The Asian market offers particularly exciting opportunities for brands, and boasts vibrant food and beverage, retail, hospitality and education sectors, all with a desire for ‘Western’ brands. However, international franchising presents a number of legal and commercial challenges. For brands looking to exploit these opportunities it is vitally important to take specialist franchising advice, and to seek local market knowledge from experts ‘on the ground’.
China
China’s current Five-Year Plan is focused on consumption over investment, with retail and consumer goods expected to be particular growth sectors. Typically, international brands have expanded into Chinese markets by way of offering franchises or distributorships to local partners. Such deals are based on the exchange of branding and know-how for local market knowledge and connections. In recent years, however, such brands have increasingly opted to enter the country on their own by establishing corporate-owned retail outlets.
Foreign brand-owners looking to exploit retail margins in China by establishing corporate-owned franchise networks should be aware of the challenges involved, be they operational, in terms of running a business on the ground in China, or regulatory, in terms of China’s various restrictions on foreign investment and business operations.
Foreign individuals or companies wishing to trade in China are required to have a locally-established entity responsible for such trading operations, called a Foreign Invested Commercial Enterprise (FICE). The FICE may be wholly owned by the foreign brand owner, or may take the form of a joint venture between the foreign brand owner and a local partner. The FICE would then be granted a franchise by the foreign brand owner.
No limitations
Would-be entrants into the Chinese market should be aware that there exist limitations on the types of products foreign companies may distribute in China. Areas such as education and healthcare, in which franchising is becoming increasingly popular, may be subject to additional regulatory requirements and should be carefully researched. Those businesses within the hotel, restaurant, fashion and retail sectors will be pleased to note that no such limitations apply to products and services in these sectors.
Franchise-specific laws in China do not differ substantially from those in other countries, but nonetheless contain provisions to which attention must be paid. Foreign-invested master franchisees essentially act as both franchisee and franchisor, and must therefore satisfy the legal requirements imposed on both such parties. Mandatory disclosure obligations are placed on franchisors, and franchise agreements must be filed with the Ministry of Commerce within 15 days of signing. The franchise agreement itself must also incorporate a number of mandatory provisions which are designed to protect the franchisee.
Another requirement to note is that franchisors in China are required to operate at least two corporately-owned stores. These need not necessarily be operated in China, and the requirement may be satisfied if a foreign franchisor operates corporately-owned stores in its home country.
Indonesia
The Indonesian government exerts fairly strict control over the country’s economic activities, and the prevailing business environment is one of protection of domestic companies and industries. For example, all contracts relating to business in Indonesia must be drafted in the Indonesian language, or will be deemed invalid.
The legal framework for franchising in Indonesia consists of two main regulations: Government Regulation No. 42 of 2007 on Franchising, and Minister of Trade Regulation No. 53/M-DAG/PER/8/2012 on the Implementation of Franchising. Specific issues relating to franchising are addressed by a number of further implementing regulations. These franchising regulations set out the main criteria for franchise businesses in Indonesia, but also set out mandatory provisions which can prove problematic for would-be franchisors.
When structuring their franchise, foreign brand owners should be aware that the grant of a franchise from a parent company to a directly or indirectly controlled subsidiary is prohibited in Indonesia. Since international franchisors cannot operate corporately-owned stores, finding local partners who can be relied upon is of paramount importance.
Franchisors and franchisees are required to use locally-produced components for at least 80% of the raw materials, business equipment and merchandise used in the franchise business. Since quality control and consistency of brand standards are of vital important to franchise businesses, foreign brand owners must find good-quality local producers in order to ensure a reliable supply chain in the market.
Disclosure obligations under the franchising regulations require franchisors to make considerable disclosures from the outset of a proposed venture, yet no corresponding obligations of confidentiality are placed on prospective franchisees. This represents a risk to the franchisor.
Due to the strict requirements of the franchise legal framework in Indonesia, alternative structures are being increasingly adopted by brands entering the Indonesian market. There is also a feel from the authors that the legal framework will be reviewed and modified to further encourage foreign brands to enter and invest in the Indonesian market.
There is no doubt that the Asian market holds exciting opportunities for international franchisors. As this article demonstrates, each country has a unique commercial and legal environment, and foreign brand owners wishing to enter these markets do face legal, commercial and cultural challenges. In order to navigate these successfully and take full advantage of the opportunities on offer, it essential to obtain specialist franchise advice, and to seek out advisers with local knowledge from experts ‘on the ground’.
ABOUT THE AUTHORS By Graeme Payne, Partner, London, Bird & Bird LLP; Dr Sven Michael Werner, Partner, Shanghai, Bird & Bird LLP, and Risti Wulansari, Partner, Jakarta, K&K Advocates (with whom Bird & Bird has a co-operation relationship).
Vietnam: Asia’s new franchise hot spot
Brands looking for new territory to expand into should look at Vietnam, says Albert Kong, Chairman of Asiawide Franchise Consultants.
Franchising as a business expansion method has become increasingly popular in Asia and one region which has been performing notably well in this respect is Vietnam.
