The East West Hospitality Scribe

Can You Really Franchise A Business in China?

The domestic franchising industry in China is growing rapidly and will no doubt continue to prosper for companies pursuing the right strategies with the right concept.  Off-shore franchising has been a mixed bag for many international chains given the dearth of committed trustworthy master franchisees available. Here are a few simple rules that can reduce your risk in this difficult market.

1) Open some company owned stores first to confirm proof of concept and show potential local partners you are willing to put some skin in the game.  You will then understand the market dynamics well and be able to properly price out the franchise terms and conditions. 

2) The most successful franchise concepts today in China are all very simple operations with the franchiser controlling the supply chain and making profits from the sales of goods and services not royalties.  If the concept is a US style full service restaurant with many moving parts, simplify first before getting started.  You will need to set up central kitchens to make it easy on the kitchen staff or you will lose them quickly. Weiduomei Bakery and Happy Lemon are great examples of localized simple concepts that are doing well in China today. 

3) Be very flexible as to menu, design and store size.  "You are not in Kansas" anymore as they say.

4) Price determines scalability. Do you want to just have a few stores in Shanghai to boast in the Annual Report or a real business? Don't let all those BMW's fool you. There is a lot of wealth in big cities but these customers will frequent non-Chinese concepts on a very random basis.  

5) China is a very dynamic market so make sure you set the concept to appeal to where the customers will be 5 years from now not just today.

In short, if you are just looking to do a third party franchise deal then you may need to re-think that strategy.  The probability of success is very low.

A recent article in the China Economic Review discusses these issues and is worth a read.   For Rent: Fast-food franchising in China

November issue of HBR has an interesting article about YUM in China. It highlights all the advice we routinely give our clients in that market. Be flexible, be entrepreneurial, be tenacious, stay the course!

http://hbr.org/2011/11/kfcs-radical-approach-to-china/ar/1

Globalization Speeds Up Everything!

Those of us who travel frequently can see how quickly trends move around the world compared to a few years ago.  Call it the result of the internet, globalization, the flat world, whatever, an interesting restaurant or fashion concept gets copied far more quickly today than before. Just look at frozen yogurt and cupcakes, old trends that pretty much started anew in Southern California are now commonplace everywhere in Asia. Barriers to entry are just so low!

International franchisers who are waiting to go abroad until their home markets get saturated are making a big mistake.  Start going international now!  If you have an interesting new concept you can be sure someone has seen it and posted it on their Facebook page and now hundreds if not thousands of people all over the world already know about it. Entrepreneurs in China and India probably have plans to copy it for their local markets. Why should they pay the franchise fee? 

If you get out to international markets first and get some deals done, you will gain some brand recognition and credibility.  Momentum will build on itself and you will be surprised at the results.

Several words of caution - don't go overseas unless you are willing to build the infrastructure to support the development. It is not just dessert after the main meal of the USA market.  It can be a main meal by itself.  Second, make sure there is a strong economic model to support royalty payments and franchise fees. A few stores in the USA alone won't cut it. At the minimum you need a sustainable concept with robust operating systems and enough stores to show proof of concept.  In short, a real franchisable concept to begin with.

Finally, don't get too excited with the early letters or emails from interested franchisees.  Many times these are children of rich parents with no operating experience.  Take the time to find well qualified partners.

But move fast or these international markets may be lost forever!

Why Second Tier Restaurant Chains Can Still Win in Asia!

Everyone who travels anywhere in the world notices the ubiquity of the big international restaurant chains. They are almost all American and very limited in number – KFC, Pizza Hut, McDonald’s and Starbucks primarily.  They are dominant in almost every country where they enter because they are backed by big powerful global corporations who invest aggressively for the long term.

 But what about the second tier international players?  Do they really have a chance to survive and prosper internationally against the “giants” of the industry? 

Every country and restaurant category is different but it is possible to find success stories for second tier brands not even well known in their own countries. Let’s look at some examples and see if we can draw any patterns that could guide strategy for others going forward.

Consider Shakey’s Pizza in the Philippines.  You would be very hard pressed to find a Shakey’s in the USA outside of the West Coast. It is a very old brand that just did not keep up with the times.  But they are thriving in the Philippines and making loads of money for the franchisee.

 

A great example to look at is the Minor Food Group in Thailand.  They have made a significant business success with second tier US brands such as Swensen’s Ice Cream, Sizzler Steakhouse, Burger King and Dairy Queen, and currently directly own or franchise over 1000 stores in the Southeast Asia region.  As a young student in California, I can remember Swensen’s and Sizzler but they have all but disappeared from the scene today.  Burger King is still a major brand in the USA but not very successful in the Asia Pacific region. Dairy Queen only experiences limited success compared to Baskin Robbins in the Asia Pacific markets and their restaurants in the USA for the most part are far from attractive.

