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China's chaotic franchise industry is expected to reorder itself and flourish as a new regulation takes effect in May.

 

The new Regulation on the Administration of Commercial Franchise Operation will bring order to the industry and reduce the risk for investors, said Pei Liang, secretary-general of the China Chain Store & Franchise Association.

 

China now has over 2,600 franchise companies, with over 200,000 retail outlets, according to the association's figures.

 

"But there are more franchises that we are unaware of," said Pei, referring to companies operating without proper registration.

 

Irregularities are rampant in the franchise industry. Diaozhabing, or "Chinese Pizza", for instance, spread at a frantic pace last year. At times four or five outlets would be set up within a kilometer in Beijing, but closed down within months.

 

The new regulation requires franchise operators to set up an information disclosure system. Distributors will have to apply to the Ministry of Commerce and update their information regularly.

 

"It's an opportunity for franchise operators," said Pei. "Regulated, franchisers can expand their market and protect the image of their brands."

 

Advertisements overstating returns on chain stores are frequently seen in the media. After the new regulation comes into effect, such promotion will be considered illegal.

 

In the case of Diaozhabing, the franchiser promised net profits of 60,000 yuan within three months and the franchise entrance fee was set at 16,000 yuan. But franchisees began to lose money shortly after opening.

 

The franchise industry, however, has attracted many overseas investors, said Zhu Fang, an analyst. Nearly all franchise operators in the education sector have foreign investors, said Zhu.

 

The industry, which expanded by 16 percent in 2006 in terms of number of outlets, has brought great opportunity to small and medium-sized investors, according to Pei. About one-third of the franchises only require an investment of under 100,000 yuan to open an outlet, Pei said.

 

Most of the franchise action is in the retail business, with franchise stores in the fast-food sector developing at the fastest pace.

 

(China Daily April 11, 2007)