"If you are 40-something and unemployed, what's your next step?" That is how Mr. Lin Yi-chun, chairman of the Association of Franchise Promotion, Taiwan (AFPT), and president of Wayoung Aquapure Technical Co., Ltd., describes this year's sudden growth in the trend to establish franchises.

Forced to start a business

Last year, as Taiwan manufacturers suffered a wave of closed factories and businesses, the 200-plus members of the AFPT recorded a 13% increase in franchise store openings, according to AFPT statistics. The number of franchise stores exploded from 56,000 to 64,000, with an increase of 8,000 over the previous year.

"Eight thousand stores represent 8,000 new business owners who are providing for themselves and who no longer have to fear unemployment. Each store also has at least two employees, which, conservatively speaking has created over 10,000 new jobs for Taiwan," remarked Lin.

AFPT consultant Kui Shih-ping points out that the specialization and speed of today's competition makes it difficult for someone who is thinking of becoming a business owner and who has only their own abilities to rely on. This is especially true as "brand consciousness" becomes the model. A new business owner would do better to rely on a good brand and its built-in market recognition, while quickly copying the brand's recipe for success and increasing his or her chances for survival. This is the reason chain franchises are flourishing.

"According to foreign statistics, most first-time business owners have only a 30% chance for success; however, joining a franchise system increases a new business's chances for success to 70%," says Wang You-chia, vice-president of Super Mill Enterprise Co. the owner of the My Warm Day breakfast franchise brand.

Small investment

As you peer up and down the commercial streets of Taiwan, business signs are as thick as trees in a forest. No matter if it's a coffee shop, a kitchen utensil shop, a vendor cart, a hairdresser, a clothes boutique, a laundry, a video store, a book rental shop, a convenience store, or even a day-care center or tutoring school, all have been divided up into those brands that everyone is familiar with. Except for a few individual specialty shops that survive, it appears most of the market belongs to one franchise or other, and that franchising is the predominant trend.

With the overall economy yet to recover, the domestic franchise industry is quietly changing.

"When the economy is good, a person with NT$3 million is willing to take on NT$5 million worth of investment. Now, the same person is only willing to take on NT$1 million, which leaves him a reserve to fall back on," observes Lin. A few years ago it was easy to invest over NT$10 million in an upscale Internet cafe, coffee shop, or large chain bookstore, all of which were quite popular. Since the investment was large, and the operating know-how complex, most franchisees would adopt a "special franchise" or "franchise arrangement," where the franchisor and franchisee would each bear half of the investment expense, and then split the profits based on an agreed percentage.

The larger chains operate in high style and require a considerable investment in decor and supplies. However, when the economy is weak, it's easy for cash flow problems to occur. Last year, both domestic and international franchise brands such as Senseio Bookstore and Barista Coffee encountered crisis situations, which caused many potential franchisees to step back and adopt a wait-and-see attitude.

In comparison, franchises such as vendor carts, fast foods, ice cream, etc., where investment is low and profits high, products simple and technology low, and where consumer appeal is wide, are quickly becoming the franchising mainstream. At the same time these types of franchise do not require strict flow control and most franchisees adopt a "volunteer franchise" model by contributing the entire investment and receiving all the profits, while keeping their relationship with the franchisor at arm's length.

Making money on your own

At Taipei's Nan Chi Ping night market, Easy Way ice refreshment franchisee Mr. Wang is looking back on his reasons for joining this franchise three years ago. Mr. Wang was a salesman for a pop music company, but after years of traveling about, his monthly salary never topped NT$40,000. He pondered long about this lack of a long-term life plan, and decided to invest his family savings-NT$700,000-into becoming an