China Franchise Industry and Economy Overview

At a Glance

Growth is expected to be 7.5% in 2014 and 7.3% in 2015, yet as China ranks 93rd in the world on GDP per capita, there is significant room for consumption growth. The long-term outlook is positive.

Franchise Glance

During the past 30 years, there has been dramatic economic growth in China and while franchising only started in the 1980’s it has also displayed rapid development. By 2012 the number of franchised stores exceeded 400,000 with 5,000 systems averaging 83 stores. The total annual sales of CCFA (China chain store & franchise association) members reached nearly US$300 billion in 2010 and represented about 13% of total retail sales in China.

The growing wealth, consumption, density of population and rising 2nd/3rd tier cities makes China a lucrative and, for the foreseeable future, growing market. It is odd when we talk about a slowdown in China yet GDP growth is still above 7%-not to be sniffed at.

China’s retail sales grew by 13.1% in 2013 (National Bureau of Statistics of China) and according to Euromonitor is expected to continue to grow year on year by 8.7% until 2018. This rapid growth, compared to the rest of the world, has resulted in a growing middle-class society with increasing disposable income.

As China becomes more open, their desire for foreign brands and new experiences grows in parallel. There are a range of hot sectors a franchise should be aware of. They value foreign brands higher than domestic brands as they are very much seen to be a status symbol. The resulting demand from these factors should be filled by savvy franchisors looking to expand out of their domestic market.

Only around 13% of American franchises have entered the Chinese market though 15 of the world’s top 20 franchises are already active in China. With foreign companies comes new business systems and despite foreign companies accounting for a relatively small share of the retail market, their business experience produces highly improved operating efficiency and profit margins which outstrip their domestic peers.

The growth of China and the franchise market in such a short time combined with consumer potential bodes well for new companies looking to enter China. The market and demand are much bigger than almost any other country so a franchisor can expect a premium for a regional or country agreement as a franchisee’s profits will reflect the ratio of investment.

The rise of the Chinese consumer

With the ever increasing growth in the middle-class (300 million as of 2012) combined with a maturing consumer, the Chinese are becoming a demanding society for new products. These economically empowered, sophisticated consumers require more than basic goods to satisfy their desires and many display their wealth through the purchase of foreign brands. To be seen carrying a Starbucks coffee on the way to work is really middle class cool.

In a nutshell, these ripe malleable consumers are young, often have a double income, are forward thinkers looking to attain a modern lifestyle and broaden horizons. As an international franchisor there is a great opportunity to introduce exciting cross-overs targeting these new adventurous Chinese consumers.

The bottom line

Many signs indicate that franchising will become easier in China over the next few years. China’s rapidly growing, sophisticated, affluent consumer base has a desire for imported brands that offer convenience, quality and service.

Finding a partner in China does involve effort but there are more potential partners than before and this number will continue to grow. Business risks are mitigated with the increase in the number of foreign brands and the tightening of business regulations ensuring better practice. The basic economics, size of the consumer market and recent trends, provide great country potential.

It is our opinion that China’s franchise market will show very healthy growth and all franchisors must view it as a challenging but primary target for international expansion.

To conclude: Trends and the economy display all the outward signals that the Chinese market and consumers are ready for new imported franchises.

Franchise Meets reckons: 8.5/10.