Thanks to a getting huge middle-class consumer base, China is surely a land of opportunities for international franchisors.
In this article, we are going to explain:
why it is convenient to develop a franchise in China, how can a foreign company do it, and, in conclusion, what can we take from two of the most important franchise food chains in China: MacDonalds and KFC.
Franchise market opportunities in China
China: the largest franchise market
China is on the top of the “biggest franchise markets list” considering the 4,368 franchisors registered with the Chinese Ministry of Commerce and the about 400,000 outlets in operation in over 70 industries.
It’s interesting to highlight a difference between China and other major franchise markets: while markets as the US and UK host many hundreds of outlets per franchise system, China counts only 90 outlets per system, which demonstrates the incredible number of competitors present in the country and the incredible potential of the market.
The industry that leads in the franchise market is undoubtedly Food & Beverage, followed by other key sectors like education, car rental, health and fitness, catering, beauty, and hospitality.
Consumption expenditure is the economy’s driving force in China
Chinese pro capita consumption expenditure is increasing year by year driving China’s economic growth.
Despite the COVID-19 outbreak damages all world’s economies including China, the “largest franchise market in the world” seems to recover faster than any other world’s region, already showing minimal growth in consumption of 0.5 percent YOY since August 2020.
Franchise market challenges in China in 2021
Big opportunities go hand in hand with big challenges. Chinese consumption expenditure is growing together with brand awareness. In fact, the Chinese are more and more aware of what the market can offer and pretend much more from companies than in the past.
This means that companies must invest a lot to create competitive products and original as well as attractive marketing campaigns able to reach their target.
In addition, as the youngest generations are becoming the main target of the majority of foreign brands, overseas companies must be aware of the fact that being online is the first rule to follow in order to reach such a pretentious consumer group.
FOOD & BEVERAGE: the leading category of the franchise market in China
Even if F&B is the top industry in the franchise sector, most of the revenues of the industry are generated by non-franchise entities. Also, the sector grew by 7,8% in 2019 compared to the previous year. Both data show a high growth margin for franchisors in China.
New trends in the F&B franchise sector of China
- e-commerce, in particular, mobile commerce
- delivery platforms
- restaurant chains in 3rd and 4th tier cities
- big data analysis
- new generations attention to healthy and fashionable lifestyle
All factors indicate that a strategy should include new sales channels and marketing tools, good customer service, and attention to product quality.
How to develop Franchise in China 2021
You need to identify your target before to develop a franchise in China
The most interesting target for new foreign brands in China is wealthy expatriates, tourists, business people, young professionals, and Young emperors.
All these categories of people are willing to spend on foreign quality products and new attractive proposals.
However, your company should consider Chinese lower-income and according to that includes a lower-priced set of products in order to meet also this target’s needs.
The Laws to follow to develop a franchise in China
- Registration measures are present on Decree No. 5 of 2011 of the Commercial Franchise Registration Administrative Measure (MOFCOM)
- Foreign investment Measures on Decree No. 8 of 2004 of the “Administrative Measures for foreign investment in Commercial Fields”
- Information disclosure Measures are present in Decree No. 2 of 2012 of the Commercial Franchise Information Disclosure Administrative Measures
- And finally, in the PRC contract law, from Article 1 to Article 129 there are Agreements inheriting general contract principles, all related to franchise regulation.
Registration procedure for international franchise entities in China
All foreign franchisors must register with MOFCOM in Beijing and can find all the documents necessary for the registration in article number 6 of the Registration Measure.
It is also necessary to record the trademark licenses with the CNIPA (China National Intellectual Property Administration).
Form of business a franchise entity should consider to enter China
Wholly Foreign-Owned Enterprise is not more admitted in China, however, foreign companies still prefer to invest in the country without establishing a local entity. This decision is relatively useful since foreign and domestic business subjects are required to follow the same rules, the Company Law of the PRC.
On the contrary, a good option can be to establish a joint venture with a domestic partner since this form of business offers more flexibility and winding-up of an undertaking than the others.
Target the right consumers
Consumers who are more able to accept innovation are the youngest generations or office workers of first and second-tier cities. They are the most active on the web. Many brands choose to target them because they indirectly contribute to promoting products through social networks and among their friends and family members.
