China's franchise sector could be set to take off after the implementation of a new law later this year, according to an international franchising expert.

 

Andrew Terry, chairman of the International Society of Franchising, said China's franchising sector had great potential considering the average franchised sales growth was 40 percent, higher than the average 10 percent growth for consumer sales.

 

However, franchises accounted for just three percent of China's retail sales, compared with 40 percent in the United States, said Terry at the ongoing seventh Law Asia Business Law Conference in Hohhot, capital of north China's Inner Mongolia Autonomous Region.

 

He said the Measures for the Administration of Commercial Franchise Operation, which took effect in February 2005 to satisfy China's WTO obligations, had helped create a level playing field for domestic and foreign franchising.

 

"China's franchising has witnessed rapid development, but is still in an experimental and transitional stage," he said. "Many domestic systems are product and trade name franchises rather than business format franchises."

 

The Ministry of Commerce said the Commercial Franchise Regulation, which is under deliberation by the State Council, would replace the 2005 Measures later this year and clarify present legal uncertainties.

 

"Foreign franchisers will begin to franchise only after relevant regulations and law are defined in China," said Terry, who is also head of the School of Business Law and Taxation of the University of New South Wales, Australia.

 

"China's growing consumer market, urban middle class and purchasing power as well as increasing urbanization and brand consciousness have prompted entrepreneurial Chinese to actively join the franchising sector."

 

Terry said that franchisees could be bosses rather than employees, which suited China's entrepreneurial character.

 

Franchising began in China with the opening of the country's first Kentucky Fried Chicken (KFC) store in 1987. Now it has more franchises, with more than 2,320 systems at the end of 2005, than any other nation, according to China's Chain Store and Franchise Association.

 

Terry said 15 of the world's top 20 franchise systems operated in China. The U.S. chain KFC, for example, had more than 1,500 outlets here and McDonald's had opened about 740 outlets since 1990.

 

"Increasing demands on time have created increasing demands for services provided by franchise systems. The development of shopping centers, department stores and hotels also provides venues for franchising.

 

"Fast food is a big franchising sector. Look at the Western food, hamburgers, sandwiches, fried chicken or coffee. But the Chinese have a lot of options. China has the best food in the world, which can be taken to the rest of the world through franchising. It is a challenging and exciting market," said Terry.

 

For instance, Beijing's Quanjude Group started making Beijing roast duck in 1864 and began franchising in 1993. Now 37 out of 60 Quanjude stores nationwide were franchised and the old Chinese brand was about to go international.

 

(Xinhua News Agency July 15, 2006)