For this Unit's Assignment please read "Case 2: Franchising in China" on Page 178 in Chapter 6 of your text. Then answer questions 1-4.
Then do some research and describe the non-store based retailing opportunities in China.
Submit your answers to the questions in a double-spaced paper, no more than three pages long, to the "Unit 4: Assignment" Dropbox.
Franchising in China
With its population of 1.3 billion people and a middle class
estimated at 200 million people as of 2009, the Chinese market
has been described by some retail analysts as ?the
mother of all franchise
markets.? In addition to the large
target audience of consumers, China is attractive because a
significant number of Chinese nationals now have the
required investment to purchase a franchise
According to Michael Isakson, the chairman of the
org): ?There are currently about 500 franchise
China, and we expect that to grow exponentially over the
next few years.? A study by the China Chain Store and
Association (CCFA) (www.chinaretail.org) found
that 14 of the top 20 franchises
in the United States have
already entered the Chinese market. As the chief executive
of iFranchise Group (www.ifranchisegroup.com) says,
China is ?in the early stages of a franchise
boom of unparalleled magnitude."
Prior to 2004, China lacked the laws to enable foreign
companies to establish franchises
in China. At that time,
foreign companies had to partner with a local franchise
that held import and export licenses. Until recently, Yum!
Brands (www.yum.com)?which now operates KFC
(www.kfc.com), Pizza Hut (www.pizzahut.com), and
Taco Bell (www.tacobell.com) franchises
did not franchise
outlets in China. Yum! Brands? initial
Chinese stores were all company-owned due to concerns
with intellectual property protection and China?s
weak legal framework. Similarly, prior to 2004, all of
McDonald?s (www.mcdonalds.com) Chinese stores
were company-owned and operated with a local Chinese
In 2005, as part of China?s World Trade Organization
commitments, franchising opportunities were opened up to
foreign-invested enterprises. As of 2005, Yum! Brands
began franchising stores that were company-owned for
12 months or had become profitable. Yum! Brands does not
want new Chinese franchisees either losing money or struggling
with the initial operation of stores. To encourage the
growth of its units in second-tier cities, Yum! Brands has
reduced the franchising fee to the equivalent of $250,000,
and McDonald?s has been franchising to Chinese nationals
since new legislation was passed.
Despite the changes in franchising laws, significant
challenges still exist in China. These relate to problems
associated with quality control, uncertainty about the
franchising regulatory environment, and weak intellectual
property enforcement. For example, General Mills
(www.generalmills.com), owner of the H?agen-Dazs
(www.haagendazs.com) ice cream franchise
, learned that it
was not properly supervising a local franchise
The franchisee apparently had been making ice cream cakes
in an unsanitary environment. It seems that ice cream was
produced in an apartment that did not have an appropriate
food preparation license. Adverse publicity associated with
the incident had a major negative impact on the brand?s
image in China.
In an incident related to intellectual property rights in
China, Starbucks (www.starbucks.com) discovered that a
Chinese firm registered its trademark prior to Starbucks?
entering China. Recovering its rightful trademark became a
costly and prolonged legal battle.
1. Describe the pros and cons of a multinational retailer
expanding into the Chinese market via franchising.
2. What are the pros and cons of Yum! Brands developing
its own stores versus using franchising as a means of
selling to the China market?
3. Should Yum! Brands modify its menu to meet Chinese tastes? If yes, how? Explain your answer.
4. Comment on Yum! Brands? strategy of franchising its
Chinese stores only after they have been companyowned
for 12 months or have become profitable.
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