Franchising Industry in Hong Kong

Overview

• Hong Kong’s franchising market has been developing steadily, with many well-known international franchise brands, including McDonald’s, KFC, 7-Eleven, Subway, Starbucks and Pizza Hut, having a presence. According to Hong Kong Franchise Association’s estimates, around 43% of franchises in Hong Kong are in the catering business, 20% in retailing and 37% in other services.
  
  
• Franchising is an established model of business expansion, which is especially common for the food and beverage, retail and other services sectors, such as laundry and mini storage. In Hong Kong, a number of home-grown brands, including Store Friendly, Fitboxx, Kung Wo Tong and Quality Dry-clean, have adopted the franchise model targeting the local market to utilise franchisees’ financial resources and personal networks.
  
  
• Many international franchise brands prefer well-established local companies with strong retail and management experience to be their master franchisees in Hong Kong. These master franchisees run the operations with their own teams and/or subcontract the operations to individual franchisees.
  
  
• Developing Asian countries have begun to embrace franchising in recent years, as their rising middle-income class becomes more affluent and gravitates towards international brands. Many international brands have started to look for franchising opportunities in emerging markets.
  
  
• Hong Kong has the edge in serving the growing franchising business in Asia, including its showcase role, track record of organising exhibitions, world-class supporting services, access to quality franchisees, the availability of industry talent, market sensitivity and extensive business connections in Asia.

Market Characteristics

Since the 1970s, when McDonald’s and KFC started opening franchised restaurants in Hong Kong, the city’s franchising market has been developing steadily. Most of the well-known international franchise brands, including Pizza Hut, 7-Eleven, Subway and Starbucks have a presence in Hong Kong. According to Hong Kong Franchise Association’s estimates, about 56% of the franchise operations in Hong Kong are local franchises. By industry, around 43% of the franchises in Hong Kong are in the catering business, 20% in retailing and 37% in other services, such as learning centre, laundry and dry cleaning.

Many international franchise brands prefer well-established local companies with strong retail and management experience to be their master franchisees in Hong Kong. These master franchisees run operations with their own teams and/or subcontract operations to individual franchisees. For example, Dairy Farm Group, Li & Fung Group and Maxim’s Group are Hong Kong-based conglomerates which operate some big brands on a franchising basis, such as Ikea, 7-Eleven, Starbucks and Toys “R” Us.

In Hong Kong, home-grown brands using the franchising model for local expansion is less common than in big economies with significant regional disparities.  Still, there are a number of home-grown brands, including Store Friendly Self Storage, Fitboxx, Kung Wo Tong and Quality Dry-clean that adopt the franchise model targeting the local market, to utilise the franchisees’ financial resources and personal networks. Some others have even adopted the franchise model across the border. For instance, Chow Tai Fook Jewellery has a total of 1,642 jewellery points of sale in China operated by franchisees as of end-September 2019; Man Wah Holdings, the brand owner of sofa product “Cheers”, has more than 2,800 retail franchises in Asia.

There is no specific franchise law in Hong Kong. Disputes arising from franchise agreements will be subject to the common law, especially the principles of contract law, and other applicable legislation, such as the Misrepresentation Ordinance, Trade Marks Ordinance, Copyright Ordinance, Registered Designs Ordinance and Patents Ordinance.

Industry Development

International Franchising in Asia 

International franchising facilitated by the increasing ease of global communications and technological development, is becoming a key trend in Asia, as its rising middle-income class becomes more affluent while gravitating towards international brands. As Asian consumers earn more, they increasingly crave the quality, convenience and service associated with foreign brands. Sectors such as food and beverages, education, as well as personal and commercial services that cater to the needs and lifestyles of the middle-income class, offer high potential for franchising in the region. Taking Vietnam as an example, about 145 foreign brands have registered franchising businesses in the country[1], such as the American donut shop Dunkin’s Donuts and Japanese convenience store Family Mart.

Fast-growing Fitness Franchises

Fitness is one of the fastest growing industry in the franchising world. As people become more health-conscious, demand for fitness centres is increasingly apparent. Besides the standard large-format gyms, consumers are also more interested in boutique fitness brands specialised in exercises such as boxing, pilates and spinning. F45 Training, an Australian fitness franchise specialising in high intensity group workouts, now has about 120 franchised gyms in Asia, including Hong Kong, mainland China, South Korea, ASEAN countries and India. Other examples of fitness franchises with presences in Asia include Anytime Fitness, Snap Fitness and Orangetheory Fitness.

Hong Kong as a Franchising Hub

Hong Kong has the edge in serving the growing franchising business in Asia, including its showcase role, track record of organising exhibitions, world-class supporting services, access to quality franchisees, the availability of industry talent, market sensitivity and extensive business connections in Asia. Hong Kong could serve as a two-way springboard for international franchisors looking to gain access to the Asian markets, and for Asian brands to venture into the global marketplace.

To help expand the franchise business and connections among Hong Kong companies, the HKTDC launched the Hong Kong International Franchising Show in 2015. The event is a one-stop platform for companies and entrepreneurs to look for franchising brands, identify business partners and get franchising advice. Held in December 2019, the fifth edition of the Show featured over 100 exhibitors from 17 countries and regions, along with a series of seminars hosted by industry experts and leaders from around the world, sharing the latest market trends and business tips.

Franchising Opportunities in Mainland China

According to the China Chain Store & Franchise Association (CCFA), the total sales of the country’s top 100 franchises increased by 15% to RMB430 billion in 2018, with the total number of stores of the top 100 franchises rising 15% to approximately 177,000. With its expanding middle-class consumer base and urban population, mainland China is one of the top potential franchise markets in Asia.

One of the difficulties encountered by international franchisors in mainland China is finding qualified franchisees. Moreover, registering trademarks and IP, applying for the right licences and setting up legal entities can be formidable challenges. Hong Kong companies may act as the master franchisees or area developers to help international franchisors deal with the challenges in mainland China. With decades of experience doing business in the mainland, Hong Kong companies are trusted partners for international franchisors, helping to manage the mainland franchisees, deal with bureaucracy, handle licence applications, fulfil import requirements, manage supply chains, and adapt to local needs and tastes.

At the same time, Hong Kong businesses familiar with the international market, business practices and culture, can also serve as agents to help mainland companies expand overseas using the franchise model. A number of Chinese brands have used Hong Kong as showcase to international consumers, such as Liu Yi Shou Chong Qing Hot Pot and Carpenter Tan.

The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)

Among other provisions, CEPA further opens up the mainland market for Hong Kong products and the distribution business to Hong Kong companies. Under the Agreement on Trade in Services (ATIS), Hong Kong service suppliers are granted national treatment to establish commercial presence for franchising in mainland China.

[1] Vietnam Ministry of Industry and Trade