SUBWAY AND THE CHALLENGES OF FRANCHISING IN CHINA. JaYoung Lee TaeSung Park Aschel Soza

Transcription

1 SUBWAY AND THE CHALLENGES OF FRANCHISING IN CHINA JaYoung Lee TaeSung Park Aschel Soza

2 TABLE OF CONTENTS Introduction of Subway What is Franchise? / China? Subway s challenges of Franchising in China. Franchise in China - Advantages - Disadvantages Questions Conclusion

3 SUBWAY? SUBWAY -American fast food restaurant franchise - Owned by Doctor's Associates, Inc. (Subway, 2014) (largest single-brand restaurant chain and the largest restaurant operator globally) (Fastest growing franchises in the world, with 40,855 restaurants in 105 countries and territories as of January 1, 2014) The first Subway on the West Coast was opened in Fresno, California in The first Subway outside of North America opened in Bahrain in December (Subway, 2014)

4 WHAT IS FRANCHISE? Franchising is the practice of selling the right to use a firm's successful business model. Franchisor is a supplier who allows a franchisee, to use the supplier's trademark, mgt knowhow and distribute the supplier's goods (Gurnick & David, 2011, p. 35) In return, the franchisee pays the supplier a royalty( (a) a royalty for the trademark, (b) reimbursement for the training and advisory services given to the franchisee, and (c) a percentage of the individual business unit's sales) - (International Franchise Association, 2006) Waste asset: that its not permanent but periodical contract normally 5-30y

5 MASTER FRANCHISE? Master franchise is a franchising contract in which the master franchisor (the owner of th e brand name) hands over the control of the franchising activities in a specified territory to a person or entity, called the "master franchisee". Master franchising is a method that has been employed by most franchise systems. The operational efficiency of these systems, with their distinctly complex organizational for m, benefits from increased growth rates of the sub-franchises. -(Kaufmann & Kim,1995).

6 Why do we choose franchise? The franchise is an alternative to building "chain stores" to distribute goods that avoids the investments and liability of a chain. Franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain and build a distribution system for servicing it. Franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees while reducing their own risk. It allows the company to retain the economies of a large chain, while allowing for the meticulous management of geographically dispersed individual stores. (International Franchise Association, 2006)

7 CHINA -GREAT MARKET! 1.34 billion, most populated country in the world, growing at about 0.46% with 47% living in urban areas. The capital of China is Beijing which has a population of about 13 million. Shanghai (16 mil), Guangzhou (11 mil), Shenzhen (8.5 mil), and Tianjin (8.2 mil). China reforms in the past 30 years in order to compete better on a global scale which led to the second-largest in the world based on GDP (Purchasing Power Parity). -IMF, World Bank China s GDP (Purchasing Power Parity) is $12.61 trillion and is growing at a real rate of 7.8% with an inflation rate of 2.6%. China ranked 91 out of 185 countries in the World Ba nk Group s Ease of Doing Business. Ranking mostly due to government regulations on business.

8 Improvement in income distribution in the past five years largely reflects two fa ctors: the continued shift from jobs in farming to better paid non agricultural job s associated with urbanization, as well as government social policies extending social safety nets.

9 Urbanization with high increase in distribution of income reflects the surge in mid-income population

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11 Franchise in China China has the most franchises in the world but the scale of their operations is relatively small. Many franchises are in fact joint-ventures, as at their forming the franchise law was not explicit. McDonald, Pizza Hut, TGIF, Wal-mart, Starbucks Franchising is only 3% of retail trade, which seeks foreign franchise growth. Mid income populations are still growing with urbanization The year 2005 saw the birth of an updated franchise law, "Measures for the Administration of Commercial Franchise". Previous legislation (1997) made no specific inclusion of foreign investors. Today the franchise law is much clearer by virtue of the 2007 law,

12 Franchising Laws Overview Disclosure laws: The franchisor must provide the prospective franchisee with a disclosure document at least 30 day s before executing the franchise agreement. Relationship laws: The franchisor must have had two company-owned units (in China or elsewhere) for at least year The franchise agreement must provide for a cooling-off period Minimum term of 3 years Registration laws: Franchisors must register with the Chinese government agencies (MOFCOM at the central govern ment level) within 15 days after signing the first franchise agreement

13 Challenges 1.Concept of franchise - Demand knowledge -Seminar towards potential franchisee -Establishing supply chain -Cultural difference in operating the business (command of control) 2.Intellectual property Laws Practical -Relatively slow take off - First register(f to F system) / Code law(civil law) -Enforcement of the law is weak ( but getting better) 3.Cities becoming increasingly expensive and saturated

14 QUESTION1 Subway brings to China various intellectual property in the form of trade marks, patents, and an entire business system. What are the specific threats to Subway's intellectual property in China? What can Subway do to protect its intellectual property in China?

