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Franchising in China

The history of franchising in China began in the late 1980’s when Yum’s KFC opened its first outlet in Beijing. Other big names of the franchising industry, such as McDonalds, Starbucks or Subway followed KFC’s lead at setting-up franchise operations in China.

A recent conservative count (October 2012) by the China Chain Store and Franchise Association (CCFA), China’s leading franchise association with over 900 members with 180000 outlets across the country, revealed that China has close to 10,000 chain store businesses and brands, inclu­ding some 5,000 franchise systems.

Today, China has the most number of franchises, however they have relatively less outlets than their counterparts in Western countries and account for a far smaller percentage of total retail sales (3% of all total retail sales in China compared to 40% in the US). Juxtaposing the development of China’s franchise industry with the one from a mature market like the USA, reveals the enormous untapped potential that China still holds for the franchising industry. Currently, the five most attractive spaces in China for franchising include:

franchising in china illustration (2)There are several drivers that can help explain China’s increasing openness to international franchise concepts. Franchising as a business model has become more known and accepted by local entrepreneurs and investment companies, who are actively seeking for new franchise opportunities. Especially international franchise concepts that can appeal to the increasingly sophisticated needs of China’s growing middle class, are sought after.

From a legal point of view, China’s ministry of commerce (MOFCOM) has been making efforts to standardize the franchise industry and eliminate the remaining grey areas. As a result franchising regulations have been revised on an ongoing basis.

Regulations introduced in May 2007 made if fully legal to use cross-border franchising. The latest update was introduced in April 2012, when the amended “Measures for administration of disclosure of commercial franchise information” came into effect. Although most of the regulations still favor the rights of the franchisees, international franchisors receive more support as well in terms of IPR protection.

Despite those improvements in the franchise legal regulations, international franchisors entering the Chinese market have additional hurdles to overcome. And finding the right franchise partner is the most challenging of them all. Problems occur when local managers have a poor understanding of the franchise concept and don’t execute the franchise terms as stated in the franchise agreement. This is oftentimes a result of a lack of supervision and management for the local franchisees by the franchisor. Generally, more training and cooperation with local (master) franchisees is needed to guarantee a successful growth of the business. At Third Place Franchise Consulting, we leverage our extensive network to find a qualified franchisee for our clients. Our international team can easily bridge the gap between the Western and the Chinese market and ensure a smooth communication and cooperation between  franchisor and franchisee.

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