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| Analysis on China's Apparel Franchise Market |
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China's franchise market overview
Franchise started in China in the 1990s, and since the beginning, it has achieved rapid developments. The franchise model currently covers 60 industries in China, with more than 2000 franchise companies and 82,000 franchisees. The whole market is growing at 49% per year.
To fulfil the commitment of opening up the franchise market in three years after China joining WTO, the Ministry of Commerce issued the Commercial Franchise Management Regulations on Feb 2005. It formally removed the restrictions on market access and treatments of foreign franchises operating in China, fully opening the Chinese franchise market to foreign companies.
Globally, franchise has been utilised by multinational retail giants as the best way for low-cost expansion. But previously, as there had been no explicit provisions that prohibited or allowed foreign companies to conduct franchise activities in China, overseas companies thus were extremely cautious in entering this market, usually taking a "cooperative" instead of a real franchise model. As the franchise regulation now has become clear, foreign companies can finally operate legitimate franchise activities in China. It's not hard to imagine how those foreign companies, which have been waiting for so long, will be eager to jump on board. So for Chinese companies, if they only know how to deliver products or services, but not capital management, it is likely that their market shares will be lost quickly. Therefore Chinese apparel companies need to learn from foreign companies and utilise the franchise model, in order to deploy local capital efficiently and capture local market shares quickly. |
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Need for franchise in Chinese apparel industry
China is a major textile and garment producing country, and the apparel industry is one of the important industries in China. But for a long time, China's garment industry has been large but not strong. The high-grade garments market has been dominated by imported brands and foreign JV products, and Chinese garment products, which lack international competitiveness, are always in a disadvantaged position. While ensuring garment quality and design, we should also focus on combining production with distributions, taking an apparel branding and franchising strategy. Fortunately, the franchise model is warming up in China today. There are several large franchise fairs every year, with hundreds of companies presenting their products and brands. The Chinese franchise market is now in a new development phase。
But there are also many franchise failures in China. Some Chinese companies were either limited by resources, or tempted by quick profits, and subsequently became hasty and disappointed. Take the example of a once high profile Chinese sports shoes brand. This company entered the market in 2004 and wanted to expand nationally with a franchise model, in order to capture the high end sports market. It spent a large amount of money on franchisee promotion fairs and celebrity endorsements. But due to quick-profit temptation and blind developments, all its promotional strategies had not achieved the expected results. Therefore in order to secure meaningful results, Chinese companies need to move step by step in this franchise game.
For a successful franchise, it not only needs to have attractive franchise conditions, but a systematic operating method is also necessary. For example, it should establish a transferable "success model" and a "franchise program", which standardises corporate branding, management, operational techniques and technical requirements, thus making them a systematic franchise solution. With further professional training and stringent monitoring policies, a viable franchise operation could be ensured.
Strategies for apparel franchises
Franchise model requires control. Apparel franchisees in China are essentially agents buying inventories from a franchisor, and sell them in their authorised areas with add-on profit margins. Such a model makes it hard to control franchisees. Therefore many garment companies in China started with franchise models, but eventually returned back to traditional distribution and agency methods.
A franchise model also needs support. The development of a franchise requires the franchisor to have sophisticated branding and technological systems, complete back-end supports and ongoing innovative R&D functions. If a franchisor's whole set of capital, brand, corporate culture, technology and operations lags behind, it will certainly affect the downstream franchisees. In order to develop a franchise, a franchisor company needs to have healthy management mechanism, channels and marketing systems.
For apparel brands to develop franchise models, it is important for them to employ professional franchise managers, or engage in professional consulting firms to assist in planning, organising and implementations. A systematic, scientific and complete project design cannot be treated lightly. A company can start with a traditional direct sales model in a defined region for the first one or two years, in order to strengthen its brand images. At the same time it could actively trial the franchise model, accumulating research efforts on successful aspects. When the time is mature, it could then copy the success model to other regions.
Franchise could be a large investment for a single franchisee, and operating apparel shops on an individual basis could be expensive and difficult, such as high logistical costs. Therefore some companies have chosen a regional franchise model, enabling a master franchisee to open several franchisee shops (counters) in an authorised region. This could help individual franchisees find good locations and utilise economies of scale, thus benefiting the brand penetration.
Source: www.chinasspp.com |
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