ADVICE

Your Way into China's massive potential is large to to be ignored and attracting increasing interest from Western franchisors. China expert Bill Edwards assesses the market

WORDS BY BILL EDWARDS

hina’s middle class will KFC began granting franchises in ongoing challenge is to get the middle rise to more than a third smaller cities in 1992. McDonalds’ and upper class consumer to pay for C of its population by started franchising in 2004. ‘China senior care despite there being no 2030, with consumer Briefng’, Dezan Shira & Associates, government support for this service. spending expected to reach the January 2019. level currently seen in the European “Typically franchisors view China The role of foreign Union, according to the Economist as an alluring destination, but education franchises Intelligence Unit. make the mistake of treating it as “The growth of the middle class As Chinese consumers earn more one single market, when in reality and the high value of American discretionary income, they want the it is many. Granting one master education in China made our entry quality, brand, convenience, and franchisee for the country may be into the Chinese marketplace readily service associated with Western appealing but often fails to achieve accepted. Rainbow Station China brands. They often buy goods and the results required under the ofers middle class parents the services at stores, restaurants, and system’s development schedule”, opportunity to provide American- service establishments that are says Jason Gehrke, Director, style preschool education franchises, thus US franchises Franchise Advisory Centre, . for their children. help fll the needs of China’s Australia franchisors who have Taught in English, fast-growing middle class. entered China include , our classes Franchising started in China in The Cofee Club , Gloria the late 1980s. In 1987, KFC’s frst Jean’s Cofees, Jamaica Blue and Ray unit opened in Beijing. As of White Real Estate. March 31, 2019, there were 4,534 Franchising opportunities also franchises ofcially registered in abound in non-F&B industries. The the Department of Commerce of best prospects include car rental China with more than 5 million and services, education, senior jobs nationwide and with 400,000 care, health and ftness. outlets in operation. Here are the USCS Country Commercial number of franchises by sector: Guide (CCG) . Tupperware has 7,000+ units, Century 21 has + Retailing: 1,470 5,300+ units, 7 Eleven has + F&B: 1,596 800+ units and Super 8 hotels + Home Service: 400 has 1,200+ units. + Education: 250 + Hotel: 101 Home and senior care + Real Estate: 110 in China + Business Services: 601 The United Nations predicts that China’s population over 60 will reach focus on In 2015, total sales of the top 100 438 million by 2050 – one out of critical thinking, franchisors in China reached a every three Chinese. According to creativity, and leadership record high of RMB 435 billion PWC, Chinese people will spend development—concepts parents (US$63 billion), according to the over US$1.5 trillion from 2016- want. We started with corporate China Chain Store & Franchise 2020 on senior care increasing 17% schools owned by our joint venture Association (CCFA). per year. U.S. Commercial Service partnership before franchising When KFC and McDonald’s 2018 statistics. In recent years both our concept and evolving into full entered China in 1980s and 1990s Right At Home and Home Instead day kindergartens.” Gail Johnson, they initially owned all their outlets. have entered the China market. An Chairwoman, Leaf Spring Schools.

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Your way to China.indd 34 10/05/2019 14:08 The brand entered China in 2013 over 400 locations in China that estate developers forming operating and has 15 full schools and three run Abrakadoodle programs, the companies and private equity kindergartens open as of early market has not disappointed us!” fnancing have all emerged and 2019. Rosemarie Hartnett, President & this diversifying trend seems to be Water Babies, a United Kingdom Co-Founder, CFE. enduring.” Marc Mushkin, Vice children’s education ftness President of Global Development, franchise, entered China through International F&B CKE Restaurants. a country licensee based in the franchises In China, originally southern coastal city of Zuhai “While Carl’s Jr. has successfully had a JV but has retained full in 2016. Today Water Babies penetrated over 30 countries for corporate ownership for several has seven aquatic centers in 25+ years using traditional area years now. "In China this will Shenzhen, Shanghai and Zuhai. development franchising, China defnitely help them unlock growth Paul Thompson, CEO of Water presented unique challenges that quickly while protecting their Babies UK, advises that the most required diferent approaches. brand". Mike Hudspeth, former important lesson they learned when As Carl’s Jr. gained experience as President of Starbucks® entering China was to fnd a local a multi-unit operator in China, Eastern Europe and presently law frm and/or consulting frm in the company has done business Chief Operating Ofcer of China to help determine how best in various formats: as part of a Brinker International. to enter the country considering joint venture, as a franchisor and McDonald’s sold its mainland the cultural diferences from as an operator of over a dozen China and Hong Kong businesses western countries. company-owned restaurants. to a consortium between the state- “When we brought our The emergence of sophisticated owned Chinese conglomerate Citic Abrakadoodle art education multi-brand operators, major real and the American private equity franchise brand into China in 2010, giant Carlyle Group for $2.03 we knew there was great interest in billion. Among the key points of the educational programs for children. deal was that it gives franchising We found highly motivated parents control to the Citic/Carlyle seeking the best in educational consortium in the PRC for a period opportunities for their of 20 years. IPO Pang Xingpu law children and very motivated frm, February 3, 2017. franchise candidates who understood the market Supply chain potential. Now with development and management “Supply chains in China are distinguished by separately- managed regional and even local divisions across the markets – pivotal to any franchisor’s success is the need to retain supply chain expertise in the country that has mastered this difcult puzzle of distributors, suppliers and government agencies. This means a likely answer is to recruit the proven expert from a brand already successful in China.” Joyce Mazero, Partner, Posnielli. The new Chinese middle class family puts health for their children number one on their priority list. That is why they prefer international F&B brands because the brands do not cut back on quality in the countries they enter. In 2013, YUM Brands’ KFC stores had a major decline in sales because the company’s suppliers had injected growth hormones and antiviral drugs into chicken beyond food safety limits. This

