Franchises going global must protect their brand – Part I of “Expanding abroad via franchising” series

Today we begin a series on expanding abroad through franchising.  Although a number of well established players in the hospitality, education and fast food industries have successfully expanded abroad for decades, growth in foreign markets still represents huge opportunity for franchise businesses. According to IFA’s(International Franchise Association) latest member survey, more than 84 percent of franchise businesses say international expansion is, “key to their development”.  Many iconic American brands, such as Yum Brands’ KFC, are growing more rapidly overseas, due to market saturation and the pure potential of developing countries and markets like Asia and parts of South America.

Upon the recent announcement that Yum was selling its Long John Silver’s and A&W brands, the franchisor released a statement that highlights its focus on foreign markets.

“As we continue to sharpen our long-term growth focus on international expansion and improving our US brand positions in KFC, Pizza Hut and Taco Bell, Long John Silver’s and A&W no longer fit our long-term growth strategy,” Yum CEO David Novak said.

With international expansion come challenges such as financing, territory demarkation and development, intellectual property, market adaptability and many others. Today’s post highlights the intellectual property concerns unique to foreign markets.

“When a franchise lawyer is asked by a client to assist in creating or expanding a franchising program, the threshold question is likely to be: ‘Is your trademark protected?” wrotePhilip Zeidman in a recent article entitled “Franchising and IP: joined at the hip, all over the world.”

Zeidman, head of DLA Piper’s franchise legal practice, cautions franchise brands considering expanding overseas to beware of the lack of sophistication in certain markets regarding IP issues.

“Franchising regulation in the United States is now in its fifth decade and is sufficiently developed that most companies and lawyers are at least aware of its existence. Not so outside the US,” he notes.

One of the issues franchisors may have to deal with overseas has to do with copycat stores. What is an established franchise is to do when copycats begin popping up in foreign countries?

Made in China: Fake Stores

WSJ’s Laura Burkitt describes fake stores throughout China whose branding looks a lot like the real thing. Reuters photo.

BEIJING—In China’s “fake world,” consumers can shop for furniture at an imitation IKEA store, eat a six-inch sandwich at an outlet strikingly similar to Subway, and then grab dessert at “Dairy Fairy”— where they might knock back an Oreo-flavored “Ice Storm” whose, thick, creamy texture takes unabashed inspiration from the famous Dairy Queen “Blizzard.”

Suddenly, one of the most famous Apple stores in the world is one that not only isn’t a real Apple Store, but apparently isn’t even an authorized Apple reseller.

Welcome to the modern era of copying in China, in which sophisticated proprietors of knockoff stores and chains are targeting increasingly sophisticated Chinese consumers with store experiences and customer service extremely similar to the real thing, down to the helpful store maps, coupons, shopping bags and employee uniforms.

Real or Fake?

Which is the original and which is the imitator? Scroll to the end of the article for answers.

Apple Store
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Getty ImagesA

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ReutersB

IKEA
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ReutersA

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Bloomberg NewsB

Dairy Queen
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Bloomberg NewsA

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Melissa Powers for The Wall Street JournalB

The imitation retailers and restaurants go beyond the simple fakes of consumer goods that have long been abundant in China. Indeed, in some cases, they aren’t even selling fake goods: the phenomenon gained global attention last month when a foreign blogger in the southwestern city of Kunming posted photos of a fake Apple Store selling real iPads and iPhones in a setting remarkably similar to Apple Inc.’s trademark retail outlets, and identifying itself as an Apple Store without the U.S. company’s permission.

Imitation retailers and restaurants aren’t new in China, but analysts and executives say they have proliferated in recent years. The trend reflects growing awareness of the importance of things like design and customer experience among entrepreneurs in China, where people long ago perfected the art of making imitation goods but where companies have been less successful building their own consumer brands, said Wei Xiaopo, an analyst at CLSA Asia-Pacific Markets.

“Chinese companies know that service and experience have become among the most critical parts of branding for businesses that operate in China,” said Mr. Wei.

