Economy

Franchise heat

By Yan Yiqi (China Daily)
Updated: 2011-06-24 16:33

As foreign brands make their way into the Chinese market, Liu Wenxian, founder of the first franchise management school in China, agrees that localization is the biggest problem for foreign franchisers.

"It is easy for them to enter the Chinese market, but how to survive remains difficult," he says.

Pei agrees that adjusting marketing strategies to appeal to Chinese consumers is the key point of succeeding in China.

"Pizza Hut is a good example. Chinese people expect high-end style when talking about Western cuisine. So it was very clever for the company to present itself as a fine restaurant, rather than a fast-food chain," Pei says.

He says lots of foreign companies, including Domino's and Burger King, have failed in China because of insufficient localization. But the Chinese franchising market remains promising.

Pei predicts that the expansion will not slow down in the following five to 10 years.

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"The Chinese market is still full of potential. There are still industries that we have yet to develop, like personal financing. Once these industries have been explored and developed, new systems and brands will come out," he says.

"But that does not mean franchising in China is fully developed. In the US, the profitability of franchises account for 14 percent of its GDP (gross domestic product). But that figure is 3 to 4 percent in China," Pei says.

Also, using the franchise model as a rapid means of development, some companies are considering taking more control of their stores once the market expansion target has been met.

"We will try to keep the ratio of franchise stores and self-owned stores to 2:1," Cao says.

Cao says although franchise can help the company expand its market quickly with low costs, this business model does not fit a medium- and high-end restaurant brand such as Quanjude in the long term.

"For fast-food brands like KFC and McDonald's, which have standard production and management procedures, a franchise is the best way to expand. However, we are focusing on offering traditional Chinese meals with exquisite food and service, so we need tighter control on stores," he says.

Cao says Quanjude receives 50 to 60 applications for franchises every year, but only five to six of them will be approved. Apart from cutting the numbers of newly opened franchised stores, Quanjude also plans to buy the old ones back.

"We had signed contracts with our franchisees that we can buy the shares of their stores in the future if necessary," Cao says. "Of course, the prices are negotiable."

"Although the notion of chain stores is the most popular among investors, franchises are excluded. The reason is very simple. The profit from franchises comes from a one-time franchising fee and, and an unstable and very small portion of franchisees' profitability. That apparently cannot satisfy the companies," Pei says.