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Your way to China.indd 35 10/05/2019 14:08 ADVICE

went viral on social media. In 2014 eliminated legal restrictions on some already exist, although not McDonald’s beef supplier for many foreign investment in franchising. on the scale as large as those in years sold them expired meat that Now, China’s franchise law is the Middle East. In addition, joint they had repackaged. Financial clearer by virtue of the 2007 law. venture has become an increasingly Times, 2013 and 2014. Very strong ‘China Briefng’, Dezan Shira & common entry mode preferred quality assurance of in-country Associates, January 2019. by both foreign franchisors and food production and distribution “For foreign franchisors, compared the well-established Chinese resources is critical for foreign F&B to a few years ago, they are certainly franchisees.” Tao Shu, Partner, brands doing business in China. dealing with more sophisticated DLA Piper “Challenges to U.S. franchise frms include a relatively weak “China adopted its first franchise law in regulatory system, increasing costs of labor and real estate and a lack 1997, but foreign franchising remained of qualifed Chinese franchisee candidates. The most recent mostly a gray area at that time until a legislation released by the Ministry of Commerce stipulates that new law was announced in 2005, which franchise frms can start franchising in China as long as they own and operate two company-owned eliminated legal restrictions on foreign stores for one year in any part of the world. In addition, franchise investment in franchising” frms must fle with the local commercial authority for record Legal issues consumers, and by the same within 15 days after the execution of China adopted its frst franchise measure, more sophisticated the initial franchise contract.” U.S. law in 1997, but foreign franchising franchisees. It would not be a Commercial Service China Country remained mostly a gray area surprise if we see multi-brand Commercial Guide, 2017. at that time until a new law franchise operators fourish in the Edward Chatterton, Partner, was announced in 2005, which Chinese market in a few years; DLA Piper, Hong Kong, says “China

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Your way to China.indd 36 10/05/2019 14:08 is a high risk IP jurisdiction in and 3,600 units across China which registering IP remains the (www.miniso.cn) best defence against infringement and brand dilution. Before any Aesthetic is a local beauty care of this is shared and before brand with 8,200 units substantive negotiations begin, the (www.kpbeauty.com.cn) parties should enter into robust non-disclosure and confdentiality Hanhuang shoe care franchise has obligations. It is expected that, 3,200 units (www.hanor.com.cn) with the introduction of the 2019 E-commerce Law, there HomeInn, with 4,000+ units, has will be an increasing number of joint ventured with Hyatt hotels successful cases in which brand to meet the evolving needs and owners defeat brand pirates in aspirations of a growing number China. China’s newly-revised of young travelers in the upper- Anti-Unfair Competition Law has midscale segment in China, introduced additional ofenses for providing them with a seamless IP, commercial secrets and other and premium travel experience. market conduct-related violations.” (www.bthhotels.com)

Successful Chinese Juewei Snacks has over 10,000 franchises units selling special local favor Local Chinese franchise brands snacks (www.juewei.cn) are growing in size and quality. International brands have been Innovation is required educating the market for years No-Cash Credit card payments and their staf left and joined local have made consuming easier and brands with higher salaries. Here faster. China is now the leading are some outstanding Chinese country in consumer wireless franchise brands. payments. Franchised stores must ofer cashless payments to succeed. I Do, which sells engagement rings A very strong online ordering that have more than to Chinese middle and upper class and constantly updating social 1,000,000 population. millennials, is an outstanding media presence is essential for In summary, franchising is alive combination of luxury retailing doing business in China today. and well in China due to the fast with franchising. In 12 years they While Chinese consumers do not growing middle class consumer have developed nearly 800 units have Facebook and Google, they who prefers brands they can trust across 200+ cities in China with do have WeChat which had 495 and despite legal and government 90% are franchised by multi-units million Chinese users in 2017 and bureaucracy challenges. The almost owners. (www.hiersun-ido.com) was used on 79% of the cell phones 400 million middle class Chinese in the country. WeChat is used for consumers cannot be ignored by Fornet is the number one local communication, ordering, buying the global franchise community. laundry franchise in China, and cashless paying in stores. with 1,600 units over 1,600 of For new start-up franchises, THE AUTHOR which90%+ units are franchised. lower investment will increasingly William Edwards, CEO of (www.fornet.com.cn) be key. This probably means fewer Edwards Global Servic- new restaurant brands and more es, Inc. (EGS), has lived Huazhu Hotel, a leading local hotel service concepts. For mature in seven counties and franchise chain, with hotels over franchises, continued growth has 45 years’ experience doing international busi- 4,200 and 70%+ are franchised. means fnding multi-unit owners ness. He lived in China from 1982-1985 and was (www.huazhu.com) who have existing infrastructure, then the AlphaGraphics quick print chain China capital and staf to take on country licensee from 1990-1992. Subsequently, The Meiyijia Convenience Stores new units. Mr. Edwards has taken numerous U.S. education, F&B, retail and service franchises into China. He is the premier local convenient New franchise development has written numerous article on doing business store franchise with 15,000 units has already moved away from the in China and lectured on this subject at several and 98%+ are franchised. very large, very high cost cities like universities. In 2014, EGS established an office in (www.meiyijia.com.cn) Beijing, Guangzhou and Shanghai Beijing. The data on emerging Chinese franchis- to such (still large cities) as Tianjin, es was supplied by James Liu, EGS’ Beijing based Greater China Managing Director. Contact Bill The M&G Stationery chain has Wuhan, Chengdu, Hangzhou, Edwards at [email protected] or 8,500 units (www.mg-pen.com) Nanjing and Chongqing. There are on +1 949 375 1896. Miniso sells household items approximately 125 cities in China

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