The domestic franchising industry in China is growing rapidly and will no doubt continue to prosper for companies pursuing the right strategies with the right concept. Off-shore franchising has been a mixed bag for many international chains given the dearth of committed trustworthy master franchisees available. Here are a few simple rules that can reduce your risk in this difficult market.

1) Open some company owned stores first to confirm proof of concept and show potential local partners you are willing to put some skin in the game. You will then understand the market dynamics well and be able to properly price out the franchise terms and conditions.

2) The most successful franchise concepts today in China are all very simple operations with the franchiser controlling the supply chain and making profits from the sales of goods and services not royalties. If the concept is a US style full service restaurant with many moving parts, simplify first before getting started. You will need to set up central kitchens to make it easy on the kitchen staff or you will lose them quickly. Weiduomei Bakery and Happy Lemon are great examples of localized simple concepts that are doing well in China today.

3) Be very flexible as to menu, design and store size. “You are not in Kansas” anymore as they say.

4) Price determines scalability. Do you want to just have a few stores in Shanghai to boast in the Annual Report or a real business? Don’t let all those BMW’s fool you. There is a lot of wealth in big cities but these customers will frequent non-Chinese concepts on a very random basis.

5) China is a very dynamic market so make sure you set the concept to appeal to where the customers will be 5 years from now not just today.

In short, if you are just looking to do a third party franchise deal then you may need to re-think that strategy. The probability of success is very low.

A recent article in the China Economic Review discusses these issues and is worth a read. For Rent: Fast-food franchising in China

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