FOCUS: China franchise market

Franchisemeets.com
Think Life. Think Franchise.
info@franchisemeets.com https://franchisemeets.com
FOCUS:
China
2016

China franchise law
FOCUS: China Franchise Market
Chinese food
franchise sector
China hot
sectors
in China
Where to open

China Market
Overview of the Market.
At a Glance
Growth is expected to be 7.5% in 2014 and 7.3% in 2015, yet as
China ranks 93rd in the world on GDP per capita, there is
significant room for consumption growth. The long-term
outlook is positive.
During the past 30 years, there
has been dramatic economic
growth in China and while
franchising only started in the
1980’s it has also displayed rapid
development. By 2012 the
number of franchised stores
exceeded 400,000 with 5,000
systems averaging 83 stores. The
total annual sales of CCFA (China
chain store & franchise
association) members reached
nearly US$300 billion in 2010 and
represented about 13% of total
retail sales in China.
The growing wealth,
consumption, density of
population and rising 2nd/3rd tier
cities makes China a lucrative and,
for the foreseeable future,
growing market.
It is odd when we talk about a
slowdown in China yet GDP
growth is still above 6.5%-not to
be sniffed at.
As China becomes more open,
their desire for foreign brands and
new experiences grows in parallel.
There are a range of hot sectors a
franchise should be aware of. They
value foreign brands higher than
domestic brands as they are very
much seen to be a status symbol.
The resulting demand from these
factors should be filled by savvy
franchisors looking to expand out
of their domestic market.growth
(14% increase) 2011-2012, was
seen in the internet and TV
shopping sectors.
Key Franchise Points
* Although growth has slowed, total retail sales in 2015 showed
a real growth of 10.6 percent after deducting price factors

China Market
Overview of the Market.
Only around 13% of American
franchises have entered the
Chinese market though 15 of the
world’s top 20 franchises are
already active in China. With
foreign companies comes new
business systems and despite
foreign companies accounting for
a relatively small share of the retail
market, their business experience
produces highly improved
operating efficiency and profit
margins which outstrip their
domestic peers.
Only around 13% of American
franchises have entered the
Chinese market though 15 of the
world’s top 20 franchises are
already active in China. With
foreign companies comes new
business systems and despite
foreign companies accounting for
a relatively small share of the retail
market, their business experience
produces highly improved
operating efficiency and profit
margins which outstrip their
domestic peers.
The rise of the Chinese consumer:
With the ever increasing growth in
the middle-class (300 million as of
2012) combined with a maturing
consumer, the Chinese are
becoming a demanding society
for new products. These
economically empowered,
sophisticated consumers require
more than basic goods to satisfy
their desires and many display
their wealth through the purchase
of foreign brands. To be seen
carrying a Starbucks coffee on the
way to work is really middle class
cool.
In a nutshell, these ripe malleable
consumers are young, often have
a double income, are forward
thinkers looking to attain a
modern lifestyle and broaden
horizons. As an international
franchisor there is a great
opportunity to introduce exciting
cross-overs targeting these new
adventurous Chinese consumers.
Key Franchise Points
* Only around 13% of American franchises have entered the
Chinese market.

China Market
Finding a China Partner.
Seeking the right partner for your
franchise business is paramount. If
you have a product, connecting
with the right distributor is
paramount. Finding these
partners is a time-consuming task.
As China is still developing in
terms of business knowledge and
a free economy, finding a suitable
partner with a track record will
involve effort but this effort will
prove worthwhile in the long run.
Though financial check systems
are improving, doing due
diligence and sourcing past
financial records is not as easy as
other countries as there is
currently no standardised national
system for company registration
in China. Professional input will
derisk and ease the mind.
Despite the above, the rise of
entrepreneurship in China, the
growth of the franchise system
and the development of China’s
regulatory environment means
Chinese businessmen are actively
seeking to introduce the next big
trend to China. This has increased
the chances of finding a qualified
reliable partner with the
necessary local knowledge and
required investment to open
franchises.
Importanace of systems
Most franchisors have their own
bespoke systems across their
stores. The implementation of
these IT systems will require a
good amount of training and the
management/ business systems
will have to understand the
thinking of local franchisees and
employees. Saying this, the
systems are fundamental because
they support the proven
uniformed model and represent a
known bottom line.
Tight systems allow your domestic
partner to conduct the majority of
daily business whilst still having
an overview, however it is key to
closely monitor and control your
domestic supplier and, in the first
instance, be actively involved in
property searches and be present
for the signing of lease
agreements.

