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Source: China Daily China Daily

Expansion slows in franchise sector

Published: 10 Jun 2014 18:52:39 PST

Expansion slows in franchise sector

Visitors attend an international franchisers expo in Beijing. Growth in terms of total stores and franchised stores last year was down 4 percentage points and 2.9 percentage points, respectively, from a year earlier, suggesting weaker expansion for the franchising sector. WANG JING/CHINA DAILY

Wages, rents take a toll on chain store, restaurant profitability, new survey finds

Fewer new retail outlets are being opened by franchisers, indicating slower growth in sectors ranging from supermarkets to convenience stores, alcoholic beverages and restaurants, an industry survey has shown.

According to the China Franchise Development Report, released by the China Chain Store and Franchise Association, the top 120 franchising retailers in 2013 had 139,701 stores.

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Among those, 115,380 were licensed to sell a retailer's products. Each company had 1,164 stores on average. There were 9,322 new franchise stores last year, up 7.2 percent, with 5,360 new licensed stores, up 4.8 percent.

But growth in terms of total stores and franchised stores last year was down 4 percentage points and 2.9 percentage points, respectively, from a year earlier, suggesting weaker expansion for the franchising sector.

Revenue grew more slowly for a wide range of businesses that offer franchises, such as convenience stores, budget hotels, training and education operations, laundries and home decoration companies.

Revenue was hit by surging operating costs, including labor and rents. The report showed that nearly 80 percent of enterprises experienced increases in labor costs of more than 5 percent. For 40 percent of the companies, the increase was more than 10 percent.

As for rents, about 68 percent of companies saw rents rise by 5 percent and more than 20 percent of the companies said rents were up by more than 10 percent.

Profitability was relatively high in the training and education sector, with margins of more than 25 percent in 2013 and 2012. In comparison, the general retail industry's average profit margin was about 2 percent.

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Due to the slowdown of the economy, rising costs and difficulties in finding staff, the licensing industry is expected to have fewer directly operated stores and more franchised ones.

Expansion slows in franchise sector
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Expansion slows in franchise sector
Chinese fast food firms challenging McDonald's 
The report found that 37 out of the top 120 franchised chains reduced the number of directly operated stores.

Second- and third-tier cities will be the major battlegrounds for franchised stores, according to the report.

Despite the weakened momentum in opening new stores, Pei Liang, secretary-general of the franchise association, said coffeeshops, education services and Chinese fast food are attracting more investors this year.

Pei commented during a franchise exhibition held in Beijing earlier this month.

South Korea-based chains have increased their presence in China in recent years as a result of the impact of Korean pop culture, including TV dramas and movies.

Caffe Bene, a South Korean coffee chain brand, plans to open more than 5,000 cafes by 2015. "Most of the investors are now in their early 20s, and they're attached to Korean brands and products," said Pei.

20-May-2014

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