Subway Franchising and China Essay Example

Subway: Franchising and China Paper Entering and operating In international markets use contemporary technology to mml mlse counterfeiting. Many flrms build biotech tags, electronic signatures or holograms into their products to differentiate them from fakes. Continuously update technologies and products. The firm that regularly renews Its technology can stay ahead of counterfeiters by offering products that counterfeiters cannot Imitate fast enough. Also differentiate products by emphasising a strong brand name. Customers usually prefer established brands that eature the latest technology. In the long run, the best way to cope with the consequences of Infringement Is to sustain competitiveness through Innovation and constant technological advances. Then, even when licensing violations occur, the firm is protected because the stolen proper rapidly becomes obsolete. Firms also lobby national governments and international organisations for stronger intellectual property laws and more vigilant enforcement, with limited success. Ultimately, when contractual strategies prove undesirable or Ineffective, focal firms may step up to the igher-control entry strategy of acquiring ownership, which accompanies FDI. Closing Case Subway and the challenges of franchising In China subway, the fast-food marketer of submarine sandwiches and salads, has over 32 000 stores in 90 countries and generates over US$12 billion in annual revenues. The franchisJng chain opened its first international restaurant in Bahrain in 1984. Since then, Subway (www. subway. com) has expanded worldwide, and generates about 20 per cent of Its annual revenues abroad. The firm e xpects foreign markets to contribute to much of its future growth. Subway is the third-largest US fast-food chain in China, after McDonalds and KFC. We will write a custom essay sample on Subway: Franchising and China specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Subway: Franchising and China specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Subway: Franchising and China specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Fish and tuna salad sandwiches are the top sellers. By 2006 Subway had opened fewer than 40 stores in China. The franchise had Its share of Inltlal setbacks. Subways master franchisor In Bel]lng. Jim Bryant. lost money to a scheming partner and had to teach the franchising concept to a country that had never heard of it. until recently, there was no word in Chinese for franchise. Cultural problems remain an ongoing challenge. After Bryant opened his first Subway shop, customers stood outside and watched for a few days. When they finally tried to buy a sandwich, they were so confused that Bryant had to print signs explaining how to order. They didnt believe the tuna salad was made from fish because they could not see the head or tail. They didnt like the idea of touching their food , so they would gradually peel off the paper wrapping and eat the sandwich Iike a banana. To make matters worse, few customers liked sandwiches. But Subway-or Sai Bei Wei (Mandarin for tastes better than others)-is forging ahead. Bryant managed to recruit a few highly committed franchisees that he monitors closely to aintain quality. Bryant is now authorised to recruit local entrepreneurs, train them to become franchisees and act as a liaison between them and Subway headquarters. For this work, he receives half of their IJS$IO 000 initial fee and one-third of their 8 per cent royalty fees. Today, there are over 140 Subway stores in China. Other multinational franchisors still face significant challenges in China, particularly in dealing with the Chapter 16 Licensing, franchising and other contractual strategies 485 ambiguous legal environment, finding appropriate partners and identifying the most uitable marketing, financing and logistics strategies. Famous brands such as AW, Dunkin Donuts and Rainforest Cafe have all experienced these issues. Why China for franchising? On the surface, franchising in China is very attractive because of its huge market, long-term growth potential and dramatic rise in disposable income among its rapidly expanding urban population. The market for fast food is estimated at IJS$1 5 billion per year. Chinas urban population, the target market for casual dining, has expanded at a 5 per cent compound annual growth rate over the past several years, a trend expected to continue. Increasingly hectic lifestyles have led to an increase in meals the Chinese eat outside the home. Surveys reveal that Chinese consumers are interested in sampling nonchinese foods. Market researchers have identified several major benefits to franchising in China: law makers, entrepreneurs and consumers. Focal firms must educate government officials, potential franchisees and creditors on the basics of franchising, a process that consumes energy, time and money. A win-win proposition. Restaurants were one of the first industries the government opened to private ownership in the early 1980s. Franchising in China combines the Western know-how of franchisors with the local market knowledge of franchisees. Many Chinese have strong entrepreneurial instincts and are eager to launch their own businesses. Ambiguous legal environment. Franchisors need to examine closely Chinas legal system regarding contracts and intellectual property rights. The Chinese government introduced regulations permitting franchising in 1997. The legal system is evolving and is full of loopholes and ambiguities. Some critical elements are not covered . The situation has led to diverse interpretations