Can't Franchising Adjust itself in Chinese Soil?

At the end of 1980s, franchising began emerging in China. LI-NING was the first company in China which applied franchise format.

In 1993, QUANJUDE began developing branches by franchising after QUANJUDE Group was established, followed by DONGLAISHUN, MALAN Noodle, RONGCHANG Washing, etc.

In 1999, franchising in China had progressed into an overall construction period. Renowned international franchisor started expanding in China.
In 2002, China lifted the restriction on access of franchisor after its entry into WTO. The statistics showed that in China there were already over 1,000 franchisors, covering 50 industries.

Though franchise is a modern business format with cost-efficient expansion and scientific management, it seems that franchise cannot adjust itself in Chinese soil. Not only domestic enterprises are excessively cautious in expanding through franchising, but also these fathers of franchisor like KFC and McDonald withdrew from franchising in China. Has franchise become a dangerous game in China?
International franchisors are unwilling to expand through franchising in China.
Yum! Inc. announced to retain ownership of Pizza Hut in China and to stop granting franchising authority. It was said that Pizza Hut wouldn't apply franchise format in the future and the headquarter would expand its business by itself. It arose lots of comments among the industry. According to Wanqun, director of public affair of Yum! Inc., Pizza Hut hadn't reached a large scale and it would impose great risks in opening franchising.

He added that Pizza Hut wasn't mature enough in China but it didn't mean that franchising door was closed forever. With support and experience from the headquarter, Pizza Hut would open its franchising door again after the brand name becoming mature enough.

KFC is slow in developing franchising
Compared with Pizza Hut's door shut closed to franchising, KFC 's franchising door was never largely opened. KFC had only granted franchising authority to forty outlets, accounting for less than 5% in its 1,000 outlets since its start of franchising in China. Moreover, it only happened in small and medium-sized cities by means of "transfer of existing restaurant ownership", with big cities like Guangzhou, Beijing, Shanghai shut out.

The insiders made some objections to KFC's slow in opening franchise. Some people said that KFC was "eating the meat and spitting out bones" because it held lucrative outlets in big cities while letting off those in small cities with poor performance. KFC's explanation to this was to avoid risks, similar to that of Pizza Hut.

Analysis: Unbalanced development of franchise market
Why did KFC and Pizza Hut, which were expanded rapidly through franchising, become so cautious on their entry into Chinese market? An analyst explained that by franchising, franchisor might lose control of some resources and become too dependent on franchisee; and the quality of products and services couldn't reach a uniform standard, while uniformity was crucial to enterprises such as KFC.

A KFC staff told the journalist in private that in fact, KFC didn't have the courage to open its franchising to a large scale since it didn't have sufficient confidence in most of the franchisees. Wanqun, director of public affair of Yum! Inc., also emphasized that Pizza Hut would resume franchising when the market was mature.

Mr. Wen, who was in charge of the Shanghai franchise business of "Blue & White" fast food restaurant, which started up through franchising, told the journalist that B & W had adjusted the development policy. Direct operation had become the major means with franchising played a supplementary role. The reason for this adjustment was they felt that the market environment was not good for brand name protection.
Corresponding to the above views, an expert from CCFA explained that the development of Chinese franchising market was indeed very uneven. The related department, professional service institution, franchisor, franshisee, prospective investor and employee, which comprised the franchise industry, didn't have equal knowledge about franchising and relative laws. The disturbance leaded to market fluctuation.

Prospect: otherwise China will become the No. 1 franchise market in the world
Guo Geping, director of CCFA, told the journalist according to China's commitment to WTO, domestic retail market was totally opened to foreign fund since December 11, 2004. The potential advantages of foreign fund hadn't been brought into full play with the former policy restriction though they had entered Chinese market long time ago. Meanwhile, consumers are paying more attention to famous brands.

A survey showed that in 2003, 70% of Chinese purchasing power flowed to well-known brand. The competition would become increasingly heated as soon as the retail market was fully opened. At that time, franchising with its special capability of acquiring brand effect and taking up the market rapidly would become more welcomed. China would probably become the world's largest franchise market in the years to come.

Some experts analyzed that under the current situation, blind development would get franchising format trapped without doubt. With sound coordination and the further improvement of related authorities and laws and regulations, Chinese franchise would positively progress to maturity.

Investors will be unprecedented powerful
Based on these years' practice, franchise format enterprises are developing more steadily and rapidly. The materials offered by Gou Geping showed that the convenience store "Quik" planned to open another four hundred outlets in 2004, among which 40% are franchise outlets.

Obviously, through franchising, well-known brand can get a more solid foundation and a more extensive network, while new brand can expand all across the nation with an unprecedented speed. With the growth of nation's economy, domestic investors will be more powerful than ever before no matter in quantity or quality, and franchise development will be based on a more solid soil.

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