While China is hardly the only country to have problems with commercial fakery, what happens here now matters enormously for multinational companies, because China is the world’s most important growth market for consumer goods. Retail spending is expected to reach 27.4 trillion yuan ($4.3 trillion) by 2015, up by more than two thirds from the level last year, according to the Chinese Academy of Social Sciences, a government think tank.

China’s government has acknowledged problems with piracy, and has taken measures to address it that some foreign executives and experts say are starting to make headway. After the fake Apple Store was highlighted last month, Kunming officials initiated a sweeping inspection of electronic stores in the city. It’s unclear whether they have taken any action against the Apple store, whose staffers now refuse to answer queries over the phone.

The fake stores present new complications for global companies that have long struggled to protect their brands in China. Some executives say that fake stores can help build brand awareness. And in cases of unauthorized resellers like the Apple store in Kunming, the foreign company is still benefiting from sales of its own products.

Alexander Moody-Stuart, managing director at sandwich chain Subway, said the number of imitators that come to franchising fairs in China increases every year. He said there are Subway copiers that use similar logos, offer sandwiches in six-inch and 12-inch formats as Subway does (China generally uses the metric system), and even accept coupons from Subway when consumers confuse the two stores.

For Subway, which is trying to build awareness to a type of food that isn’t always eaten in China, “the mimicking isn’t exactly a bad thing,” Mr. Moody-Stuart said.

But the imitation stores also limit the companies’ ability to control the experience that consumers have with their brands. Copycat companies run the risk of tarnishing a consumer’s association with an already established brand at a time when Chinese consumers are increasingly brand-conscious. Apple, for example, wasn’t able to oversee the service or hire the employees at fake stores like the one in Kunming the way it does painstakingly at its own outlets. Walt Disney Co. has similar difficulties: a number of “Disney Stores” are open in China, even though the U.S. company hasn’t yet launched its trademarked chain of stand-alone retail shops in the country—although it does license its products for sale in the Chinese market.

Spokeswomen for Apple and Disney in China declined to comment.

Copycat stores range from small regional operations, such as 11 Furniture, which runs two stores, to larger Dairy Fairy-type national franchises. To some degree, the copycat stores illustrate that there’s demand that’s not being met, because some foreign companies haven’t expanded into huge swaths of China’s interior, said Torsten Stocker, a Hong Kong analyst for Cambridge, Mass., consulting firm Monitor Group.

Apple, for example, has only four of its stores in China—in Beijing and Shanghai—though it licenses resellers elsewhere in the country. Swedish furniture giant IKEA Group hasn’t yet expanded into China’s far western cities like Kunming, where a Chinese company called 11 Furniture is mirroring IKEA’s store marketing strategy—everything from its blue-and-yellow colors and in-store room displays to special golf pencils and crinkling plastic bags.

Just like IKEA does, 11 Furniture uses blue signs and yellow arrows on the floor to direct consumers through mock living rooms, where sofas sit opposite flat screen TVs and tables that look like they should have names like Folkvik and Liatorp (instead of Shuwei Kela Chaji).

A spokeswoman in China for IKEA, which has nine stores in China and plans to open 12 more, said of 11 Furniture that “IKEA is not aware of copyright infringement.”

Not everything is knockoff in imitation outlets. At Dairy Fairy, a national franchise chain that opened in 2008, ice cream, including the Blizzard-like “Ice Storm,” is served upside-down, just like at Dairy Queen, which has 360 stores in China. Cups are marked with “DF” in red and blue, resembling the colors Dairy Queen uses and its “DQ” nickname. Dairy Fairy employees are donned in blue uniforms with red aprons—nearly a mirror image of Dairy Queen employees. But at a Dairy Fairy in Beijing on Tuesday, the menu also included items that one wouldn’t find at a DQ, such as spicy-pepper-flavored ice cream.

Dairy Fairy declined to comment and didn’t offer details on the number of stores it operates in China. Dairy Queen vice president of international marketing Justin Holtkamp said the company isn’t aware of Dairy Fairy, but that it has other imitators, who just use the company’s name or call it “Dairy & Queen.” Dairy Queen has shut down two stores that infringed its trademark within the last year, he said.

