Franchise Confidence In China

Dr Callum Floyd for Franchise NZ

China is the hot topic in international franchising today. Many global brands are entering, or have entered, China - all attempting to tap the country's population of 1.3 billion, and growing middle class that could top 200 million by 2009.

While the long-term rewards for China expansion are appealing, operating can be extraordinarily difficult. In addition to the expected cultural challenges, imitation is rife and defending trademarks can be challenging.

Starbucks has been addressing a rival Shanghai chain whose name in Chinese is almost identical to its own, and many other chains fear prospective franchisees will copy their systems and formats. Notably, Blockbuster Inc reportedly recently abandoned its Chinese plans due to high levels of video, DVD and CD piracy and bootlegging.

Despite these challenges, a number of chains like KFC and McDonald's are forging ahead with expansion in China. KFC currently already has 1200 restaurants in China. 275 were opened last year, and the same number is expected this year. McDonald's currently has 600 and is opening around 100 new restaurants per year. They aim for 1000 by 2008. Most KFC restaurants are currently either company-owned or joint ventures, and McDonald's mainly has joint ventures.

New regulations set to take effect on February 1 provide overseas franchisors with greater confidence for franchising in the market, as does the impending entry of China into the WTO with all that entails. The new regulations impose a number of requirements on franchisors contemplating Chinese expansion, such as operating company-owned outlets in China before offering franchises, various disclosure obligations, and guidance on franchisor-franchisee relationship issues.

There still exist a number of areas where leading international lawyers have concerns about the new regulations' coverage and definitions. Despite these concerns, however, both KFC and McDonald's have indicated they intend to add franchising to their expansion strategy, and other companies will be keen not to be left behind.

''There is a huge hunger for new business opportunities in China,'' says Simon Lord, chairman of the Franchise Association of New Zealand, who visited China last year. ''I think there is recognition that a lot of people need to acquire a lot of business and occupational skills rapidly in order to meet the needs of the growing economy, and franchising is ideally placed to make that happen.''

''Chinese companies are also very keen to find new opportunities to import. Last month a trade delegation from NZ visited New Zealand and was very interested in some of our home-grown franchise systems, particularly the rural/agricultural ones. They have requested further introductions when they return in June 2005 for the Asia Pacific Franchise Confederation meeting in Auckland, and this could lead to some interesting opportunities for NZ companies wishing to enter this massive market.''

However, industry advisors such as Franchize Consultants (NZ) Ltd, which has maintained contacts in China over a number of years, counsel caution. ''Successful international franchising always requires extensive planning and research. In a market as challenging as China, this requirement is only intensified,'' they say.