CHINA FRANCHISE NEWS
Vol. 2 , No.13 - July 10, 2001
TOPICS THIS ISSUE:
- China Changes the Way to Attract Foreign Investment
- Convenience Stores Booming in Shanghai
- Retail Rush for Chain Drugstores
- Fast Food Giants Push Franchise in China
- China Post Struggling ahead
- Domestic-Foreign Co-operation in Home Appliance Retailing
China Changes the Way to Attract Foreign Investment
China will stress the import of advanced technology, management skill, professional expertise, and service trade in the coming five years, said China state councilor Wu Yi at a meeting of the China Association of Enterprises with Foreign Investment. Utilization of foreign investment will change from imports of assembly lines to imports of high technology; and from setting up joint ventures only in the industrial sector to encouraging joint ventures in the service trade.
Wu said China will pay special attention to improving the "soft" investment environment, that is, standardizing the market economy and making government departments more efficient.
(Source: Xinhuanet 07/06/01)
Convenience Stores Booming in Shanghai
What appealed to local laid-off workers was a business opportunity offered by Shanghai Lianhua Convenience Commerce Co. Ltd.: to spend only 70,000 yuan (US $8,400) to set up a franchise outlet of Lianhua's convenience store.
In its promotional brochure, Lianhua says the monthly net profit of the operators of its 400-plus convenience stores citywide averages 3,000 yuan (US $360) to 5,000 yuan (US $600), which is considerably higher than the monthly earnings of most Shanghai residents.
These stores usually remain open 24 hours a day, long after traditional supermarkets have closed. Not content to be small retail outlets selling only food and small household items, the stores offer additional conveniences, from film developing to photocopying to newspaper and magazine retailing.
Lianhua is by no means the only name in this business. Many other companies have pushed ahead with their efforts to grab a bite of the local convenience business market. Foreigners want to join them. US-based 7-11 is said to have mapped out an ambitious plan to make inroads into the city. Statistics from the Shanghai Chain Business Association (SCBA) indicate that nearly 1,150 convenience stores were operating in the city at the end of last year. Experts say the figure is likely to reach 2,000 at the end of this year, and they estimate the city's capacity is 3,000 to 4,000 convenience outlets.
The start-up investment for a convenience outlet is within the reach of many people, and the initial preparations, including choosing the location, are not complex. These factors have encouraged many potential operators to kick off their business. Also, an improving economy and increasing demand for timely services have created a favorable environment in Shanghai.
However, some insiders caution that more efforts are needed to ensure healthy operation of convenience stores. Lianhua admits that nearly 8 percent of its outlets are still in the red, and experts from SCBA estimate that all convenience store operators in Shanghai, except Lianhua and Kedi, are losing money at the moment.
(Source: Shanghai Star 07/05/01)
Retail Rush for Chain Drugstores
Chinese pharmaceutical companies, encouraged by the government's policy of developing chain-drugstores, are preparing to pour billions of yuan into new business.
Last year, the Chinese paid 110.86 billion yuan (US $13.24 billion) for medicines, 85 percent of them purchased at hospitals with a doctor's prescription. To ease this burden, the government has decided to separate control on over-the-counter (OTC) medicines from prescription drugs. In addition it has been encouraging people to turn to drugstores for cheaper alternatives. About a third of China's population get their medicines for colds, headaches, or fevers from drugstore. This demand is a big boost for OTC sales, says Hu Shengyu, vice president of the China Nonprescription Medicines Association.
With the encouragement of the government, the number of drugstores run by pharmaceutical companies doubled in a matter of months in Shenzhen, a city that had led other parts of China in developing chain drugstores. Meanwhile, Chengdu, Chongqing, Shanghai, and Xian have been feeling the ripples of the same investment craze.
Shanghai-based China Worldbest Group, a textile and machinery conglomerate, has shown a big interest in the pharmaceutical sector. Its investment is expected to be at least one billion yuan. The conglomerate 999 Group has announced plans to build 8,000 to 10,000 chain stores within five years, or 6 percent of the nation's total, according to a group spokesman.
Hospitals and supermarkets are fighting back. The Shanghai Lianhua Supermarket Group is pressing ahead with plans to set up 1,000 drugstores nationwide. It reached a joint deal in 1999 with a local biomedical technology firm, Shanghai Fortune Industrial, to have pharmacies inside its supermarkets.
At the mean time, overseas capital is just waiting for the door to open wider. Two Taiwanese chain stores have already started trial operations in Shanghai and one US company hopes to enter the market by establishing a joint venture later this year.
However, the 999 Group spokesman predicted that "about 60 percent of the chain stores will be merged by 2003, and only the strong ones with quality products will survive." Drugstores will not longer be able to expect as high as 25 percent profit margin when the competition gets stiffer, analysts say.
But, even when money is not a problem, local protectionism blocks can be. Both 999 Group and China Worldbest say that co-operation with local entities is the best way to enter the market.
