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China's franchise growing pains

A McDonald's sign in Hong Kong

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MARK AUSTIN THOMAS: In China, franchises from fast food restaurants to local real estate chains account for only about 2 percent of all sales. But franchising in China is growing at about 40 percent a year, making it one of the fastest-developing markets in the world. Beijing recently changed the rules to make it easier for foreign franchises to join in. We get more from Jocelyn Ford.


[ McDonald's jingle ]

JOCELYN FORD: First time to hear this jingle? It's for the Golden Arches in China.

McDonald's is one of the early birds to test the water in China, but these days, it's got a lot of company from Hooters to the home grown Little Sheep Hotpot.

Retail business consultant Elizabeth Harrington says franchising is a perfect fit for China. The country has a lot of wannabe entrepreneurs who are eager to buy business know-how and a brand name.

ELIZABETH HARRINGTON:"It's a huge opportunity for American companies because basically china needs everything."

Not just fast food, but also services like Kinko's, car washes, and computer repairs.

HARRINGTON: "This is really a once in a lifetime window of opportunity. But that window of opportunity is only going to be there for maybe the next 5 years, the next 10 years at the very outside so. The time to do it is now."

Before someone beats you to it.

One American company that's jumped on the bandwagon is Super 8 hotel.

When Mitchell Presnick launched the franchise in China two years ago, the country had lots of branded luxury hotels, but budget chains were just taking off. He has signed up 71 franchisees and adds two new hotels a week.

That makes him the largest budget hotel chain.

Presnick says there's no shortage of enthusiasm among franchisees, but getting local hoteliers up-to-speed is a challenge. Today, he's inspecting the first Super 8 in Shanghai. It opened a year ago.

MITCHELL PRESNICK: "Let's go on in and . . ."

He finds plenty to complain about . . . peeling paint, discolored tiles. He tells the owner this is not up to Super 8 standards.

In China, Super 8 has had to open special schools to help train staff of its franchisees, something that isn't usually done in the US.

Presnick says that's the price you pay to be a leader in a new industry. Being able to maintain uniform standards is the key to success for franchises, but it's a new concept to many Chinese.

Another challenge for foreign franchisors: What to do about copycats, like the one down the street from the Super 8 Presnick just inspected.

PRESNICK: "Let's go around the corner to the Motel 168."

That's right Motel 168. The similarity in name doesn't stop with the number 8. The motel has also added an English word to its sign.

PRESNICK: What's funny is, I noticed they have a super, and they've got an 8 and you know, it's just kinda coincidental

The coincidence doesn't worry him yet. The market is plenty big, and Super 8 hotel rooms are full 85 percent of the time, about 20 percent higher than in the US. Besides, Presnick says, imitation is the best form of flattery.

In Shanghai, I'm Jocelyn Ford for Marketplace.

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