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Subway Case study

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Dhavina Chomroo

on 15 August 2013

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Transcript of Subway Case study

Subway and the challenges of franchising in China

Chomroo Dhavina
Ernesta Elaine
Sanmukhiya Kavindra
Sumessur Abhishek

The case
Subway is a fast food marketer of submarine sandwiches & salads.
It is the third largest U.S fast food chain in China after Mc Donald's and KFC.
32,000 stores | 91 countries | USD 12 billion revenue
It's master franchisor in Beijing, Jim Bryant, lost money to a scheming partner and had to teach the franchising concept to a country that never heard of it.
The word 'franchise' had no equivalent in Chinese until recently.
Question 1

Subway brings to China various intellectual property in the form of trademarks, patents and entire business system. What are the specific threats to Subway’s intellectual property in China? What can subway do to protect its intellectual property in China?

Subway brings to China various intellectual property in the form of trademarks, patents and entire business system. Specific threats to Subway’s intellectual property in China?

• Trade mark being copied. That is its logo.
• The ambiguous legal environment in China concerning contracts
and intellectual property rights.
• The lack of enforcement of IPR laws, which is uneven and
sometimes obstruct by local interest.
• Lack of training and know how in courts regarding contract laws
and IPR laws.
This can also extend to its menu and specific ingredients used which is custom specific to Subway's
What is Intellectual Property Right?
Intellectual property rights refers to products of the mind, ideas (e.g. books, software designs). Through the adaptation of Patents, Copyrights, Trade Marks, intellectual copy rights can be protected.

The case in China
Intellectual property right is of great concern for much business venturing in China. Many legal battles has arise between International companies and the local Chinese companies.

Measures Subway can take to protect its
IPR in China

• Acquire patent rights in China for their logo’s/TradeMark,
Menu/recipes and technological know-how.
• Subway must have its legal officers well versed in the terms of
Reciprocity of International treaties.
There is hope for the upgrading of the IPR legal framework as in 2001 when China joined the WTO.
To date: there are special IPR courts in most provinces and major cities.

What do you think about Subway's method and level of compensating its master franchisee and regular franchisees in China? Is the method satisfactory? Is there room for improvement?

Question 2
Franchise fee is equivalent to 2 years salary for average Chinese.
No formal banking system: loans for entrepreneurs were not readily available hence the risk to start up franchise was bare holistically by the franchisee.

Method and level of compensating its master franchisee and regular franchisees in China?

Subway uses a master franchiser in Beijing called Jim Bryant. He recruits highly committed franchisees and closely monitors them to maintain quality.
He is allowed to recruit local entrepreneurs, train them to make them franchisees.
Bryant also acts as a liaison between local entrepreneurs and subway headquarters.

Current Franchising Climate in China

As the world’s largest country and fastest growing economy China provides an enormous opportunity for foreign franchisors. The key factor is to be prepared and have the resources to survive in this rapidly growing and highly competitive market.
The concepts and products with the most interest in China include
fast food and restaurants,
auto-after market
fashion and clothing
children’s products and services.
American brands in particular are very popular.
The China strategy, which KFC, McDonalds and other franchisors employed, was to open and operate corporate locations before franchising.
A foreign franchisor must have operated two pilot locations for a minimum of one year before offering franchises in China.
The foreign franchisor must be registered with the Chinese government.

Is the method satisfactory? Is there room for improvement?

Its master franchisor “Bryant” gets half of subways initial franchise fee of US $ 10 000.
Regular franchisees in china receive 8% royalty fees. The master franchisor receives 1/3 of these royalty fees.
Close monitoring and training local entrepreneurs improves the chances of subway to maintain its existing stores and increase its market share in china.

Current case
Bryant had to print signs to explain to Chinese consumers how to order a sandwich.
Subways method and level of compensation seems appropriate especially in a country like China where there are major cultural problems.
Instead of teaching Chinese it could adapt its product to suit the taste and preferences of Chinese customers (Special ingredients).

Question 3
What are the advantages and disadvantages of franchising in China from Jim Bryant's perspective? What can Bryant do to overcome the disadvantages? From Subway's perspective, is franchising the best entry strategy for China?

Advantages and disadvantages of franchising in China

Win-Win Proposition
Combined know-how of franchisors with knowledge of franchisees in China. Chinese entrepreneurs are eager to launch their own business.
Minimal entry cost
Local entrepreneurs bear the cost of launching the restaurant, hence minimising cost to franchisors entering the market.
Rapid expansion
Franchisors can rapidly establish many outlets throughout any new market by leveraging resources of local entrepreneurs.
Brand consistency
Brand consistency is easier to maintain if the franchisor sets strict regulations, procedures and policies.
Circumvention of legal constraints
Franchising allows focal firms to avoid trade barriers associated with exporting and FDI
Advantages and disadvantages of franchising in China

Knowledge gap
Few Chinese have proper knowledge about how to start and operate a business. Filling the gap is a process that consumes energy, time and money.

Ambiguous legal environment
Issues such as local imitators can quickly damage the trademark of the focal firm, making customers confused if several similar brands are present.
Escalating start-up costs

Delayed profitability from costs to overcome challenges such as lingual and cultural barriers
Shortage of restaurant equipment in China forces franchisors to lease equipment to franchisees until it becomes available or until they are able to afford it.

What can Bryant do to overcome the disadvantages?

• Creating and enforcing a strong internal code and lobby to government to ensure that proper counter measures are in place to address loopholes and ambiguity in legal system.
• Develop measures to bridge lingual and cultural barriers/gaps
• Leasing inaccessible equipment to franchisees to make start-up cost more manageable
• Appropriate contract terms and ethical employees

Fast food Franchising Climate in China

The market for fast food is estimated at $15 billion per year.
The target market for casual dining, China’s urban population, has expanded at a 5% average annual growth rate over the past several years.
Changing lifestyles have led to an increase in meals the Chinese eat outside the home.
Surveys reveal that Chinese consumers are interested in sampling non-Chinese food.

Subway faces various cultural challenges in China. What are these challenges? What can Subway and its master franchisee do to overcome them?

Question 4
What are these challenges?

Customers stood outside and watched for a few days
Signs were done to show customers how to order
Some didn’t like the concept of touching their food, so they would gradually peel off the paper wrapping and eat it like a banana.

What can Subway and its master franchisee do to overcome them?

Study and adopt to the Chinese culture
Careful selection of products to develop and sell
Careful partner selection with reputable and ethical candidates
Tailoring products to embrace customers’ cultural norms
Establish a presence in highly commercialised areas to gain quick traction in the market place

What can Bryant do to overcome the disadvantages?

• Engaging suitable ethical business partners with substantial capital to better manage the financial and knowledge based issues related to franchising.

• To avoid confusion among customers due to lack of legal system, Subway should ensure high differentiation and specialization to separate themselves from potential imitators. Ensuring authenticity of Subway products.

From Subway’s perspective is franchising the best entry strategy in China?

• Franchising is the best entry strategy given the challenges and the means we have noted to overcome those challenges.

• Franchising is a cost-efficient mean to enter China

• Franchising would prove to be more profitable than any other entry strategy

Thank you
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