The challenges and opportunities of franchising in china's hotel industry

The challenges and opportunities of franchising in

China's hotel industry

Ray Pine

Professor and Head, Department of Hotel and Tourism Management,

The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

Hanqin Qiu Zhang

Department of Hotel and Tourism Management, The Hong Kong Polytechnic

University, Hung Hom, Kowloon, Hong Kong

Pingshu Qi

Department of Hotel and Tourism Management, The Hong Kong Polytechnic

University, Hung Hom, Kowloon, Hong Kong

Introduction

Franchising, as a form of business expansion,

achieves great success in North America and

some other parts of the world. As

globalization becomes the strategy of many

hotel companies, some hotel chains have

adopted franchising for international

expansion to newly emerging markets.

China's hotel industry has blossomed in the

last decade and is regarded as a fertile field

for future expansion. However, will

franchising work well in this particular

domain in China? In 1997 China had 5,201

hotels, while only 16 per cent of them were

operated by hotel chains (Li and Feng, 1997),

most in the form of management contracts:

franchising is seldom used in the Chinese

hotel industry. This paper aims to review the

recent trends of franchising in the hotel

industry and the development of the hotel

industry in China, then to discuss the

challenges and opportunities of franchising

in the China context.

Development of franchising in the

hotel industry

Franchising, since it first appeared as a

modern business form in 1863 (Rosenberg,

1969), has immensely changed the way of

business in the world. Although franchising

first boomed in industries such as car

dealership, soft drinks bottling, petrol

industry, drug stores and wholesaler-retailer

chains, it soon extended to the hospitality

industry. It is the characteristics of the

hospitality industry ± large volume of

mobility, wide geographic distribution,

searching for familiar product, unique travel

expectations ± which make franchising an

appropriate method for expansion. It might

appear that such a method should have a

strong potential for application in China.

In the hotel sector franchising took shape

from 1960 in the USA with the expansion of

Holiday Inn and other big names, which

greatly accelerated the growth of these hotel

giants. Franchising brings about advantages

and sets up a very good leverage between two

parties ± franchisor and fanchisee. The

franchisor offers the franchisee a package of

operational know-how, including a

successful operation system (product or

service, trade mark, corporate image,

reservation system) and essential assistance

(locating, financing, pre-opening

preparation, equipment, training,

management and techniques), which brings

the franchisee easier market access, lower

cost of bulk purchasing and economies of

scale, and the benefits of shared massive

advertising campaigns, research and

development, and problem solving

mechanism in the network (Hall and Dixon,

1988). Through franchising, the franchisor

can fulfill rapid and enormous expansion

with limited resources, enjoy early entry into

a market and a larger market share and

higher revenue from the franchisee,

strengthen its position in the market, while

reducing the risk of exploitation on a shared

base of the franchisees. Franchising, acting

as bridge between the franchisor and

franchisee partners, may be a more rational

and fair mechanism for both parties, which

enables it to be an effective and favorable

method of expansion.

The USA is the world's largest hotel

franchising market, with franchised hotels

accounting for more than 65 per cent of the

existing US hotel-room supply (Brown and

Dev, 1997). This is mainly attributed to its

large travel market, vast territory, developed

infrastructure and a prolonged business

tradition. Hotel franchising outside North

America has developed on a much smaller

scale ± in some regions it does not exist at all.

Lack of infrastructure, multi-centered

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[ 300 ]

International Journal of

Contemporary Hospitality

Management

12/5 [2000] 300±307

# MCB University Press

[ISSN 0959-6119]

Keywords

Franchises, Hotels, China

Abstract

Franchising develops quickly in

the hotel industry with the

expansion and globalization of

hotel chains, as it brings about

advantages and sets up a very

good leverage between two

parties ± franchisor and

franchisee. Major multinational

hotel corporations have entered

China, but franchising is seldom

used as a tool of expansion there.

The continuous increase in

tourism and the structural change

in the hotel industry in China

afford more opportunities for the

growth of franchising operations

and also of indigenous hotel

chains. When franchising in this

specific market, quality control,

ownership, connection, business

tradition and franchisor-franchisee

relationships should be examined

carefully in order to ensure

success. A full understanding of

China's peculiar social, cultural,

economic and political context is

essential for foreign companies,

whilst existing and new

indigenous companies require

greater technical and operating

expertise along with the

necessary business acumen to

operate hotel chains.