Pizza Express Does a 50/50 JV in India

Pizza Express, the UK based Italian casual dining restaurant chain, recently announced a 50/50 JV in India with Gourmet Investments.  This is a very well respected and beloved brand in their local market that ventured abroad with a similar model to their USA casual dining cousins.  Just sign up master or territorial franchises with no equity participation.  This recent announcement is one more example that putting "skin in the game" is more and more essential to doing business in fast growing emerging markets like China, Russia and India.

The Group MD of one of the largest and most successful F&B businesses in Asia recently told me:

"In essence, I feel in order for any brand to succeed, the brand owner must invest and take a substantial meaningful stake in order to show commitments.

Often I feel that franchisor/franchisee business model will not work for serious players in Asia and this is the best time to talk about JV."

I think that says it all!

Why Japanese Food is Everyone's Second Favorite Choice in Asia.

Every month I have the opportunity to travel to Asian cities for my projects in the hospitality industry.  I always go out of my way to sample the local food and learn more about the host city.  As we all know, food is a key ingredient defining one’s culture. What would the Korea dining culture be without bibimbap, kimchi, and Duk Bok Ki? All Asian countries have noodles and rice but these dishes say something special about the Korean people and their lifestyle

What is most apparent to me on these travels is the enormous popularity of Japanese food in every city. Japanese is always the “second choice” after the local cuisine.  This is true in China, Taiwan, Hong Kong, Singapore, Indonesia – actually everywhere!

What is most interesting is the wide variety of Japanese food available but the absence in many cases of Japan based restaurant concepts serving authentic Japanese cuisine.  In other words, local entrepreneurs are driving this trend without the help of Japanese restaurant chains in most cases.  Just think of Teriyaki Boy in the Philippines, Itoya in Thailand or Hoka Hoka Bento in Indonesia.

There are some exceptions of course when you consider Yoshinoya, Watami and Coco Ichibanya to mention a few.  But in general most Japanese restaurant companies just dabble abroad unlike the best in class manufacturing companies like Toyota, Matsushita or Toshiba.

YUM Finally Gets the Go Ahead to Acquire Little Sheep

China Antitrust authorities finally cleared the purchase of Little Sheep by YUM this week. I believe this is a big step for YUM to realize its goal of being the largest and best restaurant chain in China.  It is really hard to achieve that objective without a major presence in  Chinese food.  YUM knows that western brands can only penetrate the market so far given local taste preferences and historical experience.  I wish more US restaurant chains has this broad vision.  Jollibee in the Philippines has taken a similar strategy by acquiring two fast food Chinese chains prior to even considering the development of their flagship Jollibee hamburger brand.

Look for YUM to make more acquisitions in the China market over time.  Chinese QSR makes the most sense followed by either Japanese or Korean cuisine.  After all, that is the type of food Chinese diners prefer.

You can find my comments here on Bloomberg.  YUM's Offer for Little Sheep Gets China Antitrust Clearance

Perseverance Pays Off for McDonald's in China!

 McDonald's held an Investor Conference in China last month and the results were surprising for many analysts and Fund Mangers. Surprisingly good I might add! The results show clearly that having a consistent strategy and sticking with it over many years does get results in China and can lead to profitable growth. Also, it is clear at least in the QSR segment that sticking to a worldwide core menu, while less successful than the extensive localization of KFC, can still be an effective strategy.  It just depends on how deep your pockets are to withstand losses over a long period of time!

McDonald's currently has 1,350 stores in 150 Chinese cities. An additional 175-200 new stores will be built in 2011 (13-15% growth over previous year) and the Company is targeting 2,000 stores by 2013 year end. Operating income in 2010 was $160 Million, a four-fold increase over 2006.  It is interesting to note that while these results were impressive in the China market, they only accounted for 2% of global profits, confirming the broad world wide portfolio this brand has been able to develop in the last 50 years.

So after over 15 years of steady store development  but poor financial returns in China, McDonald's has finally cracked the code and can look forward to many years of profitable growth ahead.  I would not however recommend this strategy to most Companies unless they are very strong financially and willing to sustain large losses for lengthy periods of time.  For the rest of us, we need to be smarter and localize quickly to make our way succesfully.

My apologies to all our readers for the failure to keep this blog current. Our consulting firm, East West Hospitality Group, has been very busy with interesting and challenging projects and unfortunately this blog just slipped through the cracks. I will endeavor from now to publish at least 2 posts per week that I hope will be fun to read but also educational. I recently spent a week in East Africa on a project for a US based Private Equity Fund and really had an epiphany! Emerging markets really do have much in common in terms of consumer behaviors and retail platforms even when comparing emerging Asia to Africa. I can see now real potential for franchise concepts from Beijing or Manila for example in Nairobi or Kampala. Something more to explore in the days ahead. The weather in Hong Kong is starting to cooldown so hopefully this will give me the impetus to keep writing.