[FAKESTORE_jh]Bloomberg NewsThe Apple logo was covered up recently at a fake store in Kunming.

Some proprietors say their company’s similarity to known brands is a coincidence. At Jambo Juice in Beijing, where smoothies are made on-the-spot so consumers can add so-called energy boosters and opt for antioxidants, the green signs and tropical colors are familiar to anyone who has ever patronized U.S.-based chain Jamba Juice, which doesn’t have outlets in China.

But Jambo’s founder, Ye Jiabin, says he got the English name from an African language (it is a greeting in Swahili), and is now considering changing the name because it is too similar to the U.S. company. “We’ve just always put more emphasis on the Chinese name”—which is Jiang Bao—he said.

Still, the scale of some examples is startling. In Changzhou, Jiangsu Global Digital Cultural Theme Park Co. has opened a park called Global Animation Joyland, which bloggers have called attention to because it includes a section that appears to be based onActivision Blizzard Inc.’s World of Warcraft massive multiplayer online game.

Activision Blizzard said it hasn’t licensed the use of its intellectual property to Joyland or any other theme park, and is “actively looking into the situation.” The Chinese version of World of Warcraft, operated through a licensing agreement by Chinese Internet company Netease.comInc., is one of the most popular online games in China. Netease didn’t respond to requests for comment.

Joyland, a park that opened with blessings from local officials, also includes licensed sections devoted to other brands including “Mo’er Manor,” based on an online community for children by New York Stock Exchange-listed Taomee Holdings Ltd., and a store carrying official merchandise of Walt Disney Co.

The theme park company declined to comment.

Quiz Answers

Three of the stores were imitators; three were genuine.

Apple Store: Image A shows the exterior of the Apple Store in Chicago. Image B shows a store in Kunming that sells Apple products and copies the company’s layout.

IKEA: Image B shows IKEA’s first store in Beijing. The Swedish retailer has nine stores in China. Image A shows 11 Furniture store in Kunming, a city in southwest China.

Dairy Queen: Image A shows the inside of a Dairy Queen store in Shanghai. The chain has 360 stores in China. Image B shows a Dairy Fairy store in Beijing. The chain’s menu is like that of a Dairy Queen.

—Melissa Powers and Yoli Zhang contributed to this article.

“These copycat stores will likely dilute the quality of the brand, the products and the service a brand has worked so hard to protect,” according to international franchise development expert Bill Edwards, Chief Executive Officer of Edwards Global Services.  Edwards, who has been to China on behalf of U.S. franchise brands four times in the past year, has seen the challenges copycats pose firsthand.

“International copycats have gotten more sophisticated than they were just ten years ago,” he said. “Although this problem has been present in China over the past 10 years, the copycats are definitely getting better in their service delivery,” said Edwards. “However, what they cannot do is to provide the same highly trained customer service provided by the western brands or the consistent quality of product.”

Edwards’s advice to franchisors expanding globally is to show the outlet is the real brand. “Much like hotels display a sign as to who the franchisee of the brand is in their lobby.”

As foreign governments begin to welcome U.S. brands to their shores, they are also stepping up their enforcement of copycats. “The Chinese government has been getting better in the past 3 years in enforcing trademarks,” said Edwards.

Copycat enforcement has not been exclusive to franchise brands or the food service industry. The Chinese government moved on the fake Apple stores quickly when they were exposed in the press, as the aforementioned WSJ article noted.

Experts do point out that as the consumer becomes more sophisticated in developing countries; they want to be seen eating or shopping at the right brand and not a copycat.

“The increasingly well-to-do and sophisticated middle and upper class consumer knows the real brand and wants to be seen eating at the right brand,” said Edwards.

China is not the only place where there are copycats. Edwards points out other examples of franchise concepts outside China in Australia as some of the most challenging countries for expansion due to copycat brands that had already taken a hold in the country.

“Burger King® had to become Hungary Jack®. Two Men and A Truck® had to use Movers Who Cares® and Batteries Plus® had to use Batteries Staff® just to market their franchise in Australia,” he said.

For more information about protecting your franchise brand internationally, visit the IFA’s International resource page.

Portions of this article are reprinted from the IFA site

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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