We hear all the time in the press and from colleagues and friends that China is a very unique challenging market unlike anywhere else. One needs to deal with an abundance of opaque laws and rules that constantly change. Picking a business partner with the right “guanxi” is crucial to success. Trust is a commodity in short supply with Chinese business partners. The list goes on and on. Is China really that different from other emerging markets/transition economies?
Here are my thoughts in terms of the restaurant sector. There is no attempt here to suggest that all the comments apply to all industries.
Social Networks (“guanxi“) – Overall it is clearly better to have high social capital than low. Social networks give you access to funding, information, etc. No different from any other country but social networks are more important when the rule of law is questionable and your business is dependent on governmental approvals. Picking partners with strong relationships is generally better than partners with weak social networks, but remember that relationships can sour over time and become a negative. Setting up a WOFE and getting approvals for opening restaurants is time-consuming but does not require any special relationships other than perhaps a good lawyer and registration agent. Picking good ones however can be challenging.
Affordability and scale – The more affordable the concept the larger the scale potential. Very simple. If you are a value player in the USA then better to stick to your concept DNA and be a value player in China. Remember that pricing is relative to the local market not the home country. If you charge $5 in the USA then maybe the right price point in China or other emerging markets is $2. Disposable income per household is a very important number to understand. Walk into a mall in the Philippines and Indonesia and you will note that prices for large chains are very inexpensive. China is no different.
High carb/low price concepts work – Consumers in all emerging markets are careful how they spend their money. They are looking to fill up their stomachs at a low price. BreadTalk in China is a big success. The donut business in the Philippines, Thailand and Indonesia is a fast growing high scale business. Auntie Anne’s pretzels are big business in Thailand.
Micro – retail – Small store formats really work. They are low investment high return and very amenable to a franchise model. Look at all the micro-retail in the malls of Southeast Asia to see amazing creativity. China is catching up!
Localize – Your restaurant concept does not have much of a chance if you are sourcing many products from outside of the country. Imported products drive up the cost and in general price the concept beyond what the consumer can afford. It works for luxury brands but not large-scale restaurant chains.
Franchising – This business model is very underdeveloped in most emerging countries including China. Most successful chains are direct owned at the store level. I am always being pitched by restaurant entrepreneurs who plan to open a few stores and then franchise the rest. Not likely to happen! Emerging markets including China are many years behind North America, UK/Europe and Australia. The only success cases I have noticed to date are concepts that are extremely simple to operate and the concept owner controls the entire supply chain and finished product. Bakeries are a good example!
I will have more thoughts to share on this topic in the near future.