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The Franchise Dilemma

The Franchise Dilemma - 12 T H E B E AT A P R I L 2 0 0 8 W...

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12 THE BEAT / APRIL 2008 / WWW.SHA.BRITCHAM.ORG W ith some 200,000 franchised retail stores representing over 2,600 brands, China is now the largest franchise market in the world. Led by the early success of both foreign and domestic brands such as Nike and LiNing, franchising has been growing at an astonishing rate of 35-40 percent over the past few years. Especially in the mid to late 90s, businesses across all sectors, including F&B, fashion, education, fitness and real estate have set up franchised chain stores across China. Drivers of growth A recent study conducted by The JLJ Group found that this rapid spread of franchise networks can be attributed to the growing middle class in China, the rising acceptance of the franchising concept among entrepreneurs, as well as the overall improvement in China’s regulatory environment. Many brands have been lured to China by the increasing disposable income of its growing middle class. This is one of the key drivers that motivated Subway and Papa John’s to expand quickly in China. Their goal was to fight for a share of the market with other well established early entrants such as KFC, McDonald’s and Pizza Hut – and franchising seemed a viable option. By leveraging the financial resources of the franchisees, Subway swiftly filled East China and Sichuan with more than 60 outlets, while over 50 Papa John’s have appeared in East China over the past few years. While demand is spurred by the growing middle class, the entrepreneurial spirit of Chinese individuals and companies has helped sustain a constant supply of capital that both foreign and domestic franchisors can tap into. KFC attracts 100 franchisee applicants every month, each ready with the ¥8 million in capital required to open a KFC outlet. The gradual evolution and improvement of China’s regulatory environment has also played an important role in advancing the franchise industry. While China enacted its first franchise law in 1997, the law did not specify any provisions for foreign companies and many early franchisors were operating in legal grey areas. Following China’s accession into the WTO, new franchise regulations were promulgated in 2005 and 2007, offering much more flexibility and options for foreign brands, particularly in the area of cross-border franchising.
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