The U.S. Franchise Trade Mission to China kicked off November 3, 2013 in Beijing, China with stops here, Chongqing, Nanjing and Dalian over the next week.
This trade mission is the third mission in 2013 and is produced by the U.S. Commercial Service and sponsored by the International Franchise Association and Franchise Times magazine. The partnership is a key component to IFA’s International Development efforts to assist IFA members with identifying and meeting qualified master franchise candidates around the world.
Participating franchisors on the mission include CKE Restaurants represented by Mike Woida, Senior Vice President, International; Fuddruckers represented by Bill Edwards, CFE, CEO of Edwards Global Services; Jani-King International represented by Don Burlson, Executive Vice President; Right at Home represented by Debbie Huang, Deputy General Manager of CAJ Senior Care Services, the Master Franchisee for Right at Home in China; Rita’s Italian Ice represented by Scott Schubiger, Senior Vice President, Worldwide Franchise Development and Bill Edwards and James Liu of Edwards Global Services; Round Table Pizza represented by Bill Edwards and James Liu of Edwards Global Services; Sotheby’s International Realty Affiliates represented by Calvin Wong, Vice President, Global Development; and Wing Zone represented by Hair Parra, Vice President, International Development.
Andrew Gately, Commercial Officer with the U.S. Commercial Service is the trade mission leader and responsible for overall coordination of the mission for the four stops. As sponsors of the event, both the International Franchise Association, represented by Scott Lehr, Senior Vice President, U.S. and International Development and Franchise Times represented by Nancy Weingartner, Executive Editor provide initial marketing for the mission and support throughout the mission.
As with all trade missions, the goals are to help the participating franchisors understand the markets visited from a legal, demographic, real estate and development perspective but most importantly to get them face to face with qualified master and area development prospects for one-on-one discussions.
Josh Halpern, Commercial Officer and Shen Yan, Commercial Specialist with the U.S. Commercial Service Beijing welcomed the group and discussed the schedule for the week with the delegates.
The group was briefed on the current and future plans for China’s high-speed rail system and the opportunities available for international brands to locate within the railway retail centers that spread across the country. Mr. Hu Jun explained that passengers can now travel from Beijing to Shanghai in 4-5 hours by train and is quickly become a convenient and fast way to travel between the cities. A number of American brands have located within the railway centers including Starbucks, KFC and McDonald’s. He reported that plans to link the railway with major hubs in Delhi, India and Hanoi, Vietnam will make the trains an important transportation solution for the region in the future.
The group also heard from Mr. Zhu Lingbo with the China Commercial Real Estate Commission on real estate trends in China. He described the current real estate climate in China and reported that urbanization is the driving factor and will continue to be with more people moving to the cities to employment opportunities which dictate where U.S. brands should be looking to locate. He reported that international brands are a necessity for the young people of China and they will seek them out. These brands represent quality to the Chinese consumer and they will pay for quality. While the current strategy for international brands is to locate in the first tier cities as the start of a development plan in cities such as Shanghai, Beijing, Guangzhou, and Shenzhen more brands are beginning to look at the second tier cities of Tianjin, Wuhan, Chengdu, Chongqing, and Nanjing among others. These cities with massive populations by U.S. Standards offer more attractive lease rates and available space and less competition.
Mr. Zhu Lingbo also described a unique consideration in China where many developers will try and sell the space instead of lease which he said occurs in about half the deals. He did caution buying without a good understanding of the strength of the developer and the long term viability of the retail center.
The delegates then heard from Tim Lai, President of Highlight Consulting, and former managing director of McDonald’s China. Tim discussed the growth of the top U.S. food brands in China including KFC, Pizza Hut, McDonald’s, Burger King and Starbucks. He mentioned that one thing that all these brands have in common is that they listened, learned and adapted to the Chinese market to deliver products to the Chinese consumer’s liking. Adjusting menus even regionally within China can make or break a brand. He encouraged the brands to be flexible on certain tastes. Mr. Lai assured the delegates that they can do this and still keep the focus on the quality of their products. He said that McDonald’s is an expert at protecting the quality of their brand in China. He agreed with the other speakers that the real opportunity these days is in the second and third tier cities that offer more reasonable leases and available locations.
Belinda Tang from the Beijing office of DLA Piper offered the delegates some suggestions on maneuvering the legal environment in China. She described the legal definition of a franchise in China and the differences between a franchise and license. She stated that, in most cases, the industry sector that a U.S. brand is operating in will dictate if it is considered a franchise or license. Most food and hotel franchises would be registered as franchises in China. She also described the two plus one rule which refers to the fact that any foreign franchise that wants to operate in China must have two operating company-owned units somewhere in the world for at least one year before they can franchise in China. To prove that, the Ministry of Commerce in China will accept a certified letter from a country association stating that the company is complying with the two operating units rule. (The IFA regularly provides this service for IFA member franchisors requiring proof of a certified letter). She also stated that many franchisors would not qualify as a license in China due to the substantial control that they have over their franchisees so filing as a franchise is the most likely way to proceed.
Ms. Tang also stressed the importance of registering trademarks and domain names ASAP to avoid litigation with others that may register your marks first. She advised that it can take up to two years to approve marks and franchisors cannot enjoy protection of their marks before they have been approved.
She reminded the group that all franchisors need to file the following items with MOFCOM within 15 days of signing its first franchise agreement with a franchisee including basic information concerning the franchise system; location of franchisees units in China; franchisors market plan; copy of corporate franchisors legal qualification; registration certificates of intellectual property; evidence to verify the franchisor has owned 2 units for at least 1 year. She also stated that franchisors must provide a comprehensive disclosure statement concerning its system to prospective franchisees at least 30 days prior to signing the franchise agreement.
The delegates wrapped up the session by hearing from Xan Moody-Stuart, Subway’s master franchisee in North China. Xan reported that Subway currently has more than 400 stores open in China and another 200 under development. He reported that Beijing alone has more than 100 stores open. Xan confirmed with others that their growth will take place in many of the second and third tier cities of China in the future. They will continue to grow in the territories of Beijing, Shanghai, Guangzhou, however, the development in Xian, Sichuan, Liaoning and Tianjin will be almost as strong.
The delegates were then off to their next stop in Chongqing and a full day of presentations and one-on-one visits with candidates with their brands.