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Corporate vs. Franchise: Latest JLL research reveals strategic choices for international retailers in China

Beijing, April 15, 2015 - JLL Released a new research paper offering international food and beverage and fashion retailers’ latest insights on China market expansion strategies. This latest research report in JLL’s series of retail white papers, “China’s Retail Market: within Reach”, comes at a time when many retailers are reconsidering their China strategies to enable the most profitable growth over the long-term. At the same time, many foreign brands are planning their first foray into the increasingly maturing Chinese markets.

“China remains a compelling market for global retailers and continues to offer a plethora of untapped opportunities, despite a recent moderation of its GDP growth,” says Tom Gaffney, Regional Director, Head of Retail for JLL in Hong Kong. “However, the China market remains complex and diverse. We advise brands to carefully assess their strategic mix of corporate stores and franchises, and to define a strategy that allows them to present a multichannel brand capable of seamlessly merging the worlds of online and offline.”

Derek Chen, Director of Retail Tenant Representation in China, said: “Brands are well advised to make Shanghai and Beijing their starting point and opt for a corporate structure in these markets. Consumers in China’s alpha cities, Shanghai and Beijing, which are among the world’s top five dynamic cities according to JLL’s City Momentum Index, are much more retail-savvy and have high expectations towards customer service. Most importantly, you retain absolute brand protection, which is essential in the China market as you build your brand initially. Due to misalignment of incentives between a franchise partner and the retailer, franchisees are less inclined to focus on building brand longevity even if this adversely impacts the brand’s future. For brands new brand to the market, a corporate structure makes a lot of sense and has many advantages.”

However, in tier 1.5 markets, such as Tianjin and Nanjing, brands best develop these in a mixed strategy, if corporate control is not an option. These markets offer a level of demand depth and sales productivity potential that can justify corporate control within a few short years. Retailers should only franchise these cities by applying a strategy that would enable them to incrementally regain control over the medium-term. Buying back the top-performing stores prevents the biggest revenue gains from being diluted, and gives the retailer more control over brand marketing in these markets.

Discussing strategies for third-tier cities and beyond, Chen said: “Third and fourth-tier cities are a new frontier for most international retail brands. We suggest brands to use franchises to penetrate these markets quickly over the short and medium term. As these markets lack the degree of sophistication found in major markets. and consumers are less discerning, more forgiving and easier to please, the risks of franchising are more contained and manageable, and are usually more cost-effective. In addition, local partners offer valuable local know-how and have a better sense of the psyche of local consumers.”

Gaffney summarizes: “Retailers should fix their China expansion strategy before entering the markets, which will greatly reduce risks down the road. Corporate ownership is advisable for key markets and to build their brands. However, franchises remain irreplaceable when it comes to simultaneously achieving both fast and vast penetration of markets, and to hedge risks.”​

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