China Franchise Market
Interview with Thomas Leclercq, General Manager at Third Place Limited Franchise Network Development & Management Co., China
How did you get started as a franchise consultant?
I started developing franchises during the Shanghai World Expo, during which I was in charge of a famous franchise concept from Anheuser-Busch InBev, “Belgian Beer Cafe”. From then on, I became more and more aware of the tremendous opportunities there are for Western franchised concepts in Asia and decided to offer my experience to help them seize it safely. That’s how Third Place Ltd was created, as a franchise consulting company.
Who are your clients?
Food and Beverage concepts are our first target. Indeed, F&B is one of the most promising segments for franchises in China. The relatively low cost of food ingredient and labor in China, as well as the relatively large proportion of the population that eats out regularly explains this. Naturally, a lot of Western franchisors are interested in seizing this opportunity.
We also work with education concepts, especially for kids. This makes a lot of sense in China when you only think of their one-child policy and the focus of the family on the single child. Furthermore the growth of the Middle Class in China really fuels education as a whole industry.
Finally, we are also open to various services franchises, ranging from gym clubs to cleaning services for example. We are convinced that tremendous opportunities in the services sector are still to be seized in China.
What are the current trends on the franchising market in your country?
The Chinese economy has been growing tremendously over the last decade and with an estimated annual GDP growth of 7.6 per cent in 2012, they are still performing well.
Franchising as it is known in the most developed franchise countries, like the USA or United Kingdom, has yet to be developed in China but changes are underway and can happen rapidly in the Middle Kingdom. Also the Chinese Government is well aware of the potential of such business model to create jobs, sustain the local economy while the countries business model shifts from an export focus to a development of its own domestic market. In 2009, China's franchise industry experienced rapid development; the number of franchise systems broke the 4,000 threshold, up nearly 15% over 2008. The total number of franchised stores exceeded 330,000, and each franchise system had on average 83 franchised stores according to the China Franchise Market Report (2011).
International Franchises are also growing at a fast pace. Indeed, Chinese value many foreign brands very highly and it is expected that the Chinese middle class will grow to more than 600 million people in the year 2020. As a result, more people in China will be able afford more expensive products on a regular basis which makes it attractive for franchise concepts from all over the world to come to China.
How many companies in your country offer franchises?
According to statistics released by the end of 2010, there were more than 4,500 franchise systems in China, covering 70 industries and the total number of franchise stores has reached 400,000. The number of franchised outlets in China is likely to reach 800.000 over the next five to 10 years, creating more than 10 million jobs. It’s also stated that the top 120 franchisers had a total sales revenue of 338.7 billion Chinese Yuan (36,4 billion Euros) in 2010, an 8.9 percent increase from 2009 and that the 120 franchisers own 131,413 stores which is 12,5 percent more than in 2009.
Which are the best Franchises by growth, branch and demand? What makes them different?
By industry, franchise systems were mainly concentrated in retailing 44%, catering 30%, and service industries 26%. Service franchises witnessed the fastest growth according to the China Franchise Market Report.
Food and beverages is a great example of impressive demand, especially regarding to foreign concepts. Today, KFC is still the largest brand in China concerning fast food with 4000 restaurants. The followers are Mc Donald’s with 1750 outlets, Starbucks with 700 and Pizza Hut with 700.
To give a few figures, KFC reported a turnover of 12.6 billion dollars in 2011 of which the Chinese market contributed roughly 45% (Feng, 2012). What makes them different? Well, I think their success in China is largely explained by its ability to create a menu that combines its traditional Western fast food with dishes that appeal to Chinese tastes.
What's the average startup investment in money and time for a franchise?
This is definitely a complex question to answer since many factors are to be taken into accounts: the sophistication of the franchise system, the adaptation it requires to enter the Chinese market, the availability of the raw materials on the market, the possibility to manufacture the fit-out in China or to import it, etc.
Regarding the time in particular, franchising in China for a newcomer can done be very quickly but at some conditions: the franchise model should standardized enough, it needs to comply with the Chinese franchise regulation and the brand is preferably already well protected. On the investor side, many Chinese investors have available funds and are only waiting for the right opportunity to show up. So on the matching phase side, it can be really fast which is also one of the specificities of the Chinese market.
Which branches experience a lack of franchises?
As China’s Economy continues to develop, so will its need for more sophisticated services. Many successful franchises are actually based on services such as marketing, consulting, staffing and education, among others. New opportunities will also present themselves geographically, with franchise development currently concentrated in first-tier cities.
What is the profile of the people who choose to buy a franchise?
They are all kind of profile, I would say that each franchise has its specificities and as such, the franchise profiles might be very different from franchise to franchise.
As I mentioned earlier, and generally speaking, capital is readily available in China given the rapid economic development of the past few years. The Chinese are certainly getting richer fast: the per-household disposable income of urban consumers is expected to double between 2010 and 2020 and many Chinese entrepreneurs are looking for opportunities to bring into China.
However, these entrepreneurs might be lacking the necessary experience and management skills to successfully launch a brand or concept. That’s where the support of a franchisor is most welcome and needed.
Combining the large and growing middle class in China, the acceptance of franchise systems by entrepreneurs and the improvement in China’s regulatory environment leads to huge business opportunities for franchisors. The Chinese market values foreign brands higher than their domestic brands which makes international franchise business model very attractive to many investors.
What should a franchisor know before coming to your country? Any specific requirements, legal restrictions etc?
Success in China comes at a certain price and focus. So I will provide a few recommendations to those willing to tap into the growth of the Chinese franchise industry:
- First of all, you need to protect your intellectual property! There are still today IP infringements in China even though the situation has slightly improved over the years in major cities. However, if you venture into Tier 2 or Tier 3 cities, the risk of your concept being copied is a reality. Therefore the first step is to protect yourself. To really avoid this situation, we always recommend to our partners, to develop rapidly in a given territory to seize the full potential of the market by themselves.
- Secondly, pay the upmost attention to Partner selection, due diligence and quality of management! These are crucial elements for successful franchise development in any market but they are even more important in China.
- Be aware that there is no such thing as one China! Many international franchisors make the mistake of considering China as one single market. China is so vast and its regions so diverse that it should be treated almost as a collection of separate countries.
Third Place Limited Franchise Network Development & Management Co., China
