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If You Think Franchising in China is Challenging Now; Just Wait!

by Ed Teixeira

It's well known that exporting a franchise to China is a difficult proposition. Learn why it may become even more difficult in the future.

Franchisors and consultants that have attempted to bring a franchise concept into China have long recognized just how difficult that can be. The reasons include:

Amount of capital required to successfully find qualified candidates, legal costs, time and travel ( don't expect a candidate to visit the U.S. franchisor, pay a fee and sign an agreement)

  • Potential Intellectual Property issues
  • Need to adapt product or service to Chinese market and consumers
  • Vagaries of Chinese franchise regulations for foreign franchisors
  • Duplication by competitors
  • Challenges of negotiating a fair deal

Although one can cite the benefits that China offers to franchisors such as a huge consumer market with an increasing middle class, it's important to evaluate the market potential in terms of the costs to enter the market and the costs to be successful and It's the successful part that can be especially challenging. For example a recent article in the Wall Street Journal entitled Yum's Novelty Fades in China reveals that sales of KFC and Pizza Hut continue to shrink as the novelty of these brands has appeared to wear off as consumers are turning to new similar brands owned by Chinese companies. To counter the revenue slide Yum is re-tooling its KFC and Pizza Hut offerings.

In the report Subway and the Challenges of Franchising in China by Wan Tian Looi , U.S. franchisor giant Subway faced a number of challenges after entering the Chinese market in early 2000. By 2005 there were only 19 Subway franchisees in China operated by the Master Franchisee. As of January, 2014 the number of franchisees had grown to 437, an average of 52 per year. Despite some success the author of the report raises a number of challenges that Subway continues to face in China including; theimitation of brand or logo, loss of proprietary knowledge, strict regulations in China and maintaining the image and level of service that had been established.

If these challenges aren't a concern consider the new regulation proposed in China by the Ministry of Commerce that could make a corporate structure used in China by companies like Amazon, CBS illegal. See Foreign Companies at Risk From Proposed Chinese Law. A number of companies employ a corporate ownership structure called a variable interest entity, to conduct business where foreign investment is restricted by the Chinese government. Although the companies that could be impacted by this regulation are not franchisors, this action by the Chinese regulatory authorities offer an example of how a legal practice by foreign companies operating in China can suddenly change. Consider the master franchise structure. As foreign franchising grows in China could new regulations that threaten foreign franchisors be introduced?

China offers significant opportunities for U.S. franchisors however, entering the market and sustaining success has financial costs and challenges that must be considered.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com



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