4 May 2018
Franchising Industry in Hong Kong
- Hong Kong’s franchising market has been developing steadily, most of the well-known international franchise brands, including McDonald’s, KFC, 7-Eleven, Subway, Starbucks and Pizza Hut, have a presence in Hong Kong. According to Hong Kong Franchise Association’s estimates, around 43% of the franchises in Hong Kong are in the catering business, 20% in retailing and 37% in other services.
- Franchising is an established model of business expansion, which is especially common for the food and beverage, retail and other services sectors. In Hong Kong, home-grown brands using the franchising model for local expansion is less common than in big economies with significant regional disparities. Still, there are a number of home-grown brands including Store Friendly Self Storage, Conduct Chinese Medicine Clinic and Quality Dry-clean that adopt the franchise model targeting the local market, to utilise the franchisees’ financial resources and personal networks.
- Many international franchise brands prefer well-established, local companies with strong retail and management experience to be their master franchisees in Hong Kong. These master franchisees run the operations with their own teams and/or subcontract the operations to individual franchisees.
- Developing Asian countries have begun to embrace franchising in recent years, as their rising middle-income class becomes more affluent and gravitates towards international brands. Many international brands have started to look for franchising opportunities in emerging markets.
- Hong Kong has the edge in serving the growing franchising business in Asia, including its showcase role, track record of organising exhibitions, world-class supporting services, access to quality franchisees, the availability of industry talent, market sensitivity and extensive business connections in Asia.
Since the 1970s when McDonald’s and KFC started opening franchised restaurants in Hong Kong, the city’s franchising market has been developing steadily. Most of the well-known international franchise brands, including Pizza Hut, 7-Eleven, Subway and Starbucks have a presence in Hong Kong. According to Hong Kong Franchise Association’s estimates, about 56% of the franchise operations in Hong Kong are local franchises. By industry, around 43% of the franchises in Hong Kong are in the catering business, 20% in retailing and 37% in other services such as learning centre, laundry and dry cleaning.
Many international franchise brands prefer well-established, local companies with strong retail and management experience to be their master franchisees in Hong Kong. These master franchisees run the operations with their own teams and/or subcontract the operations to individual franchisees. For example, Dairy Farm Group and Li & Fung Group are the Hong Kong-based conglomerates which operate some of the big names such as Ikea, 7-Eleven, Starbucks and Toys “R” Us, on a franchising basis.
In Hong Kong, home-grown brands using the franchising model for local expansion is less common than in big economies with significant regional disparities. Still, there are a number of home-grown brands, including Store Friendly Self Storage, Conduct Chinese Medicine Clinic and Quality Dry-clean that adopt the franchise model targeting the local market, to utilise the franchisees’ financial resources and personal networks. Some others have even adopted the franchise model across the border. For instances, Chow Tai Fook Jewellery has a total of 2,358 jewellery points of sale in China where 39% are operated by franchisees as of end-September 2017; Man Wah Holdings, the brand owner of sofa products “Cheers”, has more than 1,900 retail franchises in Asia.
There is no specific franchise law in Hong Kong. Disputes arising from franchise agreements will be subject to the common law, especially the principles of contract law, and to the legislation relating to the registration, licensing and protection of intellectual property rights, such as Trade Marks Ordinance, Copyright Ordinance, Registered Designs Ordinance and Patents Ordinance.
International franchising, facilitated by the increasing ease of global communications and technological development, is expected to become a key trend in Asia, as its rising middle-income class becomes more affluent while gravitating towards international brands. As Asian consumers earn more discretionary income, they increasingly crave the quality, convenience and service associated with foreign brands. Busy urban lifestyles of consumers have led to outsourcing of the functions which traditionally done within the family, such as cleaning, cooking and education. Sectors such as food and beverages, as well as personal and commercial services that cater to the needs and lifestyles of the middle-income class, offer high potential for franchising in Asia.
Hong Kong has the edge in serving the growing franchising business in Asia, including its showcase role, track record of organising exhibitions, world class supporting services, access to quality franchisees, the availability of industry talent, market sensitivity and extensive business connections in Asia. According to a HKTDC survey of 70 international franchisors and 80 Hong Kong and mainland franchisees, industry practitioners were positive about Hong Kong serving as a two-way springboard for international franchisors looking to gain access to the Asian markets, and for the Asian brands to venture into the global marketplace. In particular, Hong Kong was rated positively as a testing ground or showcase for novel nosiness concepts or products, as well as an international franchising exhibition centre for franchises.
To help expanding the franchise business and connection among Hong Kong companies, the HKTDC launched the Hong Kong International Franchising Show in 2015. The Show is a one-stop platform for companies and entrepreneurs to look for franchising brands, identify business partners and find franchising tips. Being held in December 2017, the third edition of the Show featured 130 exhibitors from Hong Kong, Chinese mainland, Korea, ASEAN, Australia, Europe and North America. During the Show, a series of seminars were hosted by more than 15 industry experts and leaders from around the world to share their business tips, covering topics such as new business concepts for F&B in the digital age, as well as franchising business management.
With its expanding middle-class consumers and urban population, the Chinese mainland is one the top potential franchise markets in Asia. According to the China Chain Store & Franchise Association (CCFA), the total sales of the country’s top 100 franchises increased by 21% to RMB360 billion in 2016, with the total number of stores of the top 100 franchises rose 17% to approximately 140,000. As pointed out in the Franchising Top Markets Report 2016 issued by the US International Trade Administration, foreign franchise brands are receiving greater interest in second and third-tier cities, as markets in top tier cities, such as Beijing and Shanghai become more saturated.
One of the major challenges encountered by international franchisors in China is finding qualified franchisees. Moreover, registering trademarks and IP, applying for the right licences and setting up legal entities can be formidable challenges. Hong Kong companies may act as the master franchisees or area developers to help international franchisors deal with the challenges they may face in China. With decades of experience of doing business in China, Hong Kong companies are trusted partners of international franchisors, to help manage the mainland franchisees, deal with bureaucracy, handle licence applications, fulfil import requirements, manage supply chains, adapt to local needs and tastes. At the same time, Hong Kong businessmen who are familiar with the international market, business practices and culture, also serve as an agent to help mainland companies expand overseas using the franchise model. In addition, a number of Chinese mainland brands have used Hong Kong as showcase to international consumers, including Quanjude Peking Duck, Little Sheep Group and Carpenter Tan.
Among other provisions, Closer Economic Partnership Arrangement between Hong Kong and the Mainland (CEPA) further opens up the mainland market for Hong Kong products and the distribution business to Hong Kong companies.
In 2014, the Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong was signed for implementation from March 2015, and the geographical coverage was extended from Guangdong to the rest of the mainland starting from June 2016 under the Agreement on Trade in Services (ATIS). Under ATIS, Hong Kong service suppliers are granted national treatment to establish commercial presence for franchising on the Chinese mainland.