Q & A
1. What is franchising?
Franchising refers to a situation where, upon agreement between two parties, the franchisee pays the franchiser a Franchise Fee (which may include the fees for participation, promotion and advertisement, the right to use the franchise name, store location assessment, training, leasing costs for equipment and fixtures), in order to take advantage of being able to use the franchiser’s brand name or trade mark and operate or provide services under the franchised rights. Furthermore, the franchisee must operate in accordance with the operating model provided by the franchiser, while the franchiser has the obligation to provide the franchisee with the respective rights and support needed to supervise its operation, as a means to ensure that the brand name is operated in accordance with the company’s policies.
2. Types of franchising
There are generally two types of franchising: (a) production distribution franchises and (b) business format franchises.
a. Under the Production Distribution Franchises model, the relationship between the franchiser and the franchisee is similar to that between a supplier and agent. The franchisee may sell products, brand names or services belonging exclusively to the franchiser, but this type of franchising does not confer to the franchisee the right and technical know-how to develop products and services. Production distribution franchises are usually suitable for the distributors of soft drinks, mobile phone agencies and petrol stations.
b. Under the Business Format Franchise model, apart from enjoying exclusive rights to sell the product, brand name or service, the franchisee may also be authorised to produce and develop products or services itself. This franchising model is the most commonly used, for instance, in fast food restaurants, retail stores and restaurants.
3. Advantages enjoyed by SME franchisees
- SME franchisee will be able to benefit from certain advantages including the franchiser’s reputation, brand value, patent rights, registered trade mark, technology transfer, well-developed management systems and target customer group in the exploration of international brand business.
- A SME may also avail itself of the opportunity to diversify from the traditional business model and be innovative.
- A SME can benefit from the training programmes, business operations and management support systems.
- The franchisee can also enjoy some of the economic benefits derived from franchising, e.g. savings to be made by bulk purchasing and collective advertising.
4. Factors to be considered by SMEs wishing to franchise
In the process of selecting a franchiser, apart from considering the preferential conditions provided, the SME should also take into account other factors, to find the most suitable business plan to support the business development. Factors taken into consideration include:
- The reputation of the brand,
- The background of the franchiser,
- Its operating methods and financial state,
- Stability of product supply,
- Whether the prices are reasonable,
- The relationship between the franchiser and its other franchisees
- Potential of market development
Whatever business strategy an enterprise has chosen, it should clearly understand and be aware of the different kinds of risks and competition.
5. What can enterprises do if they have insufficient capital for operating a franchising business?
One of Macao SAR Government’s long term policies is to support SMEs’ development. To support their sustainable development, the SAR government has launched a number of supporting measures, including SME Credit Guarantee Scheme, SME Credit Guarantee Scheme Designated for Special Projects and the SME Aid Scheme (details please refer to: www.economia.gov.mo).
The recently amended Enterprise Financing Loan Interest Subsidy Scheme has been launched and opened for application on 8 June 2009. Subsidy criterion also applies to the signing of a commercial concession contract and franchising contract to encourage local SMEs to enhance their competitiveness through franchising operations.
6. What are the development potential and conditions for franchising in Macao
Following the completion of various major tourism and leisure facilities and resort hotels and driven by the rapid development of tourism, convention and exhibition industry, related industries such as retail, department stores as well as food and beverage have become new opportunities for overseas investors to establish their business in Macao. With the vigorous development in the local consumer market, international brand names and chain enterprises are entering Macao’s market in large numbers and developing their business by franchising.
Supplement V to the Mainland and Macao Closer Economic Partnership Agreement (CEPA), signed in July 2008, has incorporated co-operation on brand promotion between the Mainland and Macao under Trade and Investment Facilitation, thus further enhancing economic exchanges between the two sides through brand co-operation. Under Macao’s favourable business environment, simple and low taxation, vast and diversified consumer market, versatile international trade and economic ties, as well as other business-friendly factors such as efficient and comprehensive business services, franchising operations have great development potential.
7. How local brands can make use of Macao’s strength as a service platform to explore business through franchising?
In accordance with the development trend of franchising operations, local traditional brands or original designer brands can make use of Macao’s strength as a regional service platform to promote local products in overseas markets through various operation models such as franchising and brand agencies. Co-operation partnerships may be established to explore the Mainland, local and overseas market networks of local enterprises. Local brands may also co-operate with Mainland, local and overseas enterprises and investors to explore franchising to explore ways to further develop in regional co-operation and make better use of Macao’s business service platform.