Franchising, in its various forms, presents businesses with an excellent way of achieving profitable and successful international growth without the need for either substantial capital investment or a broad managerial infrastructure. In sectors as diverse as food and beverage (F&B), retail, hospitality, education, healthcare and financial services it continues to be a popular catalyst for international commerce and makes a strong and effective contribution to world trade.
With the significant attraction of the Mainland Chinese market, and given the commercial advantages of franchising, more businesses are considering this model for expansion into Mainland China.
Trends in various sectors
- Hotels: On an international basis, most hotel operators have a balance between franchised and managed hotels, with roughly two-thirds franchised and one-third managed (though this varies by operator). Globally, there is a growing trend towards favouring franchising in hotels. But in Asia Pacific, the vast majority of hotels are operated under management agreements rather than franchise agreements because of concerns about the quality of would-be franchisees and the need to protect brand standards.
There are signs, however, that this is changing. InterContinental Hotels Group (IHG) has been trialling what it calls a “Franchise Plus” model for its Holiday Inn Express brand in Mainland China, which extends a franchise offering to third parties while retaining some of the control elements of a management agreement. IHG has now announced plans to extend the model to its Crowne Plaza, Holiday Inn and Holiday Inn Resort brands. Chinese domestic hotel businesses are also looking to expand using this asset-light model, with Wanda Hotels and others adopting similar franchising and management models to quickly expand their hotel operations across the country.
- Retail: Issues around “omni channel” continue to dominate as traditional retailers struggle with how to roll out e-commerce and m-commerce across their international franchise networks. Most retail franchisors have granted e-commerce rights to their country franchisees as online and traditional bricks and mortar businesses become more connected. Some franchisors have developed their own platforms that they require franchisees to use. Franchisors will also need to consider approving on-line stores on marketplaces and social media sites such as TMall and WeChat in Mainland China. Master franchise agreements and development agreements need to accommodate multi-channel approvals and certification, with e-commerce being less of an add-on and more of an integral part of the franchisee’s expansion in a country.
- Wellness and Healthcare: Wellness is now a US$3.72 trillion global industry amid a huge upsurge in interest in healthy living. The wellness sector includes gyms, fitness and spas, healthy eating, nutrition and weight loss, beauty and anti-aging, preventive healthcare and complementary medicine. There are a large amount of gym and fitness franchises emerging in different parts of the world and spreading internationally, and also licenses and franchises for luxury spas. In the healthcare sector, personal home-care franchises from North America are spreading to other parts of the world, but care should be taken in adapting to local conditions and ensuring that where necessary the franchisor has “boots on the ground” in the local market.
One example of the expansion trend into Mainland China is Anytime Fitness, which became the first U.S.-based fitness franchise granted a license in the country. Anytime Fitness plans to expand its business in the Mainland to more than 300 gyms by 2020. To raise awareness of the fitness culture, the master franchisee in Mainland China for Anytime Fitness created the first “Wellness University” in Shanghai. The university aims to provide career development and certification to personal trainers. This is another example of creative business initiatives helping expansion in a new territory in the wellness franchising sector.
- Food & Beverage: Trends in food and beverage include the growth of healthy options such as vegan and smoothie concepts, and customization of food to customers’ requirements. There is an increasing use of technology in F&B such as ordering online, mobile apps and on demand products and services. Franchisors need to consider how to introduce these to the franchise network and to update their franchise documentation and manuals accordingly. In particular, food delivery services are becoming increasingly popular among consumers in Mainland China. As a result, food delivery companies have become an important intermediary for F&B operations in this part of the world. Franchisors in this sector need to consider the different channels and methods for delivery of their products to ensure success in these markets.
- Services: There is a growing trend for multi-brand franchising in the services sector whereby the franchisor group acquires complementary service brands. For example, Franchise Brands is an international multi-brand franchisor that owns ChipsAway, Ovenclean, Barking Mad and Metro Rod that has expanded through the acquisition of complementary service franchise companies. Acquiring a franchise brand can have its challenges in integrating the new brand into the existing culture and practices while keeping all franchisees across the brands happy. Franchisors need to find a balance between the economies of scale of a multi-brand strategy with the risks of overlapping services and dilution of brands.
- Social Media: Franchisors are still negotiating how to benefit from franchisees engaging in social media while ensuring that they stay on message and do not damage the reputation of the brand. Every franchisor should have a social media policy and appropriate protections in its franchise agreements.
- The Multi-Unit and Multi-Brand Franchisees: There has been a growth in franchisees who own multiple units of the same franchise brand and multiple brands across the same or different sectors. A franchisee may have a pizza, coffee shop and chicken franchise, or own multiple brands across different service sectors. It is essential to ensure that these multi-unit/multi-brand franchisees have the right management structure in place and maintain brand standards, and do not grow too fast too quickly to be able to cope.
Franchisors are still using the traditional structures in international franchising such as master franchises and development agreements, but regional master franchise and development agreements are also being granted even in smaller countries to spread the risk of a local partner not performing. Increasingly, there is the use of hybrid structures such as subordinated equity arrangements where the franchisor takes a share in the franchisee, and “manchising,” where a franchisee with little operational experience can be assisted by a management team put in place by the franchisor. Franchisors should carefully consider the different structures to find one most compatible with their business objectives in their expansion plans in Mainland China.