FOCUS: China franchise market
FOCUS: China Franchise Market Contents: Overview of China franchise Industry: The rise of the Chinese consumers Finding a China Partner China franchise law China hot sectors Chinese food franchise sector Where to open in China
FOCUS: China Franchise Market
Contents:
Overview of China franchise Industry:
The rise of the Chinese consumers
Finding a China Partner
China franchise law
China hot sectors
Chinese food franchise sector
Where to open in China
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Franchisemeets.com<br />
Think Life. Think Franchise.<br />
info@<strong>franchise</strong>meets.com https://<strong>franchise</strong>meets.com<br />
<strong>FOCUS</strong>:<br />
<strong>China</strong><br />
2016
<strong>China</strong> <strong>franchise</strong> law<br />
<br />
<strong>FOCUS</strong>: <strong>China</strong> Franchise Market<br />
Chinese food<br />
<strong>franchise</strong> sector<br />
<br />
<br />
<br />
<strong>China</strong> hot<br />
<br />
<br />
sectors<br />
in <strong>China</strong><br />
Where to open
<strong>China</strong> Market<br />
Overview of the Market.<br />
At a Glance<br />
Growth is expected to be 7.5% in 2014 and 7.3% in 2015, yet as<br />
<strong>China</strong> ranks 93rd in the world on GDP per capita, there is<br />
significant room for consumption growth. The long-term<br />
outlook is positive.<br />
During the past 30 years, there<br />
has been dramatic economic<br />
growth in <strong>China</strong> and while<br />
franchising only started in the<br />
1980’s it has also displayed rapid<br />
development. By 2012 the<br />
number of <strong>franchise</strong>d stores<br />
exceeded 400,000 with 5,000<br />
systems averaging 83 stores. The<br />
total annual sales of CCFA (<strong>China</strong><br />
chain store & <strong>franchise</strong><br />
association) members reached<br />
nearly US$300 billion in 2010 and<br />
represented about 13% of total<br />
retail sales in <strong>China</strong>.<br />
The growing wealth,<br />
consumption, density of<br />
population and rising 2nd/3rd tier<br />
cities makes <strong>China</strong> a lucrative and,<br />
for the foreseeable future,<br />
growing <strong>market</strong>.<br />
It is odd when we talk about a<br />
slowdown in <strong>China</strong> yet GDP<br />
growth is still above 6.5%-not to<br />
be sniffed at.<br />
As <strong>China</strong> becomes more open,<br />
their desire for foreign brands and<br />
new experiences grows in parallel.<br />
There are a range of hot sectors a<br />
<strong>franchise</strong> should be aware of. They<br />
value foreign brands higher than<br />
domestic brands as they are very<br />
much seen to be a status symbol.<br />
The resulting demand from these<br />
factors should be filled by savvy<br />
franchisors looking to expand out<br />
of their domestic <strong>market</strong>.growth<br />
(14% increase) 2011-2012, was<br />
seen in the internet and TV<br />
shopping sectors.<br />
Key Franchise Points<br />
* Although growth has slowed, total retail sales in 2015 showed<br />
a real growth of 10.6 percent after deducting price factors
<strong>China</strong> Market<br />
Overview of the Market.<br />
Only around 13% of American<br />
<strong>franchise</strong>s have entered the<br />
Chinese <strong>market</strong> though 15 of the<br />
world’s top 20 <strong>franchise</strong>s are<br />
already active in <strong>China</strong>. With<br />
foreign companies comes new<br />
business systems and despite<br />
foreign companies accounting for<br />
a relatively small share of the retail<br />
<strong>market</strong>, their business experience<br />
produces highly improved<br />
operating efficiency and profit<br />
margins which outstrip their<br />
domestic peers.<br />
Only around 13% of American<br />
<strong>franchise</strong>s have entered the<br />
Chinese <strong>market</strong> though 15 of the<br />
world’s top 20 <strong>franchise</strong>s are<br />
already active in <strong>China</strong>. With<br />
foreign companies comes new<br />
business systems and despite<br />
foreign companies accounting for<br />
a relatively small share of the retail<br />
<strong>market</strong>, their business experience<br />
produces highly improved<br />
operating efficiency and profit<br />
margins which outstrip their<br />
domestic peers.<br />
The rise of the Chinese consumer:<br />
With the ever increasing growth in<br />
the middle-class (300 million as of<br />
2012) combined with a maturing<br />
consumer, the Chinese are<br />
becoming a demanding society<br />
for new products. These<br />
economically empowered,<br />
sophisticated consumers require<br />
more than basic goods to satisfy<br />
their desires and many display<br />
their wealth through the purchase<br />
of foreign brands. To be seen<br />
carrying a Starbucks coffee on the<br />
way to work is really middle class<br />
cool.<br />
In a nutshell, these ripe malleable<br />
consumers are young, often have<br />
a double income, are forward<br />
thinkers looking to attain a<br />
modern lifestyle and broaden<br />
horizons. As an international<br />
franchisor there is a great<br />
opportunity to introduce exciting<br />
cross-overs targeting these new<br />
adventurous Chinese consumers.<br />
Key Franchise Points<br />
* Only around 13% of American <strong>franchise</strong>s have entered the<br />
Chinese <strong>market</strong>.
