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  Franchising in China: A Dead Duck?   Franchising in China: A Dead Duck?  Edward Young  
         
 
Franchising in China: A Dead Duck? To the casual eye Quan Ju De may appear undistinguished with its plastic tablecloths and noisy waiters. But the restaurant has hosted generations of world leaders; former US president George Bush, German ex-chancellor Helmut Kohl and Edward Heath, the former UK prime minister have all dined here.

“President Bush (senior) used to come here when he was the resident US envoy to China (in the 1970s), and although little Bush (President George W. Bush) did not eat here during his recent visit, I am sure he must have been brought here by his dad when he was younger,” says Fu Weihong, deputy chairman of the Quan Ju De group.

 
The consistent popularity of the restaurant – among more than just visiting dignitary – seemed to make extending what had become a valuable brand a surefire success. So several years ago, the Quan Ju De group began to set up franchised duck restaurants across China.

But the company’s first attempt at franchising has been a flop; cheap copycats and sub-standard franchisees have eroded its hard-won brand. In China, where the concept of franchising is just taking off, trademark infringement is rampant and the rule of law weak, companies – domestic and foreign – that want to franchise their brand should proceed with extra caution. Fu admits the extra revenue from franchised restaurants has not offset the damage done to the brand.

In a country where food is both an art form and a national passion, Quan Ju De’s reputation depends, not on the number of luminaries who eat there, but on the quality of its duck. Traditionally, the birds are force-fed, injected with water between the skin and meat, basted with honey and vinegar, then roasted at a high temperature in ovens fired with the stumps of apple, pear and persimmon trees, to crisp the skin and bring the meat to a juicy tenderness. Slivers of duck are served with sliced scallion rolled in thin pancakes smeared with sweet plum sauce. Delicious. But, to the detriment of the brand, some of the franchise restaurants offered only leathery pancakes and fatty duck.

Of the 50 restaurants that bear the Quan Ju De name in China, 41 are franchise businesses over which the Beijing-based Quan Ju De has little control. Several others are copycat operations that imitate the Quan Ju De logo to attract customers.

Serving up a different kind of bird, American fast-food chain Kentucky Fried Chicken has experienced similar problems in China. “We get copycat restaurants all the time,” says Tony Chen director of public affairs at Tricon greater China, parent company of KFC, Pizza Hut and Taco Bell. “There is a Taiwanese restaurant chain in China with very similar branding – the look is the same down to the old gentleman, he just doesn’t have the Colonel’s beard.”

For Tricon – as for other franchisers – copycats are not the only threat to their brand image; Quan Ju De successfully sued one imposter forcing it to close down. Getting the right franchisee is also a problem. “We opened our first Pizza Hut in Beijing in 1990 as a franchise, but we have already bought it back. We found our rules were not being followed, and that endangers the brand.” To protect its brand the Quan Ju De group is also planning to retain ownership and management control of all new restaurants bearing its name.

Despite the problems faced by Quan Ju De and others, franchising is beginning to take off in China. The very visible success of Starbucks, KFC or McDonalds franchises have attracted hundreds of willing Chinese entrepreneurs. Almost every well-known fast-food chain from the US is either already in China, or is in the process setting up a venture, according to William Wright, senior attorney at the law firm Lehman, Lee and Xu who advises franchise chains in China. And it’s not just the fast-food industry – photo film companies Kodak and Fuji operate thousands of branded outlets across China through a form of franchising agreement.

 
Nor is there a lack of money to buy franchises. Last year’s annual franchise convention, run by the quasi-government China Chain store and Franchise Association (CCFA) and the China International Franchise Association (CIFA), attracted more than 1000 people from around China. “We have more than 100 applicants each month and none of them have any problem raising the Rmb 8 million (about US$ 1M) in capital needed to open a KFC outlet,” says Chen.

But, while local entrepreneurs are quick to spot the opportunities, most of them still don’t understand the nuts and bolts of running a franchise. Franchisees need to be humble enough to listen and learn. In China the entrepreneurs who can put together the money for a franchise are often used to doing it their own way – they are naturally determined and creative – but individual innovation by franchisees can be the death of a brand. Consistency is everything.

“Franchising is always an attractive way to expand your business and get your brand out there,” Chen argues, “but you have to be careful. Franchisers need a comprehensive contract and then both sides need to stick to it – everything from how to cook the food to how the cashiers should behave and how clean the toilets are. It’s your brand, your proprietary business model.”

More and more Chinese businesses are coming to understand the importance of brand value, and today, some of the biggest Chinese brand owners are active in lobbying the government for stronger trademark protection. Domestic company Malan Noodles has built a US$ 40 million a year fast-food business from one of China’s most ubiquitous foodstuffs by branding quality service and food.

Guaranteeing that consistency for Peking duck is more complex, but if Quan Ju De wants to make a success of franchising its famous brand, it should take a leaf out of KFC’s book and draw up clear and detailed franchise contracts to assure brand compliance. Maybe then Quan Ju De branded Peking duck will be coming to a street – if not near you – near China’s 1.3 billion potential duck-munching customers.    

[22-Apr-2002]

 
  
  

Edward Young is a freelance journalist based in Beijing, China. He writes on Chinese business and economic issues and regularly contributes to international newspapers and magazines including the Financial Times.

     
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