By Thibaud Andre
Franchising in China has gained momentum
Franchising in China has already been on its way for the last decade with a lot of international companies entering the market. It is easy to find such famous brands as H&M, MacDonald, L’Oreal, IKEA or Starbucks in metropolitan Chinese cities such as Shanghai and Beijing. In recent years, increasing number of international brands open their shops in tier 2 and tier 3 cities, where there is still much space for investment and growing demand. As the recent data says, only in June 2014, 50 new grocery stores are opening across China including famous European brands such as Carrefour and Metro, 90% of which are in tier 2 and tier 3 cities. In 2013, Yum! introduced a strategy of business expansion in China planning to open 700 new shops across the country. By 2012, Macdonald had already had 280 restaurants in Guangzhou and was planning to grow to 300 by the next year. Due to increasing popularity of luxury goods among Chinese customers, worldwide known luxury brands of clothes and cosmetics open their shops in China including L’Oreal, Lancome, Maybelline and Kerastase. In 2013, L’Oreal announced that its sales in China reached 12 billion yuan.
Cultural difference and franchising regulations do not prevent European brands from entering the market
The reasons why European brands move to Chinese market are apparent: 1.3 billion people of which over 300 million are middle class consumers (a portion that is rapidly growing each year), WTO membership and a booming economy with a growth rate averaging around 9%. Opportunities for foreign companies are open almost in every sector from brand clothes to coffee shops. Franchising regulations in China were initially designed to make it easier for foreign brands to enter Chinese market to facilitate growth and stability in the country. There are three main conditions, which a foreign retailer must meet to franchise on Chinese territory. The franchisor must have more than two company-owned branches for at least one year. The other conditions states that a franchise agreement must have a “cooling-off” period and signed for minimum 3 years. These requirements are fairly easier to meet compared to franchising policies of other countries.
To franchise in China, it is crucial to know tastes and preference of Chinese customers, which are different from that of Europeans due to culture, traditions and different lifestyle. Therefore, many international firms face difficulties while operating in different countries due to difference in economy, business environment, politics and culture. The successful franchiser is one who is able apply existing concepts in a different cultural and economic environment. Nevertheless, while franchising in China may bring in large revenues, it also creates difficulties for foreign brands. Franchising requires sound property rights policies, trust and legal protection. However, Chinese authorities still remain uncommitted to such policies; that makes business in China more difficult. Also, it is important to insure the good implementation of brand guideline in each store.
As mentioned before, franchising in China has gained popularity in recent years. Each year, apart from tier 1 cities such as Beijing and Shanghai, more and more tier 2 and tier 3 cities are being saturated with international brands such as Starbucks and L’Oreal. Foreign companies find it extremely profitable to trade goods in China though some of them face problems with legal regulation and cultural differences, which can make franchising in China more complex and challenging. However, government authorities seek to facilitate international trade via frequent easing of franchise regulations and being more committed to property rights issues.
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Thibaud Andre is a French consultant working at Chinese market research firm Daxue Consulting. He is passionate about Chinese culture and likes to share insights about the many emerging markets of the Middle Kingdom.