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1、China Distribution & Trading Issue 71 September 2010 Franchise businesses in China I. Background 1. Definition Franchise, as defined by the Regulations for the Administration on Commercial Franchising (商业特许经营管理条例) launched by the State Council in 2007, is “a type of business, in which by contrac
2、t the franchiser grants the franchisees the rights to use the trademark, trade name, business formula and other business resources which the franchiser has a right to license; and the franchisee carries on business under the uniform business operation system in accordance with the agreement, in exch
3、ange for a franchise fee, royalty and etc”. The franchise model was introduced in China in the 1990s but the onerous regulatory requirements and less regulated market environment in the early years made it unattractive. On 6 February 2007, the State Council promulgated the Regulations for the Admini
4、stration of Commercial Franchising, to be implemented with effect from 1 May 2007. In a bid to ensure the full implementation of the regulations, the Ministry of Commerce issued the Measures for the Administration of the Filing of Commercial Franchising (商业特许经营备案管理办法) and the Measures for the Admini
5、stration of Information Disclosure in Commercial Franchising (商业特许经营信息披露管理办法) on 1 May 2007. After the launch of the regulations, franchise operation in China is more regulated. For further information on the Regulations, please refer to Issue 36 “The promulgation of the Commercial Franchise Managem
6、ent Regulation”. Until now, more than 1,000 enterprises have finished the filing procedure of commercial franchising. Simply, a franchise business is a method a company uses to distribute its products or services through retail and service outlets operated by independent third-parties. The independe
7、nt operator uses the marketing methods, trademarked goods and services and name recognition developed by the franchise company. In exchange, the independent operator pays an initial fee and royalties to the owner of the franchise. Franchiser can charge franchise fee from franchisees in different way
8、s, as a percentage of turnover, as a percentage of profits, as a percentage of purchasing volume, or a fixed amount. Profit sharing between franchiser and franchisee depends on the contract terms. Two types of franchise model are common in China direct franchising and master franchising. Direct fran
9、chising refers to franchiser signing contract directly with individual franchisee. It is easier for the franchiser to manage the franchisees; however, the expansion pace of the franchise business is usually slower. Master franchising, on the other hand, allows people or corporations to have the righ
10、ts to sub-franchise within a certain territory. For example, franchiser can sell L1 i & Fung Research Centre Member of the Li & Fung Group China Distribution & Trading Issue 71 September 2010 master franchising rights to regional franchisees, and the regional franchisee can sub-franchise
11、 to other parties. This can facilitate expansion across region and franchiser does not need to pay too much attention to managing the large number of individual franchisees. This is easier for business to get localized. However, under this contract, management of individual franchisees may be weaker
12、. 2. Advantages In China, many retailers have operated both franchised stores and self-managed stores. Retailers adopt the franchise model because it is a relatively easy way for fast and low-cost expansion. Retailers can build a captive distribution network quickly especially in less developed lowe
13、r-tier markets and expand market share with limited capital. Franchisers can also make use of the social connections of the local franchisees. Franchisees, on the other hand, enjoy the advantage of starting up a new business quickly based on a proven trademark and formula of doing business without h
14、aving to build a new business and brand from scratch; they can also enjoy the operation supports such as logistics, marketing and advertising from franchisors. Franchise operations of selected enterprises Li Ning (李宁) Li Ning, one of the largest sportswear companies in China, has established an exte
15、nsive distribution and retail network in China primarily through franchised agents. There are 129 distributors operating a total of 7,004 LI-NING brand franchised retail stores across China as of June 2010. Distributors will manage the franchised “LI-NING” retail outlets under the supervision of the
16、 enterprise. Li Ning currently only has 474 directly-managed LI-NING brand retail stores in 18 provinces in China. Franchised distributors are the major sales channel of the brand, sales to franchised distributors accounted for 85.2% of the total sales of LI-NING Brand in China in FY 2010. Metersbon
17、we (美特斯邦威) Metersbonwe, one of the leading casual wear companies in China, has 2,340 franchised stores setting up by around 300 franchisees throughout China in 2009. The company speeded up the development of self-managed stores in 2009, reaching a total of 523 stores in 2009. Sales revenue from fran
18、chise distributors accounted for 48% of the total revenue in 1H10, up by 28% yoy. The growth rate was lower than that of self-managed stores which achieved 53%. In 2009, the company has spent lots of efforts in opening large self-managed stores. The company says that it will speed up the opening on
