Taking a different tack in this month’s column, we go west of the United States to explore franchise expansion in Asia. As we continue to push through the pandemic, we investigate the changes in the demand for international brands and what the future may hold for franchisors looking to expand to China and the greater surrounding area.
Like many other jurisdictions, China and neighboring countries have seen a surge in demand for service-based franchises. The nuance being there is particular interest in concepts that assist people in reducing the amount of contact they have with others.
“While such increased demand is a response to the current pandemic conditions, the trend also speaks to general predispositions and preferences,” said Peter Pang, managing partner of international law firm IPO Pang Xingpu. The examples include food delivery, cleaning and disinfecting, and specialty transport services that avoid public transit.
Pang mused that all of this brings to mind the lyrics of the well-known Simon & Garfunkel song, “I Am a Rock,” particularly the line: “I am an island.” “It appears as though so many have become their own island over the past 12 months,” joked Pang.
Going back to delivery services, Pang explained the food delivery process in China has become so sophisticated that patrons are provided with receipts indicating the chef who prepared the food, along with the chef’s temperature at the time. The same information is provided for delivery personnel. In fact, it is estimated that more than 50 percent of food delivery services in China have adopted this system, and in some regions it is mandatory.
Demand for proven ‘winners’
Opportunities to expand to China certainly exist, but not without qualification. Over the past several months, Pang and his firm have seen a renewed interest in expansion into China and surrounding regions. A good number of the franchise brands looking to enter the Asian region have been hit hard in their home jurisdiction and are looking to other markets.
“For better or worse, those are not the conditions under which a brand should look to expand into China. That is, even if everything else looks promising and in order, even if the situation on the home front represents only a temporary setback, the cultural expectations are that brands must be ‘winners’ abroad before they have the right kind of appeal for the right kind of investor in Asia,” said Pang.
There are proclivities and peculiarities to every region and culture, not to mention a multitude of perspectives and opinions associated with same. Franchisors looking to expand internationally are tasked with having to research, investigate and synthesize all of this—ideally before embarking on the journey.
Pang cited a cogent illustration. It involved an electronics franchise that ignored local expert advice—to its own peril—around modifying its returns policy for China in order to protect its franchisees. Pang shared another example, this time a Chinese brand that his firm was working with in expanding to the United Arab Emirates. It was a hotpot concept that failed to do its research on the cultural proclivities and climate appropriateness with respect to the concept and the target region.
Consider this advice
There are several key suggestions Pang shared for brands looking to expand into China and surrounding regions. First, invest more time, effort and money than is typical in shoring up and protecting intellectual property rights well before expansion efforts commence. Among the most common errors is registering trademarks solely in the English language. Beyond that, it is also important to understand and meaningfully undertake the translation process, which is more an art than a science. Considering the phonetics as well as the desired meaning of the words (as opposed to direct translation) is critical.
Second on the list is creating a “buzz” around a franchise brand. This must stem from the strength of the franchise system’s home base, which the brand can leverage for the Asian expansion. All of the above is part of a significant cultural formula, according to Pang.
“In my experience it can be a real challenge generating interest with investors when you’re not working with a brand that is a perceived ‘winner’ with strength from the home base,” he said.
Third, Pang’s preferred approach is to have the founders of a franchise go on a “road show,” much like in an IPO process, as they are typically the best proponents of the value proposition. Pang referenced the old adage, “go big or go home,” not in terms of expenditure (although there is that aspect as well), but in the planning, preparation and execution of the road show. In Pang’s network, it’s all about finding the “money guy,” who then finds the operators and everything else. “We work with very savvy and sophisticated investors,” said Pang.
Be led by the population. Pang’s fourth point is based on his belief that when it comes to expanding into China and surrounding countries, acceptance and success in the big cities translates to acceptance and success in smaller cities. Simply put, the largest cities have the strongest appetite for international brands and the investment dollars to match.
Finally, the industries with the most appeal now, according to Pang, include quick-service restaurants, services businesses (particularly those described above as well as those utilizing advanced technology), North American-style education concepts (with online platforms) and home care services (particularly those that facilitate older adults remaining in their own residence).
Beyond the planning, the research, observing the trends, targeting the populous cities and developing strong interest in a brand, Pang’s overall guiding principle when it comes to Asian franchise expansion remains: “go big or go home.”
Andrae Marrocco is a partner and co-chair of the Franchise & Distribution Group in the Toronto office of McMillan LLP. His column World View covers international franchising in each issue. Reach him at firstname.lastname@example.org