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Food industry: Franchise a brand in China

During the 1990s, Chinese consumers flocked to Western fast-food chains, drawn to them by their features, such as clean bathrooms and air-conditioning —at that time a novelty in China. But since then, fast-food restaurants like McDonald’s and KFC have struggled against increasing competition from a boom in Chinese fast-food restaurant chains and a shift toward healthier eating. This trend regarding eating better is a high priority for Chinese consumers, it is the largest category for consumer expenditures at around 25%, as showed by a recent research.

Franchise a brand in China: The struggle for Western fast-food chains to succeed in China

Chinese consumers once viewed brands as KFC and Mc Donald as an authentic Western dining experience, but their tastes have evolved and a new trend toward upscale restaurants begun. food chain in ChinaMeanwhile, competition from Asian fast-food brands has only grown fiercer. Chinese fast-food brands like大娘水饺 (Daniang Dumpling) ,丽华快餐 (Lihua), 真功夫 (Zhen Kong Fu), or 马兰拉面 (Malan Ramen) first appeared and developed quickly, so that became the focus of the news. But after many years of rapid expansion, Chinese fast food caught up in a loss. And now Chinese fast food has entered a new period of recreation. After reflecting for few years, they have developed rapidly in the number and set a trend-like ten thousand horses galloping.

Therefore, despite opening more restaurants, Western fast-food chains has been losing market share amid shifting consumer tastes, rising nationalistic sentiments and a spate of food safety scandals in recent years.

As the Chinese middle class is rapidly burgeoning in China, Chinese’s chain industry has a large developing potential. A recent Daxue Consulting research shows that 76% of Chinese families will reach the middle-class level in 2022. The annual disposable income of these Chinese families will range from 60 thousand RMB to 229 thousand RMB and 35% of them are from the 80’s generation who are seeking after high quality of life with a strong ability to accept new and modern things. These middle-class families will become the backbone of Chinese consumer’s market; it will stimulate domestic demand of the country.

Chinese customers’ taste is also changing fast. According to Daxue Consulting, Chinese Millennials don’t spend much time dining (60% of them spend less than one hour eating out). If they are more attracted to fast food in comparison with the older generations, their food expectations are now driven by the research of new experiences.

New developments in the Chinese food industry: localization is now needed

To reinvigorate the growth in the Chinese food industry market, these companies started developing new strategies: the first was YUM!Brands in 2015, owner of KFC and Pizza Hut brands, that decided to spin-off a parent company focused only on the Chinese market (Yum China). Franchise a brand in China while creating a parent company only for the Chinese market show that food industry multinationals have recognized their need to be healthier and trendier and that they could face cost. Time and logistics issues when executing the changes by spinning off the China unit, raising more money to invest in menu upgrades and food-safety control programs.

The success of KFC could not be separated from its localization strategy. After it entered the Chinese market from the 1980s, it continuously exploited new products to attract local customers and delivered the Chinese-style fast food to customers through advertisement and promotion. They adopt local employees and use local supply chain. A localized menu appeals to extensive consumer groups for KFC in China. KFC has introduced some of the traditional Chinese products which cater to local customers’ food habits and consumption preferences in the past 20 years.

In North America KFC is famous for its Colonel’s strict recipe policies. This is far from KFC China’s strategy. KFC China has a set of ‘classics’ that are regular globally, but most of the items are available only short-term and they are highly customized.  Breakfast menu, for instance, offers both Chinese and American offerings such as burgers to congee. Their advertisement demonstrates their understanding of the local culture. Last year, for example, KFC wanted to increase awareness for their newly launched coffee service. By running a WeChat advertising campaign, the fast-food brand created an interactive experience while offering a limited number of exclusive edible coffee cups. The fans have to scanned QR codes at bus stops in order to receive a digital coupon for one free edible cup. The advertisements were targeted to locals in Shanghai, driving trial among new customers and engaging with fans.

Recently Mc Donald’s announced that it will be selling its China operations to a locally led consortium, giving franchise rights for 20 years to Citic, a state-owned conglomerate and the Carlyle Group, a private equity firm. Leaving the operational system to local investors will help the company to have a deeper penetration in the Chinese market, given their better understanding of it. The goal of the consortium is to focus on the opening of new restaurants in third- and fourth-tier cities. This is a strategic opportunity to invest in the expanding Chinese consumer sector and to tap into the rising disposable incomes in China.

Opportunities and risks of franchise a brand in China

Franchise a brand in China offers a number of benefits which traditional new product developments do not. The major one is that a brand franchising extension benefit from the company’s most valuable assets, its brand names. Consequently, the company from a position of strength moves into a new category: the immediate consumer awareness and impressions communicate by the brand. An additional benefit is that investment typically outlays necessary to establish a new brand, which means a significant expense, are minimized. An important related payoff is that the introduction of a franchise extension can increase sales even for the parent brand. The advertising and heightened awareness of the new entry can have a synergic effect on the original product. Lastly, it might be reduced the risk of failure of the new item when the brand name already strongly conveys benefits desired in the new category.

However foreign while franchise a brand in China must also prevail over problems that are specific of the Chinese market. Weak intellectual property enforcement and an inadequate legal framework are key reasons why instead of franchises in China, early foreign brands opened as company-owned stores or Joint Ventures. Also, franchises in China often experience difficulties finding local managers who understand how to run a business. Then, the most important part of franchise a brand in China is finding, evaluating, and signing a qualified company as the local, regional, or country franchisee. According to Daxue Consulting CEO, Matthew David, “The risk with franchising is to lose the brand equity of the company. That is why training your franchisees is a necessary cost to consider and a key necessity. Franchising companies may suffer from unequal brand image across various provinces as they partner with different partners. Those partners may get their own interpretation of the brand and ways of working.”

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