<strong>China</strong> Market<br />
Finding a <strong>China</strong> Partner.<br />
Seeking the right partner for your<br />
<strong>franchise</strong> business is paramount. If<br />
you have a product, connecting<br />
with the right distributor is<br />
paramount. Finding these<br />
partners is a time-consuming task.<br />
As <strong>China</strong> is still developing in<br />
terms of business knowledge and<br />
a free economy, finding a suitable<br />
partner with a track record will<br />
involve effort but this effort will<br />
prove worthwhile in the long run.<br />
Though financial check systems<br />
are improving, doing due<br />
diligence and sourcing past<br />
financial records is not as easy as<br />
other countries as there is<br />
currently no standardised national<br />
system for company registration<br />
in <strong>China</strong>. Professional input will<br />
derisk and ease the mind.<br />
Despite the above, the rise of<br />
entrepreneurship in <strong>China</strong>, the<br />
growth of the <strong>franchise</strong> system<br />
and the development of <strong>China</strong>’s<br />
regulatory environment means<br />
Chinese businessmen are actively<br />
seeking to introduce the next big<br />
trend to <strong>China</strong>. This has increased<br />
the chances of finding a qualified<br />
reliable partner with the<br />
necessary local knowledge and<br />
required investment to open<br />
<strong>franchise</strong>s.<br />
Importanace of systems<br />
Most franchisors have their own<br />
bespoke systems across their<br />
stores. The implementation of<br />
these IT systems will require a<br />
good amount of training and the<br />
management/ business systems<br />
will have to understand the<br />
thinking of local <strong>franchise</strong>es and<br />
employees. Saying this, the<br />
systems are fundamental because<br />
they support the proven<br />
uniformed model and represent a<br />
known bottom line.<br />
Tight systems allow your domestic<br />
partner to conduct the majority of<br />
daily business whilst still having<br />
an overview, however it is key to<br />
closely monitor and control your<br />
domestic supplier and, in the first<br />
instance, be actively involved in<br />
property searches and be present<br />
for the signing of lease<br />
agreements.
<strong>China</strong> Market<br />
Franchise Law.<br />
Introduction<br />
In order to better protect the legal rights and interests of<br />
<strong>franchise</strong>es and consumers, the Chinese government imposed<br />
registration and disclosure requirements on franchisors<br />
operating in the country.<br />
Key Regulations on Franchising in<br />
<strong>China</strong>:<br />
Currently, the key regulations on<br />
franchising in <strong>China</strong> include: the<br />
Regulation on Administration of<br />
Commercial Franchises<br />
(Regulation), the Administrative<br />
Measures for the Registration of<br />
Commercial Franchises<br />
(Registration Measures), and the<br />
Administrative Measures for<br />
Information Disclosure of<br />
Commercial Franchise (Disclosure<br />
Measures). The Regulation was<br />
promulgated by the State Council,<br />
while both of the Measures were<br />
issued by the Ministry of<br />
Commerce (MOC).<br />
Reproduced courtesy of<br />
wileyrein.com<br />
Robert A. Smith, Fairy Li<br />
and Kimberly L. Sikora<br />
Panza<br />
Franchise Registration:<br />
According to the Regulation, a<br />
franchisor must, within 15 days<br />
after signing a <strong>franchise</strong><br />
agreement for the first <strong>franchise</strong>d<br />
location in <strong>China</strong>, file an<br />
application with the appropriate<br />
commercial authority in the MOC<br />
to register its <strong>franchise</strong>. The<br />
registration requirement is an<br />
administrative measure to<br />
regulate <strong>franchise</strong> activities, and<br />
also provides potential<br />
<strong>franchise</strong>es with public access to<br />
more information regarding the<br />
franchisor and its business.<br />
Although the failure to register<br />
does not impact the effectiveness<br />
of the <strong>franchise</strong> agreement, a<br />
franchisor that fails to timely file<br />
the <strong>franchise</strong> registration could<br />
face a fine.
