E-COMMERCE EXPERT SAYS CHINA COULD BECOME FRANCHISING PARADISE

IFA Insider, Monday, May 28, 2001; Volume 6, Issue No. 11

Franchising in China is fast gaining ground and, thanks to ideal prevailing conditions, it could make a case for itself as the world’s franchise paradise. According to Dr. Ye-Sho Chen, a specialist in electronic commerce in franchising and international business at Louisiana State University, three core forces are driving the demand for franchising in China: Chain stores using franchising for expansion; business-to-consumer (B2C) e-commerce needing franchises to deal with physical distribution; and China’s entry into the WTO requiring it to allow foreign companies into the local market through franchising. Dr. Chen made the remarks at the recently concluded Franchise China Conference & Exhibition held in Beijing, Guangzhou and Shanghai, organized by Global Sources-CMP Media Inc. and the China Chain-Store and Franchise Association.

Shanghai in particular, is betting on the expansion of large-scale retail chain stores as part of its tenth Five-Year Plan period. It plans to set up more than 2,000 outlets from 2001 to 2005, focusing on cooperation between local enterprises and multinational retailers to target retail sales of $30 billion by 2005. In the meantime, Guangzhou, with retail volume over $13 billion, is being eyed by retail giant Wal-Mart, now in its fourth year in China, as its primary expansion site.

Information technology will also boost the prospects of franchising in China. Franchising will help establish the intermediary link as the actual point of physical distribution from the virtual world. For instance, Sina.com, one of China’s best known web portals is partnering with Yafei Auto Chain, China’s largest chain of auto franchises, to launch online car leasing and marketing. Already operational are e-commerce platforms supported by franchises in catering services, garments, education, beauty products and services, car parts and components, and books.

With China’s entry into the WTO, there is great optimism about the future of protecting and promoting franchise businesses in China. The Ministry of Internal Trade established the first Chinese franchise law in 1997, the Regulation on Commercial Franchise Business, which included guidelines on such issues as trademarks, copyrights, and intellectual property protection.

Dr. Chen points to other factors fueling the franchise rush as solid signs that franchising will prosper in the Mainland. These include increasing buying power indicators such as disposable income and the consumer confidence index of Chinese consumers; profitability of established franchising companies such as McDonald’s and KFC; and the wide-open, high-growth potential of the local market.

Local consumers have rising disposable income and are eager to spend it, Dr. Chen said. The three largest cities in China, Guangzhou, Beijing and Shanghai, have a combined average annual per capita disposable income of $1,450 and rising. People will continue to spend as indicated by a rising consumer confidence index, an indication that consumers are optimistic about their incomes and the economy in the future. On a scale of 100 points, consumer contentment was measured at 97 points in March, the highest level since 1999.