Target third-tier city
To have a presence in big cities is important to get a reputation and gain the confidence of your consumers. However, it can be interesting to consider third-tier cities in a long-term strategy,. The market is not as competitive as in first or second-tier cities and the price for implementation is lower.
… And Shanghai too!
If you are interested in the Chinese market, Shanghai can be a very interesting entry point. In fact, due to the fast development of the city, people are more open to new things.
Historically, Shanghai was a center open to foreign trade and a prosperous city.
More importantly, Shanghainese have a higher purchase capability compared to other areas in China.
Adapt your strategy to the Chinese market
Brands must adapt their offer to Chinese taste by changing a little element or some details at least. In this way, you can catch Chinese consumers’ interest on the one hand and show that your company cares about the Chinese consumer’s needs on the other.
For instance, Macdonalds asked its consumers to write messages with their expectations on products and then choose some of those to make their expectations realistic.
Internet is everything in China. All types of companies need to be digital if want to grow their business in China. That’s why you need to execute the following steps to be competitive:
- Create a Chinese website and landing page. Chinese to find you on the internet to understand who you are and this is possible if your website is hosted in China, otherwise, it cannot be found on Chinese search engines.
- Create your online reputation by doing SEO on Baidu, which is the most important Chinese search engine. This means you need backlinks on Chinese social media, Chinese forums (for example Zhihu), and website (PR with Chinese Press); you can also have faster ROI paying for the “Baidu optimization”, so investing in SEM (PPC, Banner, and Display Advertising).
- Build Brand Awareness investing in an excellent campaign, that generally implies coordination among many channels, that usually must be Social media, Events, and Key Opinion Leaders (KOLs). Live-streaming on e-commerce platforms or social media maybe is the most powerful tool at present.
- Engage your audience is another fundamental step that shouldn’t be miss in your strategy. All important companies in China invent something special to engage their target. This can be done through original kinds of communication on social media that deliver the strong sense of community of Chinese costumers or at least nurturing them with engaging content sent via WeChat Official Accounts.
How KFC use digitalization to optimize its strategy in China
KFC is the most popular fast-food chain in China, where it opened the first franchise in 1992 and has around 6000 outlets at present.
Digitalization is part of the KFC strategy. The “American chain” uses its own app to send special offers or coupons to loyal clients, and rewards the clients that download the app for the first time with a cash value of approximately $13.
Also, KFC decided to partner with Onmyoji, China’s awarded gaming brand, in order to create a special game for promoting the chain. The game encourages players to play in KFC outlets through location-based service and augmented reality.
And also, the fast-food chain adopted many other solutions to attract Chinese, among these there is the digital store on Tmall, one of the Chinese e-commerce Giants owned by Alibaba. The brand sends e-gift cards to invite clients to visit the offline stores, with the objective to realize a new “Online-To-Offline model”.
How Mcdonald’s adapts its strategy to the Chinese market
Mcdonalds settled in the Chinese market in 1990 and nowadays has 2500 outlets in China. For its 25th year, Mcdonalds created a campaign to present its story in China and its proximity with Chinese customers.
Also, many people say that Mcdonalds’s menu looks totally different in China. There are desserts made of red beans, green tea beverages, eggs, and buns. Also, teas and red beans are associated with the Chinese notion of healthy food. Most Chinese people like it because can reduce the sense of guilt about consuming fast-food.
Mcdonalds know how to adapt its products to the taste of the Chinese. Chinese weren’t used to eat foreign food as today. They thought that imported food can’t match their food consumption habit and worried to be inconvenient in foreign restaurants.
Mcdonalds understood these consumer’s scruples and takes into account their preferences for creating new tastes.
Nowadays, Chinese people are more accustomed to western food and have even more faith in it than on made in China products. This behavior is due to many food scandals that happened in the past in China.
Chinese therefore only rely on brands and products that have a good reputation.
In conclusion on how to Develop Franchise in China
We suggest foreign companies to try investing in such a challenging market because China is the future!
And even if its technological progress can scare, you surely can find partners with a long experience in promoting through the complicated Chinese digital eco-system.
Do you need a Marketing Agency?
Gentlemen Marketing Agency is specialized in the Chinese market. We can help your company enter China by providing solutions for your business development.