China Market
Franchise Law.
Introduction
In order to better protect the legal rights and interests of
franchisees and consumers, the Chinese government imposed
registration and disclosure requirements on franchisors
operating in the country.
Key Regulations on Franchising in
China:
Currently, the key regulations on
franchising in China include: the
Regulation on Administration of
Commercial Franchises
(Regulation), the Administrative
Measures for the Registration of
Commercial Franchises
(Registration Measures), and the
Administrative Measures for
Information Disclosure of
Commercial Franchise (Disclosure
Measures). The Regulation was
promulgated by the State Council,
while both of the Measures were
issued by the Ministry of
Commerce (MOC).
Reproduced courtesy of
wileyrein.com
Robert A. Smith, Fairy Li
and Kimberly L. Sikora
Panza
Franchise Registration:
According to the Regulation, a
franchisor must, within 15 days
after signing a franchise
agreement for the first franchised
location in China, file an
application with the appropriate
commercial authority in the MOC
to register its franchise. The
registration requirement is an
administrative measure to
regulate franchise activities, and
also provides potential
franchisees with public access to
more information regarding the
franchisor and its business.
Although the failure to register
does not impact the effectiveness
of the franchise agreement, a
franchisor that fails to timely file
the franchise registration could
face a fine.

China Market
Franchise Law.
In connection with the franchise
registration application, the
following documents must be
submitted:
1. Business registration certificate
of the franchisor.
2. Registration certificate of the
franchised IP right.
3. Franchise agreement
4. Certification for the 2+1
Requirement.
5. Marketing plan for the
franchised operation.
6. Other documents required by
the Regulation.
If there are any major changes to
the original filing (e.g., changes
concerning the business
registration of the franchisor,
business resource, and
distribution of the Chinese
franchisees), the franchisor must,
within 30 days, file a notice and
supporting documents with the
MOC for modification of its
franchise registration. An annual
update regarding new franchise
agreements and those terminated
in the past year also must be filed
with the MOC by March 31.
Disclosure:
According to the Regulation,
except for a renewal of the
franchise agreement on the same
terms, a franchisor must disclose
to the franchisee in writing all
information at least 30 days prior
to the execution of another
franchise agreement.
Enforcement:
Thanks to the MOC’s online
franchise registration system,
information about franchisors and
their franchising business in China
is available to the public. Where
there are any illegal activities
committed by the franchisor, any
party can file a complaint on the
MOC’s franchise system or directly
before competent commercial
authorities, who will make a
decision following an
investigation.
To read more detail go to:
https://franchisemeets.com/repor
t/asia/CN/article/17/

China Market
Final Thoughts.
The Bottom Line
Many signs indicate that franchising will become easier in China
over the next few years. China’s rapidly growing, sophisticated,
affluent consumer base has a desire for imported brands that
offer convenience, quality and service.
Finding Key Regulations a partner on in Franchising China does in involve Franchise effort Registration: but there are
more
China:
potential partners than before and this number will
According to the Regulation, a
continue to grow. Business risks are mitigated with the increase
Currently, the key regulations on franchisor must, within 15 days
in the number of foreign brands and the tightening of business
franchising in China include: the after signing a franchise
regulations
Regulation on
ensuring
Administration
better practice.
of agreement
The basic
for
economics,
the first franchised
size
of Commercial the consumer Franchises market and recent location trends, in provide China, file great an
country (Regulation), potential. the Administrative application with the appropriate
Measures for the Registration of commercial authority in the MOC
It Commercial is our opinion Franchises that China’s franchise to register market its will franchise. show very The
healthy (Registration growth Measures), and all franchisors and the registration must view requirement it as a challenging is an
but Administrative primary target Measures for international for administrative expansion. measure to
Information Disclosure of
regulate franchise activities, and
To Commercial conclude: Franchise Trends and (Disclosure the economy also provides display all potential the outward
signals Measures). that The the Regulation Chinese market was and franchisees consumers with are public ready access for to
new
promulgated
imported
by
franchises.
the State Council, more information regarding the
while both of the Measures were franchisor and its business.
issued by the Ministry of
Although the failure to register
Franchise Meets reckons: 8.5/10.
Commerce (MOC).
does not impact the effectiveness
of the franchise agreement, a
franchisor that fails to timely file
the franchise registration could
face a fine.