of the legality of franchising in China. Franchisors must be vigilant about protecting trademarks. A local imitator can quickly dilute or damage a trademark a focal firm has built up through much expense and effort. Branding is important to franchising success, but consumers become confused if several similar brands are present. For instance, Starbucks fought a Shanghai coffee shop that had copied its logo and name. The fast-food hamburger chain Merry Holiday uses a yellow colour scheme and emphasises the letter M in its signage, similar to McDonalds. There have been reports about fake Burger King restaurants perating in China. Large franchisors such as KFC and Pizza Hut are struggling to root out counterfeiters. Escalating start-up costs. Ordinarily, entry through franchising is cost-effective. However, various challenges, combined with linguistic and cultural barriers, can increase the up-front investment and resource demands of new entrants in China and delay profitability. Given the shortage of restaurant equipment in China, the franchisor may have to invest in store equipment and lease it to the franchisee, at least until the franchisee can afford to buy it. Franchisors must be patient. McDonalds has been in China since the early 1990s and has devoted substantial resources to building its brand. But few firms have its resources. Minimal entry costs. Because much of the cost of launching a restaurant is borne by local entrepreneurs, franchising minimises the costs to franchisors of entering the market. Rapid expansion. By leveraging the resources of numerous local entrepreneurs, the franchisor can get set up quickly. Franchising is superior to other entry strategies for rapidly establishing many outlets throughout any new market. Brand consistency. Because franchisors are required to adhere strictly to company perating procedures and policies, brand consistency is easier to maintain. Circumvention of legal constraints. Franchising allows the focal firm to avoid trade barriers associated with exporting and FDI, common in China. Challenges of franchising in China Chinas market franchisors: also poses many challenges for Knowledge gap. Despite the likely pool of potential franchisees, realistically, few Chinese have significant knowledge about how to start and operate a business. There is still much confusion about franchising among Perhaps the biggest challenge of launching franchises in China is finding the right artners. It is paradoxical that entrepreneurs with the capital to start a restaurant often lack the business experience or entrepreneurial drive, while entrepreneurs with sufficient drive and expertise often lack the start-up capital. Subways franchise fee of IJS$IO 000 is equivalent to more than two years salary for the average Chinese. China lacks an adequate system of banks and other capital sources for small business, so entrepreneurs often borrow funds from family members and friends to launch business ventures. Fortunately, Chinese banks are increasingly open to franchising. The Bank of China established a comprehensive credit line of IJS$12 million for Kodak franchisees. Entering and operating in international markets Availability and financing of suitable real estate are major considerations as well, particularly for initial showcase stores where location is critical. According to real estate laws enacted in 1990, local and foreign investors are allowed to develop, use and administer real estate. But in many cases, the Chinese government owns real estate that is not available for individuals to purchase. Private property laws are underdeveloped and franchisees occasionally risk eviction. Fortunately, a growing number of malls and shopping centres are good locations for franchised restaurants. The Chinese authorities maintain restrictions on the repatriation of profits to the home country. Strict rules discourage repatriation of the initial investment, making this capital rather illiquid. To avoid this problem, firms make initial capital investments in stages to minimise the risk of not being able to withdraw overinvested funds. Fortunately, China is gradually relaxing its restrictions, and franchisors have been reinvesting their profits back into China to continue to fund the growth of their perations. Reinvesting profits also provides a natural hedge against exchange rate fluctuations. learning from the success of others Experience has shown that new entrants to China often benefit from establishing a presence in Hong Kong and then moving inland towards the southern provinces. Before it was absorbed by mainland China, Hong Kong was one of the worlds leading capitalist economies. It is an excellent pro-business location to gain experience for doing business in China. In other cases, franchisors have launched stores in smaller Chinese cities, gaining xperience there before expanding into more costly competitive urban environments such as Beijing and Shanghai. Adapting offerings to local tastes appears to be a prerequisite. Suppliers and business infrastructure in the country are often lacking. Franchisors spend much money to develop supplier and distribution networks. They may also need to build logistical infrastructure to move inputs from suppliers to individual stores. McDonalds has replicated its supply chain, b ringing its key suppliers, such as potato supplier Simplot, to China. There is no one best approach in China. For instance, TGI Fridays imports roughly three-quarters of its food supplies, which helps it to maintain quality. But heavy importing is expensive and exposes profitability to exchange rate fluctuations.