Subway and the Challenges of Franchising in China

Q1 Subway brings to China various intellectual property in the form of trademarks, patents,

and an 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?

Specific threats to Subway's intellectual property in China

- Local initiators

If trademarks are not protected local initiators can quickly dilute or damage it. Therefore, consumers become confused if several similar brands are present

- Ambiguity in legal system

Chinese government introduced regulations permitting franchising in 1997. Some critical elements were not covered and has led to diverse interpretations of legality of franchising in China.

- 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 and IPR laws

Strategies that are used to protect intellectual property

1. Understand local intellectual property laws and enforcement procedures, especially when exposed asset are valuable

2. Register patents, trademarks, trade secrets, and copyrights with the government in each country where the firms does, or intends to do business

3. Ensure that licensing and franchising agreements provide for oversight to ensure intellectual property is used as intended.

4. Pursue criminal prosecution or litigation against those who infringe on protected asset, such as logos and proprietary process

Q2 what do you think about Subway's method and level of compensating its master franchisee and regular franchisee in China? is the method satisfactory? is there room for improvement?

Method and level of compensating its master franchisee and regular franchisee

Jim Bryant as a master franchisee is authorized to recruit local entrepreneurs, train them become franchisee and act as a liaison between them and Subway headquarters

Compensating for master franchisee

For this work, he receives half of their $10,000 initial fee and 1/3 of their 8% royalty fees

Compensating for regular franchisee

For this work, he receive 8% of royalty fees

Is the method satisfactory? Is there room for improvement?

The method seems to be satisfactory and has been used globally. Thus, the room for improvement is always available to any system.

As an evidence, Subway has been grown rapidly from 19 to 437 stores in China although they faced significant challenges in the past

Q3(i) What are the advantages and disadvantages of franchising in China from Jim Bryant’s perspective?

Q3(iii) What can Bryant do to overcome the disadvantages?

1. Understand the cultural difference in local business and adjust market access

2. Conduct a market or internet research (environmental, competitors, consumer behaviour, etc) to achieve competitive advantage and separate themselves from possible copycats.

3. Carefully seek the right partners - Guanxi, with substantial capital to better manage the financial and knowledge

4. Leasing inaccessible equipment to franchisee to manage the start-up costs

5. Minimize the price of final products and franchising fee to achieve rapid expansion

6. Establish a relationship with a commercial real estate broker

7. Meet regulation requirements

Q3(iv) From Subway’s perspective, is franchising the best entry strategy for China?

The franchise sector has seen huge success in China due to several reasons:

• Sustainable development in the long term
• Subway’s introduction into China has been proven to be commercially feasible and profitable
• As a good business model to solve unemployment issue and contribute to economic growth in China
• Enhance reputation and credibility in domestic market
• Could have better control upon quality, set standards and understand customer needs due to cultural differences

Q4 Subway faces various cultural challenges in China. What are these challenges and what can Subway and its master franchisee do to overcome them?

Sources:

http://www.china-briefing.com/news/2013/04/29/china-issues-white-paper-on-intellectual-property-protection.html

Hill, C., Cronk, T. & Wickramasekera, R., (2011), Global Business Today: An Asia-Pacific Perspective. McGraw-Hill, Australia (2nd Edition)

Adler, C. (2005). “How China Eats a Sandwich,” Fortune, March 21, pp. F210[B]-[D]

What is Culture?

Benefits

A system of values and norms that are shared among a group of people and that when taken together constitute a design for living.

Case Summary

What is Intellectual Property Right?

and the

Challenges of Franchising

in China

• A fast food marketer of submarine sandwiches and salads
• With 40,855 restaurants in 105 countries and territories as of January 1, 2014.
• Opened its first international restaurant in Bahrain in 1984

A win-win proposition

Rapid expansion

Minimal cost entry

Intellectual property (IP) is a legal concept which refers to creations of the mind for which exclusive rights are recognized, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.

Presented by: Looi Wan Tian 24554405

Stephanie 23556994

Jessica 23723068

Jim Bryant, Subway's master franchisor in Beijing

is authorized

(1) Recruit local entrepreneurs

(2) Train them to become franchisees

(3) Act as liaison between the franchisees and Subway headquarter

Common types of intellectual property rights include copyright, trademarks, patents, industrial design rights, trade dress, and in some jurisdictions trade secrets.

By leveraging resources of local entrepreneurs, franchisors can rapidly establishing many outlets throughout new market

Combines the Western know-how of franchisors with knowledge of franchisees in China

Cultural Challenges

Cost minimization for franchisors entering the market because much of the cost of launching a restaurant is borne by local entrepreneurs

• Faced initial setbacks.
• Construction costs on the first store rose to about seven times the initial estimate.
• With six months left on the lease, the landlord locked the doors with a bicycle chain.

(1) Customers stood outside and watched for a few days

(2) Language barrier

(3) Customers did not like the idea of touching their food

(4) Jim Bryant said most of his customers did not like sandwiches

The Case in China

• At that time, there was no word in Chinese for 'franchise'.
• Only opened 19 outlets by 2005

Intellectual Property Right is a great concern for much business venturing in China as the number of IPR-related cases has increased substantially.

The number of civil cases received over IPR issues amounted to 87,419 in 2012, up 46 percent year-on-year.

Among which, there have been

53,848 copyright cases

19,815 trademark cases

9,680 patent cases

46 cases involving technology agreements

1,123 cases involving unfair competition

2,207 cases involving other intellectual property dispute

Brand consistency

Ways to Overcome Cultural Challenges

Circumvention of legal constraints

(1) Localized the menus

(2) Hire influential Chinese celebrity as spokesperson

With strict regulations of franchisors’ procedures and policies, brand consistency will be easier to maintain

Franchising allows focal firms to avoid trade barriers related to exporting and FDI.

(3) Sponsors major events that is held in China

Challenges

Increasing start-up cost

Ambiguous legal environment

Knowledge gap

Delayed profitability from costs to overcome various challenges namely lingual and cultural barriers

Inaccessibility of restaurant equipment in China, forcing franchisors to lease equipment to franchisee until equipment becomes affordable

Imitation of brand and trademark might lead customers to confusion. China’s legal system requires much development to cover areas of copyright and intellectual property rights to protect franchisors.

Few Chinese have significant knowledge about how to start and operate business

(4) Fully utilize the function of social media

Lack of availability and financing of suitable real estate

Restrictions on the repatriation of profits

Difficulties in finding right trading partners

Strict rules in China discourage repatriation of initial investment which hamper the liquidation of capital

China lacks an adequate system of banks and capital sources, also, Chinese government does not allow individuals to purchase its own real estate

Through Guanxi, Subway may be assisted in the channel of distribution, industrial connections and good relationship with government organizations

Thank You

Nevertheless, franchising might face some risks:

• Imitation of brand or logo
• Lose proprietary knowledge
• Strict regulation in China
• Maintain the image and level of service that already established