19、franchise stores and limit the number of self-managed stores in 2010. L2 i & Fung Research Centre Member of the Li & Fung Group China Distribution & Trading Issue 71 September 2010 There are 3 types of shops which franchisees can choose to join, the specialty stores, shop-in-shop and con
20、cessionaire counters. Franchised stores should be located in the A grade commercial sites, i.e, sites with a cluster of other well-known brands. Franchisees can get the products at 54-60% of the original marked price, depending on the city tiers located. Franchisees can either buy out the products a
21、t a lower price but cannot return the goods afterwards, or chooses not to buy out but have to right to return a maximum of 10% of the goods. KFC (肯德基) Yum Brands launched the franchise model only for KFC operation in China. Different from mainstream enterprises engaging in franchises business, franc
22、hisees of KFC do not need to build a new store from scratch, instead, they will run a store which is already in mature operation. This can avoid franchisees handling the process of site selection, store set-up and renovation, recruitment and staff training etc, which reduces the risk of franchisee f
23、ailure. Contract duration for KFC is usually 10 years. McDonalds (麦当劳) McDonalds re-introduced franchise operation in May 2010 to speed up the expansion in China and is planning to double its China network to more than 2,000 outlets by 2013. Similar to KFC, franchisees of McDonalds do not need to se
24、t up a new store but run a store which is already in mature operation. II. Snapshots of franchise business in China 1. Overview Franchising operation has been growing at a fast pace in recent years, especially in sectors such as apparel retailing and catering. More companies are now willing to use t
25、he franchise model to expand with the increasing standardization of franchise businesses and more mature franchise regulations. According to the China Chain Store & Franchise Association (CCFA), there were about 4,000 franchise businesses with over 330,000 franchise stores in China in 2009, grew
26、 by 15% and 10% yoy respectively (see Exhibit 1). L3 i & Fung Research Centre Member of the Li & Fung Group China Distribution & Trading Issue 71 September 2010 Exhibit 1: Number of franchise businesses in China, 2000-2009 Year Number of franchise businesses yoy growth (%) 2000 410 n.a 2
27、001 600 46.30 2002 1,300 116.70 2003 1,900 46.20 2004 2,100 10.50 2005 2,320 10.50 2006 2,600 12.00 2007 2,800 7.70 2008 3,500 25.00 2009 4,000 15.00 Source: China Chain Store and Franchise Association The top 120 franchise businesses achieved sales revenue of 310.9 billion yuan in 2009, and sales r
28、evenue from franchise stores was 115.5 billion yuan. Average sales per store was 2.67 million yuan in 2009, down by 0.23 million yuan from 2008. These franchise businesses operated a total of 116,779 stores in China, of which 94,789 (81%) were operated by franchisees. However, the profit margin for
29、the top 120s decreased to 11.6%, down by 0.8% in 2008. The rise of rental cost is one of the main reasons, especially for businesses that require large operating areas such as budget hotels and restaurants. In 2009, the Top 120 franchise businesses have invested more on training and brand promotion,
30、 up by 34.3% and 33.8% respectively. The average payback period of the standard stores for the Top 120s was 1.97 years (see Exhibit 2). According to the CCFA, the average contract duration of the Top 120s was 3.9 years and the rate of franchisers to renew contract with franchisees was 88.1%. Exhibit
31、 2: Average payback period of the standard stores of the Top 120s, 2009 4.03.53.02.52.0Average=1.971.51.00.50.0 Source: China Chain Store and Franchise Association L4 i & Fung Research Centre Member of the Li & Fung Group YearIntegratedretailOther retailAgricultralretailApparelCateringHotelT
32、raining andeducationCleaningHomeimprovementOther service China Distribution & Trading Issue 71 September 2010 Exhibit 3: Selected key franchise businesses in China, 2009 % of franchise Total Number of stores/ Retail sales number of franchise total (million Industry Enterprise stores stores store
33、s yuan) Remarks Retail Lianhua Supermarket Major formats: Holdings Co., Ltd. Supermarket, 联华超市股份有限公司 5,599 3,773 67.39% 67,169.78 convenience store Zhejiang Gongxiao Major formats: Supermarket Co., Ltd. Supermarket, 浙江供销超市有限公司 2,000 1,897 94.85% 2,202.07 convenience store Suguo Supermarket Co., Majo
34、r formats: Ltd. Supermarket, 苏果超市有限公司 1,852 1,060 57.24% 33,236.00 convenience store Jiangsu Wenfeng Great World Chainstore Development Co., Ltd. 文峰大世界连锁发展股份Major formats: Supermarket, 有限公司 978 937 95.81% 15,664.57 convenience store An Hui Hui Shang Homeful Co. Ltd. 安徽省徽商红府连锁超市Major formats: Superma
35、rket, 有限责任公司 894 874 97.76% 1,349.28 convenience store Dongguan Sugar & Liquor Group Meiyijia Convenience Store Co., Ltd. 东莞市糖酒集团美宜佳便Major formats: 利店有限公司 2,380 2,378 99.92% 1,697.34 Convenience store Dongguan City Star Han Trading Company Major formats: 东莞市星翰商贸有限公司 1,059 1,054 99.53% 580.51 Con
36、venience store Shanxi Taiyuan Tangjiu Supermarket 山西省太原唐久超市有限: 公司 1,006 720 71.57%Major formats 2,386.73 Convenience store Hebei Guoda Chain Commercial Co., Ltd. 河北国大连锁商业有限公Major formats: 司 710 640 90.14% 878.50 Convenience store Shanghai Buddies CVS Co., Ltd. 上海良友金伴便利连锁有Major formats: 限公司 573 264 4
37、6.07% 1,417.30 Convenience store L5 i & Fung Research Centre Member of the Li & Fung Group China Distribution & Trading Issue 71 September 2010 Apparel Li Ning Company Limited 李宁（中国）体育用品有限Major product 公司 7,249 6,854 94.55% 8,386.91 category: Sportswear China Dongxiang (Group) Co., Ltd.
