Restaurant Franchising In China

-- Franchise out Unprofitability

In China,  the profitable restaurant chains hardly franchise out their stores (company owned instead) or begin to scale back on the franchise; on the contrary, unprofitable or unproven model restaurants are eager to franchise out for short term profit.

Restaurant franchising in America is an evolving concept in the past 80 years, established on market competition, gradual business development, business opportunities and visions of its leaders such as Ray Kroc, William Rosenberg and Fred De Luca.  The franchisers gain from franchisees out of franchise fee, annual fee, real estate, materials supply, and some of obvious advantages in overall buying powers, higher customer recognition, better location and so on for their company own stores.  To become a franchiser, it requires to show the record of profitability and duplicability.  For franchisees, most of them would make profits or have better chance to succeed than running on their own concept.  In general, it is a reciprocal relationship between franchiser and franchisee in the US.  

Restaurant franchising in China is mostly an abstract concept because of short history of China’s commercialization.  Nevertheless, China has the most franchises in the world.  Even more interesting scenario is that the profitable restaurant chain hardly franchise out their stores (company owned instead) or begin to scale back on the franchise; on the contrary, unprofitable or unproven model restaurants are eager to franchise out for short term profit.  Therefore, the relationship between two is a zero-sum game and will not last long for any meaningful brand building.

Franchising system is a mixed product of legal system, modern logistics & information, food production, corporate management, and consumerism. At this stage, China's legal system can not provide a fair playground for a franchise system in addition of too many governmental regulations becoming impractical for small-medium size companies to implement; the sizable food production is still immature and is export-oriented; consumerism is just starting to take a foothold in this emerging market; logistics evolvment can never follow up with unruled and unpredictable urbanization orchestrated by governmental bodies. Corporate management for food business is far behind what America had in its 1950's.

How would the franchisers make money from the franchisees in China?  

Real estate is bizarrely high and inflexible for any franchiser to buy/rent property and then rent to their franchisee.  McDonalds’ and Tim Hortons models don’t work in China.  Annual fees are hard to collect within China’s legal system.  Therefore, most of franchisers can only make long term profit from selling material goods, which requires franchisers to establish food processing factories, a huge investment in itself and a distraction from focusing on their core restaurant business. The legal system in China is most unimplementable to restrict franchisee from buying outside of agreed supply channels.  This would deteriorates the profit of franchisers and certainly seeds the problem for quality of foods in follow.  

The franchise fees and construction/consultant fee in the initial stage become the most reliable revenues resources for a franchise.  No wonder China is full of the opportunist franchises looking for quick money when more established restaurant chains shun away from franchise.  Opportunist franchise don’t care if franchisee make money.  In China, McDonald’s don’t franchise, and KFC only franchises to remote areas.

Management capability is always a big problem across all sectors in China’s restaurant and retail business.  Management is how one can build a strong brand, how to innovate the products for market needs, how to build the confidence in the franchisees to stick with the company, how to take the initiatives for the next step.  In China, because of general opportunist environment, most of restaurant chains look for quick gain and very likely run by the family.  Management development is viewed as a tool not as backbone.  

The opportunist mentality overwhelms China’s restaurant sector (also China as well), which can be a good chance for international company looking for long term establishment in China.  One interesting scenario is that many of top restaurant chains are founded and run by women in China.  So many men, when they have certain success, would use the money to invest on quicker money machine, such as real estate, manufactures and so on.  

In China’s restaurant franchising system, it has no market leader, and not even a success story to be as a reference.   The staggering development of franchise sector would certainly slow the management development and professionalism in restaurant business, innovation, and most importantly, supply chain and food production business.  In the coming decade, consumer service will play a more and more important role in China’s economy.  It would be interesting to see how China’s restaurant chain will evolve in the coming years.