The Ins and Outs of Franchising in China

Camera-clad tourists wandering the streets of China’s bustling cities can chow down on a Big Mac (or a Whopper, if that’s their thing), pop into KFC for a bucket or hit up one Papa John for some better ingredients, better pizza. The Americanization of the world is happening, and franchisors are looking toward Asia for expansion opportunities – with good reason. [caption id="attachment_8312" align="alignright" width="150" caption="Philip Zeidman"][/caption] The CIA World Factbook estimates that China’s population will hit 1.4 billion this month, and according to the International Franchise Association, the retail amount of social consumption will exceed RMB 20 trillion by 2020. “The million or so people who have moved out of poverty and into the middle class in China is unprecedented in history,” said Philip Zeidman, partner at the business law firm DLA Piper. “The growth of young people, the appetite for Western foods and the familiarity with international brands thanks to social media, movies, etc., as well as the urbanization and large moves from country to city, all make this a market that no one can ignore.” [caption id="attachment_8310" align="alignleft" width="150" caption="Blake Martin"][/caption] Blake Martin, Vice President of International Operations for Right at Home*, a leading in-home senior care franchise      that has recently expanded to China, echoed Zeidman’s enthusiasm. “American brands are highly credible in China, as  long as the brand proves to the consumer base that it’s willing to assimilate with the nation’s rich history and culture,”  he said. Despite these appeal-building factors, some potential roadblocks exist. Chinese law requires any franchises to operate  at least two company-owned locations for at least one year – anywhere in the world – before becoming a registered  franchisor. (The law previously stated that these company-owned stores had to be operating in China for one year  before the IFA lobbied heavily and met with the Chinese government to update and simplify the regulation). [caption id="attachment_8314" align="alignright" width="150" caption="Tao Xu"][/caption] Bridging the gap between American and Chinese law can also become an issue when it comes to intellectual property. Tao Xu, also a partner at DLA Piper, says that although China’s intellectual property legislation is quite good, problems can arise. “The enforcement regime is very complex,” he said. “There are multiple players involved, such as court systems and trademark offices, so it’s difficult for a foreigner to navigate this on their own.” Martin agreed, nothing that Right at Home has been much more aggressive in protecting its intellectual property there because of the sheer volume of potential violators. If franchisors are equipped and ready to traverse the regulation pool to plant their business on Asian soil, patience and capital are the key factors for success. “People have a mystic impression that it’s a get-rich quick opportunity,” Zeidman said. “No one should think this is something where you can go in and get out in 18 months and make any kind of money.” Martin seconds this notion, stating that success in China won’t come overnight. “You must be willing to both make a long-term investment and to make necessary adaptations to the very distinct culture,” he said. For those still on board, the final step falls in location selection. “There are anywhere from five to 10 top-tier cities with huge middle-class populations, including Beijing, Shanghai and Chongqing,” Xu said. “However, these cities are extremely expensive to do business in. If you want to be seen, that’s where you go, but if you want to make money, check out second, third and fourth tier cities such as Hangzhou, Suzhou, Wuxi and Nanjing.”