In any case, drugstores should not just sell drugs. They need to adopt the foreign practice of selling cosmetics, candies, cigarettes, and newspapers as well to attract more customers, according to Wang Jinxia, president of the Association of China-Drugstores.
(Source: South China Morning Post 06/28/01)
Fast Food Giants Push Franchise in China
The world's leading fast food providers, McDonald's and Kentucky Fried Chicken (KFC), will both resort to franchises to further expand their presence in mainland China.
McDonald's said it will begin to grant franchises for opening McDonald's outlets to domestic individuals in 2003.
Peter Chen, president of McDonald's China Development Company, said McDonald's will offer franchises to individuals but not companies. The qualified individual must have good ethics, a successful business experience and capital of 3.5-4 million yuan (US $ 422,700 - 483,000).
Currently, McDonald's has established a joint venture with a Chinese enterprise, Beijing Agricultural, Industrial and Commercial Federal Co. to expand its presence in the domestic market. Chen said that given China's large territory, it is hard to promote McDonald's to various regions without help from a franchising system, especially in the small and medium cities and the far hinterland regions. As a result, the first batch of five franchises will be offered to small and medium cities.
Coinciding with its global rival, KFC has also targeted China's medium and small cities with franchise as its major strategy for expansion. KFC said it prefers to locate its franchises in small cities with relatively high demand because the industry is experiencing fierce competition in large cities. However, the qualifications for a KFC franchisee are still very high. A potential partner can buy a KFC chain store with 8 million yuan (US $ 996,100). To date, there are only 20 KFC franchises.
(Source: China Daily 06/26/01)
China Post Struggling ahead
The State Postal Bureau (China Post), once the most profitable government arm, has suffered huge losses in recent years. Starting next year, the bureau will have to survive without any government subsidies or assistance from associated companies in the telecom sector.
The EMS (emergency mail service) business is the major revenue source of China Post, but is under severe competition from international and domestic delivery companies.
Fedex and UPS, the world's two top express delivery companies, both have the right to run direct flights to China. The two companies are now planning to jointly enter China's domestic express delivery market. In a bid to compete, China Post plans to increase EMS delivery speed starting from July 1. By renting more planes and using more air routes, China post will provide 24-hour delivery to most of the country by the end of the year, said Liu Liqing, director general of China Post.
Analysts say China Post can no longer rely on ordinary mail to be its major source of revenue. Supported by over 60,000 postal outlets nationwide, the bureau aims to become the biggest express mail provider. Retail services are also within China Post's business scope. China Post began providing one-day cash remittance services in July, challenging the banking sector. It may also lend remittance money to other financial institutions.
But business insiders also warn that China Post must avoid depending on monopolies to survive. China Post recently accused many private express delivery companies of breaking the law by delivering letters. According to regulations, China Post is the only legal carrier of letters. But the private companies claimed that the definition of letter was not clear enough and China Post's statements had harmed their reputation. The dispute between China Post and private delivery firms has not yet been settled. Both sides agree the law should be clarified.
(Source: Business Weekly 07/03/01)
Domestic-Foreign Cooperation in Home Appliance Retailing
The Beijing-based Guotong Electrical Appliance Company announced it has reached an agreement with the Asia Financial Service Company, which is under the US-based International Enterprise Service Group.
Last week, Guomei, another Chinese consumer electronic appliances retailing giant, revealed its plan to start negotiations with its foreign counterparts on co-operating, and said the US-based Best Buy Inc. could be a possible choice.
Guotong, Guomei, and Suning are the three largest retailers of home electrical appliances in the country. However, insiders said that their current scale would not be able to withstand challenges from foreign retailers after China enters the WTO. The world's retailing giants often have 500-600 chain stores, compared with the 20-30 owned by domestic giants.
Co-operation between the domestic giants offers the best way for their future development. Joining hands with foreign partners is also ideal for quick expansion and learning experience, said experts.
Although the foreign giants have more capital and richer experience in running a big sales network, Guotong's reputation among customers, good relations with local producers and its network will be factors that foreign partner must rely on, said Sang Qi, secretary of Guotong's board of directors.
(Source: China Daily 07/05/01)
Lehman Lee & Xu
China Lawyers, Notaries, Patent, Copyright and Trademark Agents
Suite 188, Beijing International Club
21 Jianguomenwai Dajie, Beijing 100020 China
Tel.: (86)(10) 6532-3861
Fax: (86)(10) 6532-3877
mail@chinalaw.cc
http://www.chinalaw.cc/
To unsubscribe from this newsletter send an email to unsubscribe_franchise@chinalaw.cc Please include the email address to which the newsletter is being sent (not a forwarded address) in the body of the email.
The China Franchise News is intended to be used for news purposes only. It should not be taken as comprehensive legal advice, and Lehman, Lee & Xu will not be held responsible for any such reliance on its contents.
