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Joining Franchise vs Building Own Brand

After the conclusion of the Closer Economic Partnership Arrangement (CEPA), various trades and industries have started to look at the way forward.

In the garment industry, opportunities abound. For people who wish to start their business, franchising, i.e. joining an operation with an existing brand, is an easier option. As for those who already have garment manufacturing factories, whether in Hong Kong or the mainland, they can consider building their own brand.

Building Own Brand

  1. As a company with a brand, it is necessary to register first, the registration fee is Rmb6,000.
  2. It is necessary to set up an office, the size of which depends on the nature and scale of the business. If the business activity is purely design, the venue can be a simple workshop and the actual garment making and processing can be outsourced. In this case, an office with three to four rooms and six to ten employees may be sufficient.
  3. There must be sufficient capital covering staff salary for half a year and providing cash flow for the first year.
  4. Basic office equipment and supplies must be available.
  5. There must be funds for making the garments, including costs relating to fabrics, processing, packaging, accessories etc.
  6. A certain budget for advertising is required. If financially possible, participating in trade shows provides good opportunities for brand exposure. Furthermore, advertising through the media often helps, the spending on which depends on the situation of individual companies. Product leaflets and catalogues are also important publicity tools for a new brand.
  7. As for the choice of sales outlets, setting up special counters in department stores can save costs in terms of decoration and opening one’s own shop. But the company has no autonomy in the decoration of the sales counter and future business development is limited by the location and customer flow of the department store. Moreover, a deposit of Rmb10,000-20,000 and 25-30% of the revenue from each item of merchandise sold have to be paid to the department store. Some department stores also set a minimum sales amount and the tenant is required to pay a guaranteed sum if the minimum sales amount is not met.
  8. The price of garment is often six to eight times its basic cost, depending on the type of fabric used and how well-known the brand is. As the cost of the fabric takes up a significant portion of the basic cost, it is suggested that expensive fabrics should not be used if the merchandise is not aimed at the high-end market. Instead, fabrics at reasonable prices should be used or sourced in China.
  9. A carefully prepared profit analysis and budget could provide the best grounds for formulating future development plans.
  10. Fashion houses usually would have the next season’s designs ready six months in advance and would hold a buying fair every year in May. Franchise operators often attend such fairs to select designs and place orders.

Joining a Franchise

  1. With the support from the head office of the franchiser in terms of sales system, trademark and management know-how, this arrangement demands less in terms of time, capital contribution and efforts than building one’s own brand.
  2. To enhance its goodwill and beat its competitors, the franchiser often develops unique, high value-added products to offer product differentiation. The franchisee can take advantage of these benefits.
  3. As the franchiser coordinates all sales promotion, stock supply and accounting system, the franchisee can concentrate on selling the product.
  4. As the franchisee belongs to a chain operation with an established name, customers will have confidence in its business even if the store is new.
  5. While those setting up their own business may encounter problems with products or raw material supply, franchisees can enjoy all sorts of convenience provided by the franchiser as a result of economy of scale. Sometimes even equipment and furniture can be offered at low prices or on credit.
  6. The franchiser will provide assistance in pre-operation training as well as guidance during the operation.
  7. Those setting up their own business have to face competitors single-handedly, while franchisees can rely on the backup of the franchiser.
  8. Selecting the right business location is often a difficult decision for those starting their own business. But franchisees can consult the franchiser in this respect.
  9. The franchiser will regularly conduct market surveys to obtain information such as changes in customer profile or consumer preference. Such information will enable the franchisee to take appropriate measures.
  10. As the success of the franchisee is the success of the franchiser, very often franchisees with good business results will receive bonuses and benefits from the franchiser.

Disadvantages of Joining a Franchise

  1. As chain operation demands consistency and uniformity from franchisees, franchisees have virtually no autonomy in operation.
  2. As there are detailed stipulations on the way the business is run, franchisees cannot implement their own creativity. They can put forward good creative ideas to the franchiser and it is possible that they may be accepted.
  3. All products and inventories are standardised and uniform. Therefore, channels replenishing inventories are restricted.
  4. Franchisees are bound by contract and cannot transfer their business to a third party without the consent of the franchiser. However, in most cases, so long as there is no breach of contract terms, the franchiser would agree to terminate the contract and work with a more willing partner.
  5. Even upon expiry of a contract, there are still certain restrictions regarding engagement in the like business.

To take advantage of CEPA, players in the garment industry seeking business expansion should decide on whether to build up their own brand or to join a franchise. Such decision should depend on their circumstances, the terms of the contract, and various other issues related to operation. Joining a franchise is an arrangement to the benefit of both parties. A potential franchisee should be aware of the characteristics of the franchise operation as well as the advantages and disadvantages involved. Both parties in a franchise arrangement must maintain good communication and try to understand each other in order to ensure smooth cooperation and mutual benefit. Franchise is a profitable business model creating a win-win situation for both the franchiser and franchisee. For the franchiser, business can be expanded at relatively low cost. For the franchisee, it is not necessary to go through the process of trial and error or start a business without any guidance.

Source: http://info.hktdc.com

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