Does franchising work in Asia? – Part II
Sep 22, 2020
In part I of this series, we looked at what franchising is, where it came from, why people do it, how it came to Asia in the first place, and some of the challenges that face franchisors when they come to Asia. We also drew a few conclusions:
- Franchisees must follow a set system provided by the franchisor, even when entering new regions like Asia
- 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
- 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
- Many challenges can face International brands that wish to enter the Asian market, and their new franchisees here
If you haven’t read part I yet, I would recommend that you do so. You can find it on our website: CLICK HERE
In part II, we will look at the number 1 industry in franchising. Food & Beverage, or F&B for short. Around 50% of all franchises are in the F&B industry, the largest number in restaurants. In the US, this is a multi-billion dollar industry and remains the largest number of international franchises as well. But with the above conclusions, “Do F&B (food & beverage, restaurant) franchises work well in Asia?” is a good question.
There is a long list of both success stories and also quite a few notable failures of restaurants that have entered our market. Let’s look at a few, starting with McDonald’s and Burger King in Vietnam.
In 2018, CNBC ran a news broadcast “Why McDonald’s and Burger King flopped in Vietnam”, you can watch it HERE
While Burger King had more than 16000 stores in 2018, and McDonalds more than 36000, both in more than 100 countries worldwide, their performance in Vietnam has been far below expectations. In 2014 among the big hype people waited for long hours to get into McDonalds yet many years later there are still only 17 McDs (Burger King has even less). McDonalds has 1000 of stores in many Asian countries yet struggled in this particular market. Why? Experts point to several reasons. In Vietnam, consumers can get Vietnamese street food very fast already, so no need for western style “fast food”. They also point to underestimating local rivals and high quality tasty food at rock bottom prices. Other sources add Western menu pricing as an additional reason for the struggle. This means that while the Vietnamese have a high food spending budget 78% still goes to local food. Thue Thomasen, the founder of Decision Lab, an Asian based market research firm, states that in his opinion there are 2 rules for food in Vietnam “1. You need to be able to share the food, and 2. It needs to be chicken”. While I don’t necessarily agree in full, he has a very valid point. The preference for family style food, especially when out in groups, makes a huge difference, and burgers just aren’t fit to be shared. The video also claims that traffic to fast food chains dropped 31% between 2016 to 2018. Together McDonalds and Burger King had 2.8% market share for both brands in 2018. In comparison KFC had 11.4% and Pizza Hut 21.3%. The local franchisees still continue to tweak the menu, marketing, and positioning and time will tell how the long term success of these iconic brands will fare.
Another interesting example of both failure and success is KFC (Kentucky Fried Chicken) which entered China in 1987. They struggled as poor Chinese translation turned “Finger Lickin’ good” into “Eat your fingers off”, locally sourced chicken had odd flavors from being fed with fish meal, supply chain had serious issues in 2012-2014, and they faced a host of operational issues in their stores on a day to day basis.
But with a little trial and error and some hard work they overcame these initial challenges and now KFC is one of the biggest players in their market segment with almost 6000 units by 2018. They are targeting more than 20,000 units in China as they expand. Some of the specific things they did was launch special menu items that appealed directly to the tastes of the markets. The highest selling menu item according to David C. Novak is the Zinger Burger, and among the top sellers the Dragon Twister, both unique items to the Asian market. This dramatic shift away from the company’s strict recipe and menu policy has led to egg tarts and congee, Peking duck inspired dishes, and wraps with Sichuan-style seasoned beef. KFC also achieved huge success in Vietnam. While KFC took 7 years to open just 10 restaurants when they first entered, but after adjusting their menu to cater to local tastes, like launching their shrimp burger and chicken rice combo, they now have more than 130 stores in 21 cities throughout that country.
Our final example is the COCA / Mango Tree restaurant group. A family owned and run business which began way back in 1957, they have now grown to be present in more than 15 countries, most of which are in Asia. COCA is a Cantonese Suki (hot pot) brand with Thai influence, and Mango Tree is a premium group of Thai brands that range from small cafes to their upscale casual restaurants. We had a chance to speak with Trevor MacKenzie, the Managing Director of Asian Cuisine & Hospitality (COCA/Mango Tree) and asked him a few related questions.
My first question was “What challenges his company faced as they franchised across Asia?”
Trevor says “Always the number one challenge is finding the right partner. This is especially challenging as there is not a one size fits all criteria for partners across Asia. In our case we had to study the cultures of each country and determine what type of partner we wanted in that country. The cultural differences and levels of understanding franchising is different in each country from the expectation of what they can pay, to what royalty they are willing to pay. Also I think the challenge is finding partners with the right passion and mindset to be in the F&B business – many a people look at it as a glorious business and almost feel that it’s like status thing to own a restaurant. Therefore emotions get in the way which clouds the vision and clouds the success as when they see the reality of hard work, dedication and the non-stop problem solving in F&B business it’s like a big blow and they can lose motivation.”