Franchise Sectors
Overview.
Although franchises cover over 70 industries the top 3 sectors are:
Retail
Catering
Services
In addition to our other articles about China, the market is especially
appealing to new brands because of the development of
consumers-they are a lot more open to new experiences and are
becoming sophisticated and knowledgeable. This represents a broad
range of opportunity for new foreign franchisors to entice these
quickly evolving consumers. An experienced franchise consultant
should be able to highlight key franchise sectors and trends and
smoothly steer you through the franchise process!
According to the China chain store & franchise association survey,
sectors that receive widespread attention from franchise enterprises
and franchisees include:
Children’s education and training.
Online shopping.
Economy hotel.
Convenience store.
Car rental.
Domestic service.
Products for babies.
Hotpot cuisine.
Drinks for leisure time.

Franchise Sectors
Food.
Demand for higher quality imported food is on the rise due to
consumer economics and recent food scares. There is a trend of
specialty import shops opening and supermarkets are looking to
differentiate themselves by offering a wider range of imported foods.
In addition, Chinese consumers perceive international brands as higher
quality products and the status of eating imported food outwardly
portrays a certain level of lifestyle.
Food Forward Trends 2014 reports that 42% of Chinese consumers
shop at specialty foreign supermarkets, confirming that consumers are
open to trying new foreign foods. Consumers are more knowledgeable
than before and better quality produce or ingredients are held in high
regard. This has resulted in a marked rise in organic foods and produce
with advertised provenance.
Global foods are expected to have a big impact in lower tier cities as
consumers are exposed to new products and their tastes adapt. Mintel
expects higher premium goods to lead the growth in this sector but
other global foods such as cheese, pasta, sweet bakery and bread
products have grown at a rate of over 30% from 2008 to 2013.
In summary, the general trend for success is for foreign foods that have
high quality ingredients and are authentic to their countries of origin.
Ready-meals are another interesting food sector worth a quick
mention. Very much an emerging sector it is difficult to predict the
future growth. The base consumer trend is there and the change in
retailers, particularly convenience stores who now offer a range of
ready-meals, would support the trend but has to be balanced against
the Chinese culture which has little experience of ready-meals and
value cooking at home.
Assuming the market follows the pattern in other countries combined
with purchase drivers of lack of time and the need for convenience, this
sector will flourish. To reduce the risks of this emerging market make
sure a qualified franchise consultant is employed.

Location, Location
Where to open your China franchise.
Similiar to our article on choosing a region in Japan, for China it may be
wise to view Tier 2 and 3 cities as the best option to open the first store.
The reasons for this assumption are as follows:
City and consumer growth potential.
A workable infrastructure.
Lower real estate costs.
Available human resources at a lower wage.
Lower competition.
Increased customer lifetime value.
These are all important factors but the primary opportunity to create a
well-respected brand and tie in consumers from an early stage means
these cities have superior market potential.
Being such an large country you would expect diversity across regions.
These diverse regional markets make franchise development a more
meticulous task. It is rare to offer a whole country agreement to one
regional SME company as their expertise are honed to their area.
A better way
The better strategy is to find experienced partners within each region
or a large domestic player-your golden goose! This does require more
time to control multiple licenses but do not lose the fact that the size
of each regional market can bring in more profit than the total of your
domestic market, so it is well worth the extra effort to guarantee your
products are correct for each step of your China expansion.
Basically, be open-minded and flexible, do not be afraid to rotate or
change products rapidly in the early stages if they are not doing well.
When choosing location bear in mind:
China has been proactive in removing tariff and non-tariff barriers
through regional free trade agreements. The Government’s inward
investment incentives and Shanghai’s Free-Trade Zone.

Franchisemeets.com
Think Life. Think Franchise.
info@franchisemeets.com https://franchisemeets.com
FOCUS:
China
2016