<strong>China</strong> Market<br />
Franchise Law.<br />
In connection with the <strong>franchise</strong><br />
registration application, the<br />
following documents must be<br />
submitted:<br />
1. Business registration certificate<br />
of the franchisor.<br />
2. Registration certificate of the<br />
<strong>franchise</strong>d IP right.<br />
3. Franchise agreement<br />
4. Certification for the 2+1<br />
Requirement.<br />
5. Marketing plan for the<br />
<strong>franchise</strong>d operation.<br />
6. Other documents required by<br />
the Regulation.<br />
If there are any major changes to<br />
the original filing (e.g., changes<br />
concerning the business<br />
registration of the franchisor,<br />
business resource, and<br />
distribution of the Chinese<br />
<strong>franchise</strong>es), the franchisor must,<br />
within 30 days, file a notice and<br />
supporting documents with the<br />
MOC for modification of its<br />
<strong>franchise</strong> registration. An annual<br />
update regarding new <strong>franchise</strong><br />
agreements and those terminated<br />
in the past year also must be filed<br />
with the MOC by March 31.<br />
Disclosure:<br />
According to the Regulation,<br />
except for a renewal of the<br />
<strong>franchise</strong> agreement on the same<br />
terms, a franchisor must disclose<br />
to the <strong>franchise</strong>e in writing all<br />
information at least 30 days prior<br />
to the execution of another<br />
<strong>franchise</strong> agreement.<br />
Enforcement:<br />
Thanks to the MOC’s online<br />
<strong>franchise</strong> registration system,<br />
information about franchisors and<br />
their franchising business in <strong>China</strong><br />
is available to the public. Where<br />
there are any illegal activities<br />
committed by the franchisor, any<br />
party can file a complaint on the<br />
MOC’s <strong>franchise</strong> system or directly<br />
before competent commercial<br />
authorities, who will make a<br />
decision following an<br />
investigation.<br />
To read more detail go to:<br />
https://<strong>franchise</strong>meets.com/repor<br />
t/asia/CN/article/17/
<strong>China</strong> Market<br />
Final Thoughts.<br />
The Bottom Line<br />
Many signs indicate that franchising will become easier in <strong>China</strong><br />
over the next few years. <strong>China</strong>’s rapidly growing, sophisticated,<br />
affluent consumer base has a desire for imported brands that<br />
offer convenience, quality and service.<br />
Finding Key Regulations a partner on in Franchising <strong>China</strong> does in involve Franchise effort Registration: but there are<br />
more<br />
<strong>China</strong>:<br />
potential partners than before and this number will<br />
According to the Regulation, a<br />
continue to grow. Business risks are mitigated with the increase<br />
Currently, the key regulations on franchisor must, within 15 days<br />
in the number of foreign brands and the tightening of business<br />
franchising in <strong>China</strong> include: the after signing a <strong>franchise</strong><br />
regulations<br />
Regulation on<br />
ensuring<br />
Administration<br />
better practice.<br />
of agreement<br />
The basic<br />
for<br />
economics,<br />
the first <strong>franchise</strong>d<br />
size<br />
of Commercial the consumer Franchises <strong>market</strong> and recent location trends, in provide <strong>China</strong>, file great an<br />
country (Regulation), potential. the Administrative application with the appropriate<br />
Measures for the Registration of commercial authority in the MOC<br />
It Commercial is our opinion Franchises that <strong>China</strong>’s <strong>franchise</strong> to register <strong>market</strong> its will <strong>franchise</strong>. show very The<br />
healthy (Registration growth Measures), and all franchisors and the registration must view requirement it as a challenging is an<br />
but Administrative primary target Measures for international for administrative expansion. measure to<br />
Information Disclosure of<br />
regulate <strong>franchise</strong> activities, and<br />
To Commercial conclude: Franchise Trends and (Disclosure the economy also provides display all potential the outward<br />
signals Measures). that The the Regulation Chinese <strong>market</strong> was and <strong>franchise</strong>es consumers with are public ready access for to<br />
new<br />
promulgated<br />
imported<br />
by<br />
<strong>franchise</strong>s.<br />
the State Council, more information regarding the<br />
while both of the Measures were franchisor and its business.<br />
issued by the Ministry of<br />
Although the failure to register<br />
Franchise Meets reckons: 8.5/10.<br />
Commerce (MOC).<br />
does not impact the effectiveness<br />
of the <strong>franchise</strong> agreement, a<br />
franchisor that fails to timely file<br />
the <strong>franchise</strong> registration could<br />
face a fine.