He continues with a 2nd challenge, “Another challenge is building good mutual relationships – for example when I started in Asia our Group already had a good relationship with Japan. That then took years to hand over and build trust to me, now I am in the process of handing off the relationship and again it’s a long process. Most times Asian customers want to stay with the person they first signed up with vs a whole team of staff so it’s always a challenge to get everyone mutual respect.”
My second question was then obviously “How did you overcome these 2 challenges and successfully expand your brands across the region?”
Trevor replied “We overcame the first challenge by insuring we spent lots of time upfront with potential partners. We make sure we educate them honestly about the business and make sure they understand they may not see there husband/wife as often as before because the restaurant takes lots of time. We also make sure they must visit our home and spend a few days with us to see what our heart and passion is in this business – usually by the 2nd day they will know after listening to us and seeing us in action whether they are still excited about this business if they are then next step is a small trip together and this is for us to learn about them. Travelling is and can be stressful this way we get to see how a person handles such. Are they solving positively or win/win or are they demanding. I often say its like when you are dating before you get married. You always have your things you like and don’t like. Franchising is a min 10 year marriage so you better make sure you are clear on what you like and don’t like before getting into a franchise relationship- too many Brands come at franchising from short term perspective of just sell the franchise to people – selling is easy – having a long term relationship is hard and takes work!”
“To overcome the second challenge we started group calls, conferences, CSR events and in general things that involved more interaction amongst our franchisees and team. Therefore when it’s a marketing matter they call marketing department, operations they call ops department instead of like it was where all calls came thru me and I felt like a call centre! ( hahaha ). I also make sure that our team makes the time to call and build relationship with our partners so they have the opportunity to vent to our team vs just me. This benefits our team as well cause what better way to bond with someone than to help them solve a problem.”
Now, let’s return to some of our earlier conclusions and stated challenges.
#1) Franchisees must follow a set system provided by the franchisor, even when entering new regions like Asia
While key to any successful franchise, we see that it is important to partner up with a franchisor who is willing to allow some customization to appeal to local tastes. While staying within the brand style, merging the internationally successful menu with a few items or changes that specifically target the local community seems a recipe for success. People don’t go to a pizza chain like Little Caesars Pizza for local Thai food, but there is nothing wrong with a brand like them focusing on toppings like Seafood, which is loved by most Asians, instead of ingredients that are not familiar to the Thai consumers. If the franchisor is not willing to work with a potential franchisee and with a local market, my suggestion would be to seek out a different brand. Even the undisputed leaders in F&B franchising, Starbucks and McDonalds needed to adjust.
#2) Can a European or US based franchisor really support a franchisee in Asia when it is so far away?
This does make a difference. For sure a locally based support team, stationed in Bangkok for example, can be more in tune with the region and offer more and faster support in a physical way. This can be a nice bonus advantage of a brand like Mango Tree or COCA, or any Japanese or Korean brand.
US brands can overcome this challenge in several ways. First, communication is key and thanks to modern technology, video calls on a regular basis are free and easy to do. Some chose to allow their Asian franchisees a little more flexibility or decision making than they would for franchisees in the US. Others invest in regional market research from companies like VF Franchise Consulting so they are up to date with the local environment, competition, and economics. Eventually many once they have enough demand in the region, will open an office in Asia to provide direct support. So while a factor to evaluate and be aware of, and a good question to ask any franchisor, it is not a challenge that can’t be overcome.
#3) Success in other countries doesn’t necessarily mean a brand will be successful in my area
This is a very true statement. However, consider this. Would you rather invest in a concept that has no track record (like opening your own restaurant) or in a brand that has been successful in 15 or 100+ other countries? There are few guarantees but for sure the wealth of experience that a franchisor has learned can be of great help in your new venture. This also brings up a major point, a brand’s success is greatly influenced by the local franchisee. Many of the decisions still fall on the shoulders of the franchisee. Business strategy, local market knowledge, hiring and motivating the team, maintaining the brand standards at an international level, and the local marketing strategy and initiatives are mostly determined by the franchisee (of course with franchisor support).
#4) Many challenges can face International brands and their franchisees that wish to enter the Asian market.
As we learned from Mr. Trevor, there are unique challenges for every brand in every country. But instead of focusing on the issues, we can first expect that they will happen. And second by working together, the experienced franchisor and their international team with the local franchisee and their intimate market knowledge to come up with win-win solutions. Teamwork is key.
In conclusion: There are and will be challenges to any journey, including expanding an F&B franchise in Asia. Expect them, enjoy the challenge of overcoming them, and the sense of accomplishment when you do. There are always solutions when a good close relationship is built between the franchisor and the franchisee and almost any problem can be solved. Each party brings great strengths to the partnership and when we leverage those strengths and are willing to accept and use the strengths of others we can be successful.
Keep an eye out for Part III of “Does Franchising work in Asia series – Can Education franchises be successful in Asia?”
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.