38、Major product 中国动向（集团）有限公司 3,511 n.a. n.a. 3,970.41 category: Sportswear Shanghai Metersbonwe Fashion & Accessories Co, Ltd.* 上海美特斯邦威服饰股份Major product category: Casual 有限公司* 2,979 2,435 81.74% n.a. wear Bossini International Major product Holdings Limited category: Casual 堡狮龙国际集团有限公司 1,178 640 5
39、4.33% 2,254.00 wear Giordano International Major product Limited category: Casual 佐丹奴国际有限公司 1,017 n.a. n.a. 4,233.00 wear Baiyuan Trousers Co., Ltd. Major product 山西百圆裤业有限公司 1,292 1,242 96.13% 555.21 category: Trousers Shanghai Ordifen Underwear Co., Ltd. 上海欧迪芬内衣精品有限Major product 公司 1,035 547 52.85%
40、 404.45 category: Underwear Chouchou baby Shenzhen Co., Ltd. 深圳市丑丑婴儿用品有限Major product category: Baby and 公司 601 470 78.20% 101.00 childrens apparel Pharmacy Chongqing Peace Drugstore 重庆和平药房连锁有限责任公司 2,460 800 32.52% 1,980.00 Shanghai Huashi Pharmacy Co. Ltd. 上海华氏大蘖房有限公司 811 304 37.48% 1,903.62 Beijin
41、g Jinxiang Drugstore 北京金象大药房医药连锁有限责任公司 320 121 37.81% 700.00 Wine Noble Family 名品世家(北京)酒业连锁有限公司 350 250 71.43% 96.00 Zhejiang Chateau Legend Co., Ltd. 浙江名庄传奇葡萄酒有限公司 52 47 90.38% 95.00 Gift & Chongqing Carpenter Tan Handicrafts Handicrafts Co., Ltd. 重庆谭木匠工艺品有限公司 870 866 99.54% n.a. L6 i & Fun
42、g Research Centre Member of the Li & Fung Group China Distribution & Trading Issue 71 September 2010 Stationery Shanghai M&G Stationery Co., Ltd. 上海抗馕木吖煞萦邢薰?850 780 91.76% 871.90 Toy Beijing KAKU Cartoon Satellite TV Ltd. 北京卡酷卡通动漫文化有限公司 111 104 93.69% 53.20 Home Veken Holding Group texti
43、le Co., Ltd. 家纺 宁波维科家纺有限公司 562 290 51.60% 350.00 Cosmetics Lotion SPA 北京明弘科贸有限责任公司 350 199 56.86% 120.00 Traditional China Quanjude (Group) Chinese Co., Ltd. Food 中国全聚德(集团)股份有限公司 85 63 74.12% 2,196.27 Hot pot Little Sheep Group Limited 内蒙古小肥羊餐饮连锁股份有限公司 454 293 64.54% 6,217.00 Inner Mongolia Xiao Wei
44、 Yang Catering Franchise Co., Ltd. 内蒙古小尾羊餐饮连锁股份有限公司 435 373 85.75% 5,506.20 Western Yum! Brands Inc., China fast-food Division 百胜餐饮集团中国事业部 (肯德基) 3,200 118 3.69% 28,800.00 Caf Dio Coffee 苏州迪欧餐饮管理有限公司 791 602 76.11% 2,080.09 Chinese Shanghai Xian Zong Lin tea house Food & Beverage Co., Ltd. (RBT)
45、上海仙踪林餐饮有限公司 164 149 90.85% 298.00 Home Beijing Dong Yi Ri Sheng improvemeDecoration Co., Ltd. nt 北京东易日盛家居装饰集团股份有限公司 235 137 58.30% 2,400.00 * Estimated values Source: China Chain Store and Franchise Association, Li & Fung Research Centre L7 i & Fung Research Centre Member of the Li & Fun
46、g Group China Distribution & Trading Issue 71 September 2010 2. By industry franchise operation is the most popular among catering industry The top 120 franchise businesses covered 59 industries in 2009, compared with 45 industries in 2008. Most of the franchise businesses were in retailing and
47、service sectors (see Exhibit 4). Retailing industries include meat, stationeries, toys, outdoor equipment, cosmetics, eye-glasses etc; service industries include advertising, designing, e-services, cosmetology etc. Sectors such as apparel retailing are the most popular due to low entry threshold, hi
48、gh standardization of product offerings and mass market positioning. For catering and other service sectors, franchise operation is also common despite higher capital investment and operation complexity. Amid the economic downturn in 2009, the development of the top 120 businesses was steady. The sa
49、les growth of professional stores, hotel chains and educational training was the fastest, while growth of general retail and catering sales was relatively slower. Exhibit 4: Share of different industries among Top 120 franchise businesses Other serviceindustriesIntegrated retail14%11%Apparel retailHome decoration6%5%Agricultral retailC4%leaning5%Training andeducation6%Budget hoteOther retaills6%business24%Catering19%
