How To Be Successful

Although only a proportionately tiny number of foreign franchisors have tackled China to date, we have enough data to begin to understand the elements prerequisite for foreign franchise success in the coming struggles for sector dominance in the world's largest franchise market.

To put these elements in context, it is helpful first to categorize foreign franchisors according to their approach to China. Broadly speaking, foreign franchisors entering China to date have fallen into one of three categories:

Chinese Take-outs. Reactive rather than proactive, these franchisors sell China Master Franchise Rights to the first likely comer, and wait (often in vain) for the royalties to flow...

Bulls in the China Shop. Excited by the 1.3 billion consumer opportunity, these franchisors rush in themselves with an aggressive territorial land grab, often critically overestimating the relevance of their home-market franchise systems...

Global Thinkers - Local Masters. These are the Taoists of foreign franchisors, taking what is strong from their own franchise systems, and adapting to local ways. Their characteristically deliberate and iterative movements give them key competitive advantage.

In keeping with a franchise spirit that engenders dissemination of know-how, Baker Tilly, via this brief article, is pleased to share the 'Eight Locals', key elements of strategy from global franchisors who have successfully mastered the local way...

I. Local Market. It is a mistake to consider China as a single market - language, culture, development and consumer taste will vary as much between, say, Shanghai and Kunming as they would between Chicago and Athens. The potential for a foreign franchised product or service in any of China's regional markets will depend upon timing, local taste, local economy, and of course, local competition...

II. Local Competition. Don't underestimate it! The days are numbered, we hear, for flagrant appropriation (such as the 1996 opening of TGI Saturdays, less than 100 meters away from TGI Fridays' flagship Beijing development...), but have been replaced by an era in which a well-educated, well-financed and well-connected local competition can respond quickly to opportunity, iterating with better-localized franchise models at a time when the foreign brand has yet to achieve traction.

III. Local Structure. Corporate structure considerations are key in China, where very few sectors have yet to allow unhindered foreign investment, and where structure, once chosen, will determine the franchisor's flexibility for control, financing, foreign exchange, import, licensing and - crucially - repatriation of franchise fees. While difficult to generalize, the foreign franchisor will typically be advised to avoid an 'all eggs in one basket' approach, for instance by supplementing national/regional master franchise Sino-foreign equity joint ventures with one or more separate WFOEs (wholly foreign-owned enterprises) - the latter with scope to provide training and marketing advice to franchisees, and license of technology and know-how to the master franchise joint ventures.

IV. Local Finance. Many foreign franchisors underestimate the investment necessary to establish their brand in one or more of China's regional markets - very few indeed consider China (or Asia, for that matter) as a source of local finance to ensure sufficient capitalization. And yet western venture capital and private equity firms in the region favor models that marry western know-how with local markets, and - better still - genuinely local venture capital can often come bundled with useful local connections and strategic influence...

V. Local Product/Service. How well would consumers take to a milkshake with cheeseburger and fries, in a country where cows (as we know them) are a recent foreign import, and rice and noodles are the staples of choice? Very well, as it happened, but local seasonal soups are also menu favorites (at McDonald's and KFC outlets throughout China), and indeed very few franchise products and services