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China's small and medium-sized enterprises (SMEs) and individual investors face a wealth of business opportunities as increasing numbers of international franchisers make inroads into the nation.
International Franchise Association President Sidney J. Feltenstein said: "China is one of the leaders in terms of franchise business growth...many international franchisers have put China at the top of their list.
"China's franchise industry is on the verge of enjoying explosive development," declared Feltenstein.
There are a total of 1,900 franchisers operating on the Chinese mainland, compared with 2,000 in the United States.
And there is a great deal of potential for further growth, according to statistics.
For example, the franchising business only accounts for 3 percent of China's total retail sales, starkly contrasting with around 30 percent in the United States.
The nation's robust economic growth has been accompanied by a similar strengthening of the purchasing power of many Chinese people.
The average income exceeded US$1,000 last year, a landmark indicator that many economists believe will lead to explosive consumption.
And franchising, usually brand and service-centered, might be entering its golden age, with more Chinese consumers turning their attention, and their financial clout, to issues such as brands and service quality, rather than mere practicability.
Meanwhile, "China's further opening to the world also paves the way for more franchisers to head for the nation," said Feltenstein.
In line with the nation's World Trade Organization (WTO) commitments in late 2001, China will lift almost all restrictions on foreign investment in the retail sector, including franchising.
Restrictions related to geography, capital, shareholding and experience will be largely eliminated in 2005.
"Many franchisers have a feeling that it is the very time to cash in on China," he said.
Feltenstein identified some of the potentially lucrative areas for the franchising sector in China.
"Food will continue to be the most successful franchise business," said Feltenstein, who was a noted franchiser in that sector.
"Other sectors include logistics, childcare, packaging and taking care of the elderly," he added.
But Feltenstein added a note of caution, urging overseas franchisers to do their homework before they enter the Chinese market.
"The most important thing for them to learn is Chinese culture," he said. "Cultural difference may have an impact on their business."
He said the experience of some big-name franchisers might offer some food for thought.
"When McDonald's entered India, it substituted beef in its menu with lamb and vegetarian options to show respect to Indian religions," he said.
Moreover, there are differences between some regions of China.
For example, eating habits differ greatly. People in the south prefer soup-related dishes. Noodle-related dishes, on the other hand, sell well in northern China.
And for a laundry franchiser, although his business may prosper in Beijing, expansion of the franchise may be trickier than in Shanghai as people there tend to be more frugal.
"It needs time for a foreign franchiser to understand the Chinese market before they can make the right decision," Feltenstein said. "Many franchisors fail because they do not study the market thoroughly."
It is also based on this belief that the president advises international franchisers to build brands and business models in a few Chinese cities with either a local partner or a master franchisee, before they sell franchises throughout the nation.
Established franchisers such as McDonald's and KFC (Kentucky Fried Chicken) did not offer franchises to individual Chinese investors until very recently.
And franchisers should not just seek growth in China for the sake of it, Feltenstein suggested.
A smart franchisor should make sure he can offer sufficient infrastructure and all-round support to each of his franchisees, he claimed.
Over-expansion could put a strain on the ability to offer services and support to franchisees, which usually results in a loss of consumer confidence and is likely to undermine the entire franchise system.
Feltenstein believes overseas franchisers' flocking into China might offer many chances for domestic players, particularly SMEs and individuals.
Medium to large-sized Chinese retailers and other service companies can be ideal master franchisees, he said.
"They are much more familiar with the local market, and will become the type of partners that foreign franchisers want," he said.
Regarding individual investors, Feltenstein said, the Chinese culture of entrepreneurship is suitable for franchising.
Franchises will offer an increasing number of relatively safe and profitable business opportunities in the years to come.
According to surveys in the United States, about 30 to 50 percent of individually-run businesses go bankrupt in the first year. The proportion falls to between 3 and 5 percent among franchising businesses.
And the requirements to start a business for individual franchisees are normally not very harsh, Feltenstein said.
Golden Rossi, an Italian coffee franchiser that launched franchises in China last year, requires less than 200,000 yuan (US$24,000) for individual franchisees to run a coffee bar.
More importantly, they can enjoy the support from their franchisers in terms of supplies, and use of already-established brands, patents and business models, he said.
Topping the franchisees' agenda is finding a suitable franchiser, Feltenstein suggested.
First, he said, a franchisee should be clear about what service and support the franchisor can offer.
And he should remain alert to financial situation of his franchiser, making sure that the franchising system he is going to join is on a sound footing.
Moreover, the franchisee should talk to his foreign counterparts. This will help them better understand the franchiser, Feltenstein added.
(China Daily November 9, 2004)
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