Foreign Franchise Brand Surges Chinese Curves to Avoid “Two Stores One Year”

“There are a lot of franchise brands all over the world who want to enter China,” said Jiang Jinxing, CEO of Icewell Franchise Consultants (hereafter referred to as “Esway”). Aisiwei is headquartered in Singapore and currently represents 30 brands and helps them find Chinese franchisees. Jiang Jinxing believes that if China does not have a "two-storey one-year" requirement, more brands will come in.

The “one year of two stores” he referred to is the abbreviation of “a franchisor has at least two directly-operated stores operating in China for more than one year or direct sales stores established by its subsidiaries and holding companies”. China's first legally effective "Regulations on Commercial Franchise Management" (hereinafter referred to as the "Regulations") is expected to be introduced within the year. It is understood that there will be "two-storey one year" clause.

As the "Regulations" came into force, some overseas licensed brands adopt a wait-and-see attitude, while some brands have managed to circumvent the "two-storey one year" requirement.

"Come to China" Craze

Recently held at the 2006 International Franchise (Shanghai) Exhibition, about 40% of participating brands are foreign brands.

South Korea’s Liberty City Corporation’s head office is expanding the Chinese market for its Korean fried rice and Shuai Qingmian. The permanent director and deputy chairman of the German Chartered Association introduced the 12 German franchise brands brought to him at the exhibition forum, including cappuccino coffee houses, music schools, house-building companies, fresh juice bars, housewares and so on.

The Australian Trade Commission’s China Franchise Specialist Liu Zhen introduced that some franchised brands in Australia and New Zealand are also negotiating with Chinese franchisees. He has more than ten brands in contact with them, one of which is a coffee chain franchise brand and a juice bar has already found franchisees. It may be possible to enter China at the end of the year.

The American Brand Pavilion organized by the Commerce Department of the US Consulate includes fast food brands Subway, Stick John, and Best Music; Super 8 Hotels, the largest economy hotel chain in the United States; and M edicine S hoppe, the nation's largest pharmaceutical chain. The 21st century immovable property is the largest real estate agency in the United States; Gymboree, the world’s largest brand for early childhood education. Some American brands have entered China to find franchisees for further expansion. Ye Yinsheng, Asia Development and Lease Manager at Subway Inc., introduced that the vast majority of Subway's stores are currently concentrated in Beijing, followed by intensive stores in other cities.

Overseas brands wishing to enter China include: Harcourts, New Zealand’s largest real estate agency, YongenFruz, a Canadian leisure drink, and Cuisine Plus, a French kitchen and bathroom furniture chain brand.

Three years after joining the WTO, that is, at the end of 2004, China has fully opened the franchise market for foreign capital, but relevant laws and regulations have been established. People in the industry believe that after the introduction of the "Regulations", foreign capital will officially enter the Chinese franchising market, and it may set off a wave of foreign franchise brands to enter the climax.

"The Chinese market is very attractive because of the emergence of the middle class and the increase in purchasing power," said Wei Yi, a director of Franchise Business Consulting.

"Two stores a year" constraints

Liu Zhen said that the franchise brands he came in contact with were not willing to open direct sales stores in China. Due to the "two-storey one year" requirement, some brands have retired and some brands are watching. Observers believe that the "Regulations" have not yet been introduced and that the "two-storey one-year" requirement may also change. He introduced that some Australian and New Zealand brands negotiate Chinese franchisees and hope to find the Chinese headquarters to be responsible for the brand's operations in China, or at least regional headquarters, to develop franchisees in a region. For the joining of single stores, they are "too troublesome" and they are even more reluctant to set up direct sales stores.

Jiang Jinxing believes that the "two-storey one-year" rule may prevent commercial fraud at the starting point. It is understood that some brands have already found Chinese franchisees. In order to cope with the possible "two-storey one year" legal requirement, they decided to sign related agreements, such as franchise agreements, with franchisees to open two stores in China and operate for one year. As the brand's "direct store" in China.