Restaurant franchisors are eyeing developing countries. China is
among the first considered for a number of reasons. These include
size, 1.3 billion people, with a 230 million middle class consumers
in 2005, the world's highest economic growth rate in 2005 (about
9%), WTO membership, and recent franchise and contract laws. Shanghai
is an excellent entry point because the government has targeted
Shanghai as a new economic center to shift emphasis from Hong Kong.
In addition, the per capita income in Shanghai, over $6,500 (adjusted
to purchasing power), is the highest in mainland China. Shanghai
offers numerous economic incentives, an increasingly westernized
population, and a large numbers of tourists and expatriates.
There is reason for caution, however. While legal reforms have
taken place, laws still seem archaic and sporadically enforced.
And there remains insufficient protection for copyright, trademark
and intellectual property. Add the language barrier, the cultural
distance between the West and China, and the fact that many Western
brands are unknown in China, and it's clear that Shanghai is a challenging
opportunity to be considered carefully.
Franchising is a niche strategy that works; trading expertise and
a proven business format for local knowledge, connections, and contacts.
Successful franchising rests on the ability to transplant strategy
that was successful in the home country. In Shanghai, the fundamentals
of successful restaurant franchising are the same; consumers want
flavorful food, delivered quickly and efficiently in a clean, pleasant
environment at an affordable price. One recent survey of people
in Shanghai conducted by the author revealed that consumers rated
taste, service, atmosphere, price and brand name in declining order
of importance when selecting a restaurant.
Given the cultural, social, political and infrastructure differences
in Shanghai, complete standardization is unlikely. The key is to
assess what adaptation will be necessary.
Product - The product includes the novelty, service, atmospherics,
and overall experience that the restaurant provides. Traditional
domestic restaurants are not direct competitors. Franchisors may
be more successful by emphasizing the westernness of their products,
making standardization viable. Of course, minor modifications will
be required to adapt to local tastes. For example, Starbucks in
Shanghai offers a sausage Danish while McDonald's serves seafood
Promotion - Adaptation will depend largely on the product
strategy. Standardized products make a standardized message possible,
while different products mean different messages. Pizza Hut, for
example, localized its business by decorating with large red "Double
Happiness" signs, decorative firecrackers, traditional poetic
couplets and the traditional Chinese character Fu (fortune); changing
the design of the red roof to a Chinese feather Calligraphy brush
willed with red; offering a customized "Xinyi" (goodwill)
pizza from the Chinese new year to the Lantern Festival.
Pricing - First-time visitors to Shanghai are amazed at
the low prices of locally-made goods. International franchisors
need not use local restaurant prices for reference. As long as the
product is of high quality, and presents a new concept of consumption,
a higher price will signal quality and credibility. But remember
that average income is substantially lower than in the West. Effective
strategy might include portioning some products in sizes that can
be purchased at very low price points. Both McDonald's and KFC ran
1 Yuan (about 12 cents) ice cream specials to entice customers into
Distribution - Three location strategies seem viable.
- Downtown - The commercial and cultural center, it boasts the
greatest variety of restaurants. But high rents have restricted
growth. Only 2,100 of over 29,000 restaurants are located in Xuhui
and Jing-an, the busiest sections and the center of the downtown
area. Foreign restaurants are concentrated in Huaihai Lu, Maoming,
Nan Lu and Henshan Lu; streets of the French Quarters in old Shanghai.
- Special Economic Zones - Pudong, a financial center and the
site of many multinational corporations and government offices,
has 2,700 restaurants. Substantial residential construction is
also underway. Hongqiao, west of Shanghai boasts over 1,300 restaurants
and is a favorite of expatriates and foreign investors.
- Upscale Residential - About 2 million people have moved to suburban
residential areas, made possible by numerous infrastructure projects
that have increased the commutability of city workers.
Target Markets - Three segments represent attractive targets
for international restaurant franchisors.
- Foreigners and Expatriates - Short and long-term expatriates,
visitors and tourists have relatively high income, and a willingness
to pay a premium for familiar food with consistent quality. Continued
foreign investment will result in a growing expatriate population
as well as an increase in tourism.
- Business People and Young Professionals - Includes educated
professionals 25-50. They are likely to be the most receptive
to new ideas, value the foreign dining experience, and possess
sufficient discretionary income.
- Young Emperors - Preschool through college-age children.
There are an estimated 1.25 million one-child families in Shanghai.
Young Emperors command the attention of the extended family and
have a substantial influence on family buying decisions. A foreign
restaurant that attracts these children will attract their parents
and extended family as well.
Restaurant franchisors that miss the opportunity to enter China
now will face intense competition from early entrants. It will be
difficult for restaurant franchisors entering now to beat the scale
and profitability of the already entrenched McDonald's and KFC.
Nonetheless, the market is vast and great potential exists in many
Despite the potential, doing business in China is difficult. The
language and culture are remarkably distinct. Franchisors should
seek local partners who can help them navigate the local business
environment. A partner in the same industry with channels of distribution,
industrial connections, and guanxi (personal connections) can greatly
facilitate the success of the franchisor.