Vietnam’s healthy economy (which has been growing in leaps and bounds in the last decade), coupled with a huge, mainly-young population of 94 million (65% of Vietnam’s population is under 30 years old), has meant that more and more people (and corporations) are showing a strong interest in franchising.
Although ‘early birds’ such as Texas Chicken (at that time franchised to an Indonesian company to operate in Vietnam) and certain ice cream brands did not do too well in the 1990s, the situation now is a lot more conducive to successful franchising, due to the increasing size of Vietnam’s middle income group.
By 1997, the franchising market increased threefold with the entry of KFC. Other pioneer franchise brands in Vietnam include Lotteria (fast food) and Jollibee (fast food). As for local franchise brands, Trung Nguyen (coffee and cafés), Pho 24, Pho 2000 (both sell beef noodles) and Maxx clothing shops were the first few to appear, increasing the buzz among locals.
Foreign brands
According to the Vietnam Ministry of Industry and Trade, there are currently about 145 foreign brands that have registered their franchising businesses in Vietnam. The majority of franchisors come from the USA, Australia, South Korea. Singapore, Thailand, Japan, Hong Kong, Canada, and the Philippines.
In tandem with a growing interest in western-style food and beverage concepts (McDonald’s, Starbucks Coffee, Pizza Hut, Hard Rock Café, Domino’s Pizza, Popeye’s Chicken, Dunkin’ Donuts, Coffee Bean and Tea Leaf are all now in Vietnam), there is also a considerable demand for lifestyle-oriented products and services such as retail (e.g. convenience stores like G7 Mart, Circle K, Family Mart and Shop & Go ), education (e.g. Mathnasium, Crestcom, Cleverlearn, Dale Carnegie, and Kumon), entertainment, healthcare, and lifestyle-oriented businesses.
The enthusiasm is infectious. It is inevitable that more and more Vietnamese businesses are now exploring new business opportunities available via franchising. For example, Wrap and Roll has even expanded overseas, with potential overseas franchises like Phuc Long (café) probably following suit in the near future.
Another healthy indicator is the amount of M&A deals involving franchise brands: example Highland’s Coffee and Pho 24 being acquired by Viet-Thai International /Jollibee Foods Corporation. Other notable facts about Vietnam that will entice franchisors include:
1) Vietnamese middle class: Vietnam now has 12 million people classified as “urban middle-class consumers.” This figure is expected to double in size to 33 million by 2020.
2) Urban living: More than 34% of the population now lives in urban areas
3) 100 per cent foreign-owned: As of 1 January 2009, franchises established in Vietnam can be 100 per cent foreign-owned. Note: Many legal firms have detailed info concerning the rules and regulations affecting franchising
4) Growing retail developments: There are rapidly emerging modern retailing channels and growing retail developments in the key cities of Ho Chi Minh City, Hanoi, Danang, Can Tho, Haiphong and Nha Trang thus making it easier to find suitable locations
5) Franchise-related trade shows: These include the Food & Hotel Vietnam, IFBO and the Vietnam International Retail & Franchise Show
I am bullish about Vietnam. The franchising scene will be even more robust should the association that represents the franchising fraternity in Vietnam join the Asia Pacific Franchise Confederation ( and subsequently, the World Franchise Council).
They Mastered the Far East
How hard is it to franchise in a diverse and different region like the Far East? Bill Edwards. CEO of Edwards Global services, Inc, talks to two franchisors who have done just that.
In 1988 I brought the AlphaGraphics quick print franchise to Hong Kong and Mainland China. In the succeeding almost 30 years, numerous foreign franchises of all types have entered the Australasia market. Our company has brought numerous F&B franchises to this region as well as home care, handyman and fitness franchises over the years.
The challenge of diversity
Just over 4.2 billion people live in the Asia-Pacific region in 2010, constituting 61% of the world’s population (unescap.org). There are 46 countries in this region, which includes much of East Asia, South Asia, Southeast Asia, and Oceania. “Half of the most religiously diverse countries are in the Asia-Pacific region.” (Pew Research Center). Over one third of the world’s approximate 3,000 languages are spoken in this region (Red Apple Education Ltd.)
The economies range from first world (Hong Kong, Singapore and Japan) to just emerging (Cambodia, Laos and Myanmar). The GDP growth varies from less than 1% in Japan to over 7% in India (The Conference Board).
With this diversity in mind, international franchisors have operated across the Asia-Pacific region for several decades, especially the food and beverage brands. The presence of Muslim countries means no pork and Halal preparation. India means no beef on the menu. In Japan the menu has to be altered to take into account the need for low dairy and salt content.
What type of franchises do Asia-Pacific consumers and investors want?
Children and adult education, health and fitness, business coaching, childcare, convenience stores, food and beverage, entertainment, fashion brands, business services, security and ecommerce. Food and beverage franchises are the most sought-after, followed by children’s education, as Asian families spend an unusually high percentage of their income on the education of their children in order to give them a edge when growing up.
There are numerous challenges in locating an international franchise brand here. Supply chain, diverse laws and regulations, distances, diversity of cultures, a wide range of consumer-buying capability, tariff barriers and outright government adversity to foreign business models. But consumers in both developing and developed countries in this region strongly desire Western products and services, and unlike some other parts of the world, growth is generally strong here.
Far Eastern success
PJ’s Coffee Of New Orleans recently opened it first franchised unit in Ho Chi Minh City, where there are already numerous coffee franchises. Coming from New Orleans, this brand has a French flavor, which is in demand by the Vietnamese consumer, according to Sean Ngo, the Ho Chi Minh City-based President of VF Franchise Consulting who brought this franchise to his country.
Ned Lyerle, President of US-based CKE Restaurants, which operates Carl’s Jr restaurants, sees tremendous growth potential in Asia and views the region as a key driver of shareholder value for our stakeholders in the years ahead. “We are bullish on Asia and see tremendous potential for the brand for decades to come!” says Mr. Lyerle. Twenty percent (20%) of CKE’s restaurants are located outside the United States, with Asia representing 10% of our international system and 35% of our development pipeline. Carl’s Jr currently operates in 12 countries in Asia and has development commitments to build another 440 restaurants throughout the region. Worldwide, CKE has over 3,500 restaurants in more than 30 countries.
According to Mr. Lyerle, franchisors need to dedicate resources in the region to manage the complexities of diverse markets, diverse tastes, mature and emerging markets, as well as the challenge of localized supply chain and procurement infrastructure. “CKE has made these investments,” he says. “We operate with a focus on the area development franchise business model. However, we operate a joint venture in China. We have invested significant time, money and resources to localize our supply chain in the Australasia region and now are ramping up growth on the back of our investment and successful opening. Also, food quality and food safety are paramount to a successful operation in any country. Our supply chain team and quality assurance division have invested countless hours in developing a safe and reliable network of local suppliers and distributors in the market.
“In both New Zealand and Australia, we enjoy the benefit of executing our brand with very little menu and marketing modifications. We are achieving scale in New Zealand where we advertise on TV, and we just cracked the Australian market with one of our most successful openings of all time. To be successful in Australasia, a franchisor must recognize the uniqueness of operating in each sub-region and also the unique channels that each country presents franchisor and franchisee alike. In the past year alone, we have enjoyed successful openings in three key markets; Australia, India and Japan. India presented a different challenge, given that we are primarily a premium, QSR plus burger brand.” Carl’s Jr spent two years developing a localized menu in India and testing it with consumers.
“All food packaging and paper are localized specifically for India and our back of house had to be completely separated for vegetarian and non-vegetarian staff and production lines. While we stayed true to our best-in-class product positioning, our menu in India is very different than other markets in Asia. At present, we are only operating in the New Delhi metroplex. However, we plan to springboard to other markets in the near future.”
Japan, he says, is a very mature food service market with established suppliers and competitors. “It is important to understand that the Japanese consumer has very high expectations in terms of food quality, taste, dining experience and service,” Mr Lyerle explains. “Japan has some of Asia’s most discerning consumers and a franchisor must satisfy their appetite for something unique, innovative and real. For Carl’s Jr’s entry into Japan, we created a new ‘urban industrial’ restaurant design to elevate our in-restaurant experience to the same premium positioning that our brand delivers with its menu and service system. The new design and launch was well received in the market and we have high expectations for the future in Japan.
The Dairy Queen experience
Brad Houser, Senior V ice President of International Dairy Queen says, “American Dairy Queen Corporation (ADQ) operates a 6,800 unit franchise system in the United States and 28 other countries. Fans of our delicious food and mouth-watering treats have remained loyal to the brand for over 75 years. Our Asia market has been the driving force behind our international development, with over 700 locations operating in China, 400 locations operating in Thailand and close to 100 locations present in the Philippines. Our recent success story has been in Vietnam, where we introduced our DQ Grill & Chill concept whose vast menu includes delectable burger offerings, including a Flamethrower GrillBurger, and our signature chicken strip basket, along with a vast array of salads, wraps, and delicious sandwiches. All of our restaurants also include our industry-leading DQ soft serve ice cream products, such as our world-famous Blizzard Flavor Treat, fruit smoothies, MooLatte Frozen Coffee Flavored Beverages, and frozen cakes in a variety of flavors. To meet with local flavour desires, Green Tea, Mango Sticky Rice and Red Bean offerings complement global offerings such as Oreo and Strawberry Cheesecake.
“Our global focus for development moving forward will be on our DQ Grill & Chill concept as we believe our array of offerings are what our fans are looking for during any day part and provides the greatest opportunities to build consumer brand loyalty success to our franchisees. South Korea, Malaysia and Japan are on the horizon in the future as great opportunities for one of America’s most loved brands.”
ABOUT THE AUTHOR William Edwards, CEO of EGS LLC, has 42 years of international business experience. He has lived in seven countries, worked on projects in more than 60, and has advised more than 50 U.S. companies on international development. Contact him at 1 949 375 1896, bedwards@edwardsglobal.com, and read his blog at geowizard.biz
