We are aware that Australian franchises and American franchises often fail in achieving compliance in China, whereas home grown Chinese franchises don’t experience the same issue.
We spoke to DC Strategy Chairman Rod Young in 2012 to draw on his experiences with international expansion.
Here are some insights from our conversation:
Snapshot of China
The Chinese are highly entrepreneurial.
Growth in China’s franchise sector is through domestic brands, (as is with most countries) and as such home grown franchises outnumber international imports.
The emergence of a lot of ‘new’ rich in China has seen the entrepreneurial scene grow more rapidly in recent years however the rule of law in this area is not yet as established as other regions, such as Europe where the law and processes have developed over generations.
As a result the Chinese may have little respect for Intellectual Property, and they manage conflict in their own way.
The Chinese also have a focus on cutting costs, which comes out of the psyche of the Chinese people, and this tends to be the same in India as well as Vietnam.
Differing franchise models may influence failure to comply
The Chinese franchise model is not the same as Western models.
Rod explains while in the West most franchise models are centred on receiving royalties from franchisees, this is not the case in China.
In China there is less emphasis on royalties, with franchisor revenue more linked to the supply side of the business.
Chinese franchisors also extract income other ways, such as controlling the property for the franchise unit which they rent to the franchisee at a premium.
Compliance monitoring and local standards
Generally Chinese franchises monitor their franchisees less.
This is in part due to the nature of franchisees in China, which are often part of extend family groups with interests in multi-conglomerates with shared responsibilities across the groups (as opposed to ‘Mum and Dad’ franchisees often seen in the West).
The Chinese also have different operational standards, particularly around product quality and cleanliness, and franchisors entering Asian markets need to reflect local norms, not Western norms.
Rod points out Western brands generally enter Asian markets looking to achieve the same standards as they do in the West, whereas the franchisees desire more local standards.
Interestingly he adds, even Chinese migrant franchisees in Australia can find compliance challenging.
Local master franchisees
According to Rod more than 80 per cent of master franchisees fail to achieve their development schedules because they underestimate the difficulty and nuances of the market.
Finding a good local master franchisee (or area developer) is crucial to international franchising success.
Rod says a lot of the local master franchisees he sees are generally locals, yet educated in the West.
They are of higher calibre than single unit franchisees, have better English and have been exposed to Western concepts.
Generally they are proactive about bringing a franchise brand into the country.
Further, master franchisees understand the thinking of employees.
Understanding the local culture
Rod gave the example of a restaurant business where the employees would line up outside the store every morning singing the company song until their manager assigned them their duties for the day.
This experience also rings true for Kerry Miles while we were in South Korea in 2012 to present at the Korean Society of Franchising Conference.
We were walking through a department store when it first opened. All the staff bowed to us as we walked through and there was a big fanfare with music playing – being one of the first customers of the day almost made you feel like royalty.
Alternatively, Australian franchises generally train employees to use eye contact and treat customers as an equal – and that’s not going to work.
Franchises need to understand the thinking of local franchisees and employees, as well as adapt their offering to suit the local market.
Boost Juice for example needed to adopt a café style outlet for the Chinese market as people wanted to sit down and enjoy their juice, as opposed to the ‘grab and go’ kiosk format that’s popular in Australia.
Three tips to keep in mind are:
- Franchises need to adapt more and aim for local standards.
- Local franchises have ‘grown-up’ there and understand the cultural and operational norms.
- Finding a suitable master franchisee is absolutely critical.
A number of Australian franchises have approached international markets with great intentions, however, have retreated after experiencing unexpected challenges.
Some of these challenges may have come about due to an ad-hoc and reactive approach to international franchise market development.
Taking a strategic and considered approach to international growth, supported by strong research and in-country analysis is the foundation for success.