Franchise Sectors<br />
Overview.<br />
Although <strong>franchise</strong>s cover over 70 industries the top 3 sectors are:<br />
Retail<br />
Catering<br />
Services<br />
In addition to our other articles about <strong>China</strong>, the <strong>market</strong> is especially<br />
appealing to new brands because of the development of<br />
consumers-they are a lot more open to new experiences and are<br />
becoming sophisticated and knowledgeable. This represents a broad<br />
range of opportunity for new foreign franchisors to entice these<br />
quickly evolving consumers. An experienced <strong>franchise</strong> consultant<br />
should be able to highlight key <strong>franchise</strong> sectors and trends and<br />
smoothly steer you through the <strong>franchise</strong> process!<br />
According to the <strong>China</strong> chain store & <strong>franchise</strong> association survey,<br />
sectors that receive widespread attention from <strong>franchise</strong> enterprises<br />
and <strong>franchise</strong>es include:<br />
Children’s education and training.<br />
Online shopping.<br />
Economy hotel.<br />
Convenience store.<br />
Car rental.<br />
Domestic service.<br />
Products for babies.<br />
Hotpot cuisine.<br />
Drinks for leisure time.
Franchise Sectors<br />
Food.<br />
Demand for higher quality imported food is on the rise due to<br />
consumer economics and recent food scares. There is a trend of<br />
specialty import shops opening and super<strong>market</strong>s are looking to<br />
differentiate themselves by offering a wider range of imported foods.<br />
In addition, Chinese consumers perceive international brands as higher<br />
quality products and the status of eating imported food outwardly<br />
portrays a certain level of lifestyle.<br />
Food Forward Trends 2014 reports that 42% of Chinese consumers<br />
shop at specialty foreign super<strong>market</strong>s, confirming that consumers are<br />
open to trying new foreign foods. Consumers are more knowledgeable<br />
than before and better quality produce or ingredients are held in high<br />
regard. This has resulted in a marked rise in organic foods and produce<br />
with advertised provenance.<br />
Global foods are expected to have a big impact in lower tier cities as<br />
consumers are exposed to new products and their tastes adapt. Mintel<br />
expects higher premium goods to lead the growth in this sector but<br />
other global foods such as cheese, pasta, sweet bakery and bread<br />
products have grown at a rate of over 30% from 2008 to 2013.<br />
In summary, the general trend for success is for foreign foods that have<br />
high quality ingredients and are authentic to their countries of origin.<br />
Ready-meals are another interesting food sector worth a quick<br />
mention. Very much an emerging sector it is difficult to predict the<br />
future growth. The base consumer trend is there and the change in<br />
retailers, particularly convenience stores who now offer a range of<br />
ready-meals, would support the trend but has to be balanced against<br />
the Chinese culture which has little experience of ready-meals and<br />
value cooking at home.<br />
Assuming the <strong>market</strong> follows the pattern in other countries combined<br />
with purchase drivers of lack of time and the need for convenience, this<br />
sector will flourish. To reduce the risks of this emerging <strong>market</strong> make<br />
sure a qualified <strong>franchise</strong> consultant is employed.
Location, Location<br />
Where to open your <strong>China</strong> <strong>franchise</strong>.<br />
Similiar to our article on choosing a region in Japan, for <strong>China</strong> it may be<br />
wise to view Tier 2 and 3 cities as the best option to open the first store.<br />
The reasons for this assumption are as follows:<br />
City and consumer growth potential.<br />
A workable infrastructure.<br />
Lower real estate costs.<br />
Available human resources at a lower wage.<br />
Lower competition.<br />
Increased customer lifetime value.<br />
These are all important factors but the primary opportunity to create a<br />
well-respected brand and tie in consumers from an early stage means<br />
these cities have superior <strong>market</strong> potential.<br />
Being such an large country you would expect diversity across regions.<br />
These diverse regional <strong>market</strong>s make <strong>franchise</strong> development a more<br />
meticulous task. It is rare to offer a whole country agreement to one<br />
regional SME company as their expertise are honed to their area.<br />
A better way<br />
The better strategy is to find experienced partners within each region<br />
or a large domestic player-your golden goose! This does require more<br />
time to control multiple licenses but do not lose the fact that the size<br />
of each regional <strong>market</strong> can bring in more profit than the total of your<br />
domestic <strong>market</strong>, so it is well worth the extra effort to guarantee your<br />
products are correct for each step of your <strong>China</strong> expansion.<br />
Basically, be open-minded and flexible, do not be afraid to rotate or<br />
change products rapidly in the early stages if they are not doing well.<br />
When choosing location bear in mind:<br />
<strong>China</strong> has been proactive in removing tariff and non-tariff barriers<br />
through regional free trade agreements. The Government’s inward<br />
investment incentives and Shanghai’s Free-Trade Zone.
Franchisemeets.com<br />
Think Life. Think Franchise.<br />
info@<strong>franchise</strong>meets.com https://<strong>franchise</strong>meets.com<br />
<strong>FOCUS</strong>:<br />
<strong>China</strong><br />
2016