Does franchising work in Asia? – Part I
Sep 9, 2020
Does franchising work in Asia? – Part I
For those of us who live in Asia, we understand it as an interesting complex conglomeration of cultures. Even after many years, somethings that are successful, and some that are not, often completely take us by surprise, and baffles some of the best companies in the world. Throughout September and October I plan on writing a series of articles about franchising in Asia, beginning with this one.
First we will set some foundations that can be built upon and look at what franchising is, where it came from, why people do it, how it came to Asia in the first place, and what challenges face franchisors when they come to our region. Using some of the key conclusions we make, the next 3 articles will focus on answering the following related questions, with a focus on the Asian market:
- Do F&B (food & beverage, restaurant) franchises work well in Asia?
- Can Education franchises be successful in Asia?
- What questions should I ask when considering a franchise and how should the answers affect my decision choice?
What is franchising? What does it really mean?
A dictionary defines “Franchising” as an arrangement where one party (franchisor) grants another party (franchisee) the right to use its trademark as well as certain business systems and processes to produce and market a good or service according to certain specifications.
In simple terms, the owner of a brand like Little Caesars Pizza for example, will give the rights to a company based in Vietnam to use its trademarked brand and open Little Caesars restaurants throughout a territory. This might be a city like Ho Chi Minh, or the whole country of Vietnam. The company must follow the standards, recipes, and procedures as specified by Little Caesars.
Key Conclusions: Franchisees must follow a set system provided by the franchisor.
When and where did franchising begin, and when did it come to Asia?
Interestingly franchising began way back in the Middle Ages in Europe. The word “franchise” actually means freedom in old French. In more modern times it began in 1851 in the United States with Singer sewing machines. For fast food it began with White Castle and A&W in the 1920s, also in the US. The franchise industry in the US now generates more than 1 trillion USD/year for more than 5,000 franchisors and their franchisees. Now famous brands also franchised in the early days; KFC (1930), Dairy Queen (1940), Dunkin Donuts (1950), McDonald’s (1955), and IHOP (1958).
Kentucky Fried Chicken (KFC for short) is usually a very early mover into new markets. They are currently present in most Asian countries and have been since as early as the late 1960s, early 70s: Hong Kong (1973), China (1987), Japan (1970), Malaysia (1973), the Philippines (1967), Singapore (1977), Thailand (1984), South Korea (1984), India (1995), and Vietnam (1997).
In Asia, the Philippines started franchising very early back in the 1960s and 1970s with companies like KFC and A&W. McDonald’s came in 1981 and today more than 1,000 franchises exist in that country. In contrast many countries in Asia are still in franchise infancy. Vietnam, a country of more than 97 million people, only has 235 international brands registered for example. Myanmar, Cambodia, and Laos have less than 100.
Key Conclusions: While a few markets like the Philippines are quite developed, they are still significantly behind the US and thus have room to continue to expand, and most Asian markets are still in franchising infancy.
Why do companies purchase franchises instead of inventing their own brand?
While there are restrictions on what you can do as a franchisee, there are many advantages. There are not that many unique ideas and odds are that whatever you are planning someone has already done it. By franchising you can take advantage of their experience, move faster, and reduce your own risk. You also normally receive the following benefits:
- Tried and tested products
- Instant brand recognition
- International standard designs and décor
- A proven and efficient system
- Employee and owner training
- Ongoing support with marketing, training, R&D, QC, and QA
Many companies feel these advantages and the support of a good franchisor outweigh any franchise fee or royalty fees they must pay.
Key Conclusions: In most cases the powerful advantages of a good brand outweigh any costs or control limits involved in becoming a franchisee instead of doing it all yourself.
What challenges face franchises when they come to Asia, particularly for non-Asian brands?
There are some valid arguments for why some companies in Asia hesitate to partner with International brands, particularly those which were not developed in the region. They may feel that the concept won’t be able to duplicate its success in a vastly different environment. Depending on the industry, the education methodology, food flavor profile, pricing structure, marketing/branding initiatives, etc. may not be effective in the local Asian market despite its proven success elsewhere. Why pay for a “tried and tested product” if it hasn’t been proven successful in your market?
It is true that Malaysia, Indonesia, Singapore are very different than Thailand, Cambodia, Laos, which in turn is different to Vietnam, Korea, or Japan. They are all very different from the US market and consumer.
They may also question the training, quality control, and R&D support a brand which is based in the US or in Europe can provide to their efforts in their local country and for their team.
These are all valid arguments and identify the amount of effort and resources that a franchisor needs to dedicate to overcome. We will address these and other challenges in parts II, III, and IV of this article.
Key Conclusions: Many challenges can face International brands and their franchisees that wish to enter the Asian market.
About the author:
Robert has over 30 years of F&B and Franchise experience and has lived in ASEAN for more than 13 years. He is currently the Director of Franchise Development & Operations at VF Franchise Consulting, based in Ho Chi Minh City, Vietnam.