An overview of commercial franchising in China

Set to reach US$ 6.1 trillion by 2021, China’s consumer market is the largest in the world. Given the consistent growth of local purchasing power coupled with widespread urban development as the country transitions to a consumer economy, the market for franchises is expected to expand significantly.

 

According to an Aliresearch/BCG market study, there are five emerging consumer profiles in China: Brand-aware, fashion conscious shoppers across demographics, single urban residents aged 35 and older, environmentally conscious individuals, trend hunters and digitally immersed connected consumers.

 

Each of these market segments represent consumer preferences and market demand to be catered to by branded enterprises that engage demographic needs and identities. One characteristic that unites all PRC consumer demographics is openness towards new brands, particularly if they are from overseas.

 

New franchise enterprises are expected to cater to demographic segment preferences, such as items packaged and priced for single person households or online shopping services offering customizable fashion product packages.

 

The potential for business development now extends far beyond mass market franchises with well-known brand names. According to the Ministry of Commerce, 62% of registered enterprises in China had less than ten outlets. The F&B and retail sectors contain the majority of franchise enterprises, most of which are small scale domestic brands. The considerable extent to which commerce in China is digitalized through integrated sales and social media portals presents many further opportunities to fine tune market research through data analysis.

 

Commercial Franchising in China is governed by the Regulation on the Administration of Commercial franchises which was enacted on May 1^st 2007. Commercial franchises are defined as a form of business operation where enterprises with business operation resources, such as a trademark, logo, patent, or technology, grant other enterprises permission to use those resources  through a contract that specifies a common operation model and sets franchising fees.

 

Franchisers must be enterprises – defined as for-profit entities with independent accounting systems. These can be under individual ownership, limited companies or Foreign Invested Enterprises. Hong Kong companies, however, cannot establish PRC franchising unless they  register  a subsidiary in China. The enterprise can be a Foreign Invested Commercial Enterprise with authorization to carry out retail and franchising, which can be structured either as a Wholly Foreign Owned Enterprise (WFOE) or Joint Venture (JV). Another options is to set up a cross border franchise licensed to domestic companies from overseas,

 

Prospective franchisers should demonstrate a sophisticated, established operation model, capacity to support and advise franchisees and least two direct sales outlets  in China that have operated for over a year.

 

Franchiser Record Filing

 

Franchisers are required to maintain national network-based filing. Applications for record filing should be submitted to the local Commercial and Industrial Administration Bureau within 15 days of signing a franchise contract. Yearly renewal notification is required prior to March 31^st every year. Incomplete documentation is required to be filed within 7 days after which the authority processes the filing within 10 days. Franchisers making changes to their business registration and store distribution should notify the filing authorities within 30 days. Franchisers that falsify or conceal relevant information can have their business license revoked.

 

Filing Procedures

 

Records should be filed with the local Commercial and Industrial Administration Bureau where the franchise operates. Franchises that operate in areas under direct central government control should file records with the Ministry of Commerce.

 

Materials required:

• Basic Franchise information
• Outlet distribution information
• Marketing plan
• Business licenses
• Trademark registration certificates
• Approval documents from government departments
• First franchise contract
• Sample franchise contract
• Contents of operation manual (With number of pages specified)
• Franchiser Commitment
• FIE Approval certificate

 

Franchisers that do not provide these documents face a fine of RMB 10,000. Documents from outside the PRC should be notarized, translated to Chinese and certified by PRC consulate in that country.

 

Information to provide to franchisee:

• Information about the franchiser and business
• Complete franchise contract
• Marketing Plan
• Basic information about business resources
• Basic information about franchising expenses
• Information on product pricing and equipment costs
• Information on services provided to franchisees
• Forms and guidance for business operations
• Investment budget
• Two-year summary of financial and accounting statements and audit reports
• Information on any court cases involving the franchise within past five years

 

Franchisers have the right to require confidentiality agreements, and franchisees cannot share trade secrets either during or after the contract period. Franchisees will be held liable for compensating the franchiser for any unauthorized use of trade secrets. Precautions should be taken regarding any trademarks even if there are no immediate plans to franchise in China, since there has been a precedent of domestic firms registering brand trademarks in the PRC, requiring foreign brands to reacquire the rights from the domestic trademark holders by going to court.

 

Should you have any enquiries about setting up a franchising business in China, our business advisory services can help ensure you develop an advantage from the outset. Our offices in Guangzhou, Shanghai and Beijing have helped guide many enterprises through new ventures in China. We pride ourselves on working closely with our clients, and we are excited for China’s market expansion over the next decade.  

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