinaonline.com), a US-based website for Chinese business news and information:

 

Further research on ChinaOnline related to these three companies reveals:

 

After 10 years of testing and examination, these three large franchising companies have arrived to the conclusion that China is ready for franchising.

 

I recently gave a talk at the Franchise China 2000 Conference and Exhibition (www.english.franchisechina.com) held in Beijing, Guangzhou, and Shanghai – three major cities in China – from November 6 to 14.  The talk was entitled “Information Technology Solutions to Increase Franchise Efficiency and Productivity.”  I had a chance to meet and chat with many business people, government representatives, and professors and graduate students from two leading universities in China.  Through these conversations, I gained more insight on why now is the right time for franchising in China.  Here are some compelling reasons for foreign franchisors to consider venturing forth in China:

 

1.        There are three major forces behind the driving demand of franchising:

·         Chain stores have found franchising to be an effective way for expansion.  Chain stores started in China in the mid- 80s, but at the end of 1997 there were just over 90 chain store enterprises in China and about 30 franchise stores.  By the end of 1998, however, the number had grown to over 120 chain stores with sales volume of 50 million RMB (US$6.05mn), among which 40% are franchise stores. (ChinaOnline, August 2, 1999)  This recent phenomenon can be attributed to the ever-increasing cost of opening and managing new chain stores, especially in the western providences of China.  By using this dual concept of chain stores and franchises, a company could run more efficiently and become more competitive.

·         Business-to-consumer (B2C) ecommerce needs franchising to deal with the problem of physical distribution.  Although various surveys show that ecommerce is gaining popularity in China, it faces obstacles such as online payments, relatively small groups of shoppers (mostly young and educated), an underdeveloped network infrastructure, and most importantly, the distribution of goods.  Franchising is believed to be the most feasible solution for the problem of goods distribution.  For a more detailed information, see the article “China Ecommerce & Franchising: A Heavenly Marriage?” (ChinaOnline, May 1, 2000).

·         Entry to the World Trade Organization (WTO) requires China to allow foreign companies to get into Chinese markets through franchising, according to Ms. Guo Ge-Ping, the Executive Director of the China Chainstore and Franchise Association (www.ccfa.org.cn) in her paper delivered at the Franchise China 2000 Conference and Exhibition.

2.        The buying power indictors, such as the GDP, disposable income, and consumer confidence index, of the Chinese consumers are increasing.  See China Market Update at www.english.franchisechina.com/MARKET.

3.        The laws and regulations governing franchise businesses are improving.  On November 14, 1997, the Ministry of Internal Trade published and released the very first Chinese franchise law, the Regulation on Commercial Franchise Business (for Trial Implementation).  The guide includes important legal issues such as trademarks, copyrights, and intellectual property protection.  Since then, various meetings and conferences, participated by international and local law experts, were held to enhance the Regulation.  For example, Philip Zeidman, general counsel to the IFA, was invited by the Ministry of Internal Trade and the China Chainstore and Franchise Association to speak on franchise law issues (www.ccfa.org.cn/2000magazine/ls0002/ls000221.htm; Chinese-enabled browser required) in February 2000.

4.        Over the years, leading franchising companies such as McDonald’s and KFC, have proven records to show that franchising is a profit-making business.  These companies also have built their own franchise value chain systems, e.g., customer relationship management and supply chain management programs.  Many Chinese are exposed to these systems and can benefit a great deal to learn more about how they operate.

5.        While there is rigorous competition in the United States, the franchise business in China is wide open with high growth potential.  Ronald Ray of Pizza Factory said it best at the interview after the Franchise China ‘99 exhibit (www.english.franchisechina.com/REVIEW/TEST.HTM) by saying, “We had a very successful show.  In 14 years of doing franchise shows in the States we have sold only one store.  This is my first show and we sold two franchises in Shanghai and in Xian, both being potential development agents.”

 

At the Franchise China 2000 Conference and Exhibition, I also met many homegrown franchisors having the exhibits there to sell the franchises to Chinese investors.  Several of them had more than 30 units.  There were also foreign franchisors from various countries, including United Sates, Singapore, Malaysia, South Africa, and India.  Some were inexperienced while others had been there for several years.  What are the general advices for those potential newcomers?  Here is what I have learned:

 

·         Register the brand early.  Since the brand name is first-come, first-served in the legal environment, without the official registration, even a well-known company can find itself in a difficult position when that brand name is registered by someone else.  Case in point: Shenzhen Newsnet Co. registered in July 1998 an Internet domain name Viagra.com.cn and was promptly sued by Pfizer for infringing its US-registered trademark “Viagra.”  On December 13, 2000, the Beijing No. 2 Intermediate People’s Court ruled in favor of Shenzhen Newsnet Co.  Pfizer lost the suit because “the name ‘Viagra’ is not sufficiently well-known in the country to be specifically associated with Pfizer, nor is the name registered as a trademark.” (ChinaOnline, December 14, 2000).  This might be the reason why Century 21 registered its brand 10 years before introducing franchises into China real estate market.

