Subway faces various cultural issues in China. What are these challenges and what can Subway and its master franchisee do to overcome them? Important information: Use Harvard style referencing- not less than (7) references. 800 word count.Avoiding plagiarism and similarities.
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Subway and the Challenges of Franchising in China
(Source: Cavusgil, S.; Knight, G. and Riesenberger, J.R.. (2012), International Business: The
New Realities. 2nded.New Jersey: Pearson, pp. 482-484.
Subway, the fast food marketer of submarine sandwiches and salads, has more than
32,000 stores in 91 countries and generates some $21 billion in annual revenues. The franchising
chain opened its first international restaurant in Bahrain in 1984. Since then, Subway
(www.subway.com) has expanded worldwide and generates about one-fifth of its annual
revenues abroad. The firm expects foreign markets to contribute to much of its future growth.
Subway is the third-largest U.S. fast-food chain in China, after McDonald’s and KFC. Fis
and tuna salad sandwiches are the top sellers. By 2006, subway had opened fewer than 40 stores
in China. The franchise has its share of initial setbacks. Subway’s master franchisee in Beijing,
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 to buy a sandwich,
many were so confused Bryant has to print signs explaining how to order. Some didn’t like the
idea of touching their food, so they would gradually peel off the paper wrapping and eat the
sandwich like a banana. To make matters worse, few customers liked sandwiches.
But Subway-or SaiBei Wei (Mandarin for “tastes better than others”)- is forging ahead.
Bryant managed to recruit a few highly committed franchisees that he monitors closely to
maintain quality. He recruits local entrepreneurs, train them to become franchisees, and acts as a
liaison between them and the Subway headquarters. For this work, he receives half of their
$10,000 initial fee and one-third of their 8 percent royalty fees. Today, there are more than 140
Subway stores in China.
Why China for Franchising?
On the surface, franchising in China is 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 $15 billion per year. China’s urban
population, the target market for casual dining, has expanded at a 5% 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 non-Chinese foods.
Market researchers have identified several major benefits to franchising in China:
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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.
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 strictly adhere to company
operating 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
China’s market also poses many challenges for franchisors:
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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 lawmakers, 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.
Ambiguous legal environment. Franchisors need to closely examine China’s legal system
regarding contracts and intellectual property rights. The Chinese government introduced
regulations permitting franchising in 1977. The legal system is evolving and has
numerous loopholes and ambiguities. Some critical elements are not covered. The
situationhas 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, which
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
McDonald’s. There have been reports about fake Burger King restaurants operating in
China. Large franchisors such as KFC and Pizza Hut are struggling to root out
counterfeiters.
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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. McDonald’s has been in
China since early 1990s and has devoted substantial resources to building its brand. But
few firms have its resources.
Perhaps the biggest challenge of launching franchises in China is finding the right partners. 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. Subway’s franchise fee of $10,000 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 to launch
business ventures. Fortunately, Chinese banks are increasingly open to franchising. The Bank of
China established a comprehensive credit line of $12 million for Kodak franchisees.
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 centers are good location for
franchised restaurants.
The Chinese authorities maintain restrictions on the repatriation of profits to the home country.
Strict rules discourage repartriation 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 operations. 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 to the southern provinces. Before it was
absorbed by the mainland China, Hong Kong was one of the world’s leading capitalist
economies. It is excellent pro-business location to gain experience for doing business in China.
In other cases, franchisors have launched stores in smaller Chinese cities, gaining experience
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. McDonald’s has replicated its supply chain; bring its
key suppliers, such as potato supplier Simplot, to China. There is no one best approach in China.
For instance, TGI Friday’s imports roughly three-quarters of its food supplies, which helps
maintain quality. But heavy importing is expensive and exposes profitabilityto exchange rate
fluctuations.
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