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Franchising (Article1) Local SMEs seizing business opportunities by being franchisees
Subsequent to the advantages brought about by the rapid growth of Macao’s economy and the rapid pace the city is becoming knownglobally, international brand names and chain enterprises are entering Macao’s market in large numbers and developing their business byfranchising. At the same time, Supplement V to the Mainland and Macao Closer Economic Partnership Agreement (CEPA), signed in July thisyear, 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.
By co-operating with franchise operators, SMEs can start up an international brand business more cheaply, in a shorter period of time and take advantage of the marketing expertise. Local traditional brands are also able to launch their own franchising business to develop Mainland or overseas markets by working with other brands around the world. The cover story in this issue will discuss how SMEs are able to develop their brand business as franchisees.
In view of this, IPIM has launched a series of services to assist local SMEs to capitalise on the business opportunities brought about by franchising, including a Franchising/Agency Business Pavilion which will be set up at the 13th Macao International Trade and Investment Fair (MIF) to be held from 23 to 26 October this year, and the organisation of a conference on franchising and business co-operation exhibition.
SMEs can utilise IPIM’s business-matching and referral service on franchising co-operation to source business partners and co-operation opportunities. The Small and Medium-sized Enterprise Service Centre (SMEC) will also provide assistance and support service to enterprises seeking overseas brand names.
Be a franchisee – A means to strengthen local SMEs’ Competitive Edge
1. 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 operation and management support system.
- 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.
2. The franchising model
Generally speaking, franchising refers to a situation on which, upon agreement between the 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 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.
There are generally two types of franchising:
A. Production Distribution Franchises
Under this operating 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 service 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. Business Format Franchises
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. Factors to be considered by SMEs wishing to franchise
As the agreement or contract between the franchiser and franchisee limits, to a certain extent, the franchisee’s freedom to operate its business at it sees fit, as it must comply with the franchiser’s requirements as stated in the agreement. Therefore, when selecting a franchiser, apart from considering the preferential conditions provided, the SME should also take into account other factors, including: 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 and possibilities of market development and then select the appropriate franchiser that it feels will be the best to support its business development.
Whatever business strategy an enterprise has chosen, it should clearly understand and be aware of the different kinds of risks and competition. Therefore, franchisees should take into consideration issues such as operation strategy, costs and management to maintain its competitiveness.
IPIM supports SMEs wishing to franchise
As Macao strives to become a regional platform for investment and trade services, coupled with the recent conclusion of several mega tourism and leisure projects, the local market is attracting an increasing number of franchisers and brand operators. To cope with this, IPIM is making the effort to gather more information concerning franchising, to provide existing local enterprises with the opportunities for business
development and transformation, and to provide start-up entrepreneurs with opportunities. IPIM is aiming to assist local SMEs select the franchising business, brands and co-operation models most suitable to their needs.
To support local SMEs in the development of franchising, IPIM’s One-stop Service provides a series of trade and investment related enquiry and business matching services. Furthermore, in order to provide local SMEs with more franchising-related information, IPIM’s SMEC at the Macao Business Support Centre will hold a series of franchising-related workshops and seminars from August to October this year. Themed talks and inter-active experience-sharing sessions will be organised to introduce different types of franchising models and relevant business prospects, with the aim of familiarising local SMEs with franchising operations and management strategies.
The 13th MIF will set up a new Franchising/Agency Pavilion to showcase franchising brands in Hong Kong, the Mainland, the United States and other countries, enabling participants to gain a better understanding of franchising operating conditions. In addition, this year’s MIF will also include for the first time a Business Co-operation Pavilion
to introduce more business co-operation models such as franchising, agencies, brand name authorisation, in order to strengthen the ties between Macao, Mainland China and the rest of the world.
Apart from the above-mentioned Franchising/Agency Pavilion, this year’s MIF will also hold for the first time a Conference on Franchising Co-operation; experts, entrepreneurs and academics from Mainland China, Hong Kong, Macao and the United States in the field with franchising networks, theories and practical experience have been invited to be key- speakers at the conference, thus offering a platform for the flow of information among local and foreign business operators seeking business opportunities through franchising.
Source:
- International Franchising Association’s web page: http://www.franchise.org/
- Hong Kong Franchise Association’s web page http://www.franchise.org.hk/
- An Introduction to Franchising, Barbara Beshel, IFA Educational Foundation, 2001 Lianhe Xuebao, Yang Ying, Chapter 9, Issue 6, November 2007
- Government’s three directives on assisting SMEs – support, develop and enhance competitiveness (Chinese version only), Macao Daily, 2007-11-23
- Supplement V to the Mainland and Macao Closer Economic Partnership Arrangement
Important Notice : All information is for reference only. While every effort is made to ensure the accuracy of information, IPIM will not be held responsible or be liable for failing to guarantee the accuracy of any information provided, nor for any damage caused by inaccurate information or omissions.