·         Beware of the pre-existing law in seeking franchisees.  The Regulation on Commercial Franchise Business “adds a new and very important investment vehicle to the future options of foreign investors in China,” writes Robert Sheppard, an attorney associated with the Lehman, Lee, & Xu Law Firm in Beijing.  He continues, “Nevertheless many of the old restrictions may well persist and be applied alongside the provisions of the new Franchising Regulation, limiting its potential application.”  What is his advice? Visit www.chinalaw.cc/lib/articles/franchis.htm for details. 

·         Understand the regional preferences before you select a site.  The Chinese consumption behaviors vary from region to region.  For example, an Italy-based cloth-washing master franchisee, with 30+ units, told me that, although his business is doing well in Beijing, he might have a hard time expanding his franchise to Shanghai.  Why?  Because people in Shanghai are more frugal.  Another example is seen when a restaurant franchise owner in Guangzhou told me that eating habits differ greatly among regions.  The people in the south prefer soup-related dishes.  Noodle-related dishes, on the other hand, sell well in the northern China.

·         Adapt the franchise system to the Chinese needs.  A recent A.C. Nielsen survey listed KFC to be the most recognized international brand name among Chinese.  McDonald’s, on the other hand, ranked number five.  An article in ChinaOnline on September 9, 1999, entitled “McDonald’s and KFC Vie for China’s Consumers,” explains that KFC’s food tastes more similar to traditional Chinese food.  In order to compete, McDonald’s adapted its menu in China to include spicy chicken wings and chicken burgers “remarkably similar to those at KFC”.  Mark Spitainik, the general manager of Sign*A*Rama in Beijing, at the Franchise China 2000 Conference gave another example.  His company came to China in 1998 with a company-owned unit in Beijing, spent one year in China to learn about the sign business, e.g., prices, banners, quality, and the suppliers in China market.  They then adapted its business model for the various markets in China.

·         Pay attention to guanxi, the Chinese version of customer relationship management.   Traditionally, Chinese do business based on interpersonal trust.  Since trust can’t be built overnight, Chinese do business with people having tighter relations (guanxi) first, e.g., relatives, classmates, people in their hometowns, and friends.  As the business expands, the guanxi relationship has to extend from insiders to outsiders, usually reluctantly.  For outsiders, it takes time and patience to negotiate, cultivate, and develop the interpersonal trust.  Regarding negotiation, Tony Fang in his book “Chinese Business Negotiating Style,” (www.liu.se/org/imie/PhDHomepgs/tony2.html) addresses the subject “by looking systematically at various components of Chinese business culture which range from contemporary Chinese politics to ancient Chinese philosophies and military stratagems.”  In this book, Chinese negotiating tactics are classified under the famous thirty-six ancient Chinese stratagems.      

·         Participate in the community.   Philip Zeidman in his International Column of Franchise Times on September 1999 writes, “‘Americanization’ or ‘Westernization’ is not always to be feared.  Look at the contributions that McDonald’s made in Russia.”   His point applies very well to China too.  There have been reports on the fear Chinese people and business owners have on the accession of WTO.  Chinese people fear that their history, culture, and traditional values will be damaged or forgotten.  Business owners, on the other hand, worry about the tremendous competition coming from the well-run foreign companies.  Building good images by contributing to the community is the key to curb the fear.  A recent case in point:  Business Daily reported on May 31, 2000 that Eastman Kodak Co. and the Industrial and Commercial Bank of China’s Shanghai branch had entered into an agreement to jointly fund Kodak’s individual franchisees.  Through the help of the loan, Chinese entrepreneurs, including unemployed workers, will be able to start up with their own Kodak franchises.

 

About 2,400 years ago, the Chinese military strategist Sun-tzu wrote, “When torrential water tosses boulders, it is because of its momentum; when the strike of a hawk breaks the body of its prey, it is because of timing.  Thus, the momentum of one skilled in war is overwhelming, and his attack precisely timed.  His potential is that of a fully drawn crossbow; his timing, that of the release of the trigger.” (www.edepot.com/taowar.html).  Now, China is ready for franchising.  Are you?

 

______________________________________________________________________________________

Ye-Sho Chen is a Professor of Management Information Systems in the Department of Information Systems and Decision Sciences, E. J. Ourso College of Business Administration, Louisiana State University.  He is also the Associate Director of International Franchise Forum (www.bus.lsu.edu/academics/entrepreneurial/internationalfranchise.html) at LSU.  He can be reached at qmchen@lsu.edu.