A Conference Note From Justin Pillette

Walking the floor at the China Franchise Expo (held in Chengdu, China, March 12-13), OTR Global found large crowds gathered for presentations by Yum Brands Inc.’s KFC and high interest in KFC franchising opportunities among Expo attendees (mostly owners of small businesses in the struggling apparel, shoes, communication products or construction materials industries). Only Jollibee Foods Corp.’s Yong He Da Wang and Shanghai Happy Lemon Catering Management Co.’s Happy Lemon seemed to attract similar crowds. OTR Global noticed little enthusiasm for Yum Brands’ Little Sheep, which also was in attendance. 

Yum Brands has been offering lower franchising fees to regional managers of KFC company-owned stores to encourage refranchising internally, which has aided franchise investment by KFC managers during the past year. (OTR Global found high fees and fluctuating profitability concerns for KFC managers considering franchise opportunities in March 2015.) It’s unclear by how much the fee differs for KFC employees compared with those offered to unaffiliated franchisees, which start at 2 million yuan ($308,115) but often range from 3-8 million yuan ($462,229-$1,232,612), depending on the location and profitability of the stores, according to Yum staff at the Expo. In addition, franchisees can only buy specific stores that have been in operation at least two years, and they cannot open new stores. Franchisees pay Yum a 6% royalty and 5% for advertising fees annually. Overall, KFC had the highest franchising costs of any restaurant brand at the Expo.

Still, most attendees OTR Global spoke with who had attended KFC’s presentation were optimistic about the opportunity to become a KFC franchisee and were undeterred by the high associated costs. Attendees said KFC is doing a much better job on food safety, dining environment and service compared with local Chinese restaurants, and that KFC was regaining a strong brand image in China, similar to findings in OTR Global’s March 22 report. While some were worried about the potential for franchise stores to be cannibalized by new company-owned stores, most had little doubt about the strength of KFC’s business model.