Franchising in China

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China Foto Press

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The Pros and Cons of Franchising in China
US companies must jump hurdles to operate successful franchises in China, but the potential benefits are too great to ignore.
William Edwards

40 July–September 2011



estern and local franchise brands have developed group is largely a young, upwardly mobile, and aspirational significantly in China over the past 15 years, as the two-income family demographic with one child and Chinese consumer has become an engine of considerable discretionary income. economic growth and the country’s business environment has Food service improved.
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healthy and reproducible bottom line margins. US franchises in China thus have high potential to succeed. I Second- and third-tier cities are open to franchising. First-tier cities offer developed infrastructure, businessfriendly governments, and a multitude of services and internationally standard amenities. These cities are generally “easy” for newcomers to enter, but labor and real estate prices have risen and competition has intensified in recent years. Second-tier cities have millions of potential consumers and often have lower labor and real estate costs and local governments that encourage the creation of new businesses (see the CBR, November–December 2010, p.12). In addition, US food franchisors are increasingly allowing small companies to own franchises—a trend that KFC and Papa John’s started in second- and third-tier cities in the last few years.

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Foreign franchises must also overcome problems that are specific to the China market. I Intellectual property protection is uneven. Weak intellectual property enforcement and an inadequate legal framework are key reasons early foreign brands opened as company-owned stores or JVs, instead of franchises, in China. Many US brands have seen local

The sheer size of China, and its diversity of business and food culture, makes franchise development difficult.
Foreign franchises face opportunities…
Many trends indicate that the China market is ripe for franchises. I The consumer class is

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