15 THREATS TO SUBWAY Brand Image Counterfeiter Brand loyalty Revenue Consumer

16 THREATS TO SUBWAY(CONT ) Breakdown of production of counterfeit goods worldwide (Slocum, & Jenny, 2010)

17 PROTECT IP (INTELLECTUAL PROPERTY) Patent Trademark Unfair competition law

18 PROTECT IP (CONT ) 1. Become familiar with the Chinese legal system 2. Register your IP in China, and do it as soon as possible 3. Actively protect your IP 4. Consider your partners carefully

19 NEW TRADEMARK LAW First to file system New law is issued and effective from May 1, Strengthened protection against piracy - Shortened trademark prosecution times - Strengthened well-known mark protection - Narrowed legal standing for oppositions and invalidation - A mark proceeding to registration if the opposition fails at the first level of adjudication at the Trademark Office - Increased fines, compensation, and statutory damage against infringement

20 PATENT REGISTRATION May NOT relevant to Subway The PRC passed the Patent Law of the PRC to encourage invention-creation and to promote the development of science and technology. Invention patents Utility models Design Patents

21 ANTI - UNFAIR COMPETITION LAW According to Article5, an operator may not adopt the following unfair means to carry to transactions in the market and cause the damage to competitors (2)using, without authorization, the name, packaging or decoration peculiar to well-known brands, so that his goods are confused with wellknown goods of another person, causing buyers to mistaken them for the well-known goods of the other person

22 OTHERS Copyrights Quan Xi

23 SIPO You can find relevant law and regulation here (SIPO State Intellectual Property Office of P.R.C)

24 QUESTION2 What do you think about Subway s method and level of compensating its master franchisee and regular franchisees in China? Is the method satisfactory? Is there room for improvement?

25 WHAT DO YOU THINK ABOUT SUBWAY S METHOD AND LEVEL OF COMPENSATING ITS MASTER FRANCHISEE AND REGULAR FRANCHISEES IN CHINA? Pros regulate quality of service (providing equipment and method of preparing food) ensuring highest quality of food served (providing local supplie rs for fresh vegetable to save cost) acts as a method of spreading subway on large scale by bridg ing the cultural and language barrier Cons the franchisees need to pay 8% royalty fee initial Payment fee i s quite steep for an startup cost

26 IS THE METHOD SATISFACTORY? Conclusion Even though the startup cost is high, this method allows the fra nchisees to succeed in the business. (taking external factors int o consideration) The method to maintain and manage the business is taught to them which makes it easier. Easier for international Brands to come into the country with ea se

27 IS THERE ROOM FOR IMPROVEMENT? Allow installment payments of the initial cost. Reduce the percentage of Royalty fees that needs to be paid over a period of time.

28 QUESTION 3 What are the advantages / disadvantages of franchising in China from Jim Bryant's perspective? What can Bryant do to overcome the disadvantages? From Subway's perspective, is franchising the best entry strategy for China?

29 ADVANTAGES OF FRANCHISING IN CHINA A win-win proposition Minimal entry costs Rapid expansion Brand consistency Circumvention of legal constraints Fast expanding consumer class Highly reputed Western brands Second-and third-tier cities are open to franchises

30 DISADVANTAGES OF FRANCHISING IN CHINA 2. Ambiguous legal environment 1. Knowledge gap 3. Cultural difference (Taste, perception) 5. Escalating start-up costs 4. Lack of management skills of local managers

31 OVERCOMING DISADVANTAGE 1. Knowledge gap - Seminar towards potential of franchise, governments, consumers (Education)

32 OVERCOMING DISADVANTAGE (CONT ) 2. Ambiguous legal environment - Include all the possible rights into enforceable legal documents - Consider the ambiguity as the opportunity (e.g. Quanxi)

33 OVERCOMING DISADVANTAGE (CONT ) 3. Cultural difference (Taste, perception) - Hire local managers - Pursue focus group investigation

34 OVERCOMING DISADVANTAGE (CONT ) 4. Lack of management skills of local managers - Establish proper/ precise training system

35 OVERCOMING DISADVANTAGE (CONT ) 5. Escalating start-up costs - Look for proper franchisee / partner - Hire the right local person to minimize linguistic and cultural costs.

36 IS THE FRANCHISE BEST FOR SUBWAY IN CHINA? Franchising Exporting Licensing Modes of entry Wholly owned subsidiary Strategic Alliance Joint Venture

37 QUESTION 4 Subway Faces various cultural challenges in China. What are th ese challenges and what can Subway and its master franchisee do to overcome them?

38 CHALLENGES Competition from local competitors Have more outlets Cheaper than western competition Knows the target audience well Eg:- Di Cos

39 CHALLENGES Majority of the population in China do not prefer ham burgers such as McDonalds and KFC in comparison to Sandwiches. The taste plays a major role. Black Beans, Red beans, Green Beans

40 OVER COMING CHALLENGES Using Celebrity endorsements to promote the products. Displays emotions and consumption Incorporate the Subway with local Festivals by having offers to get consumers on a personal level with the product. Customizing the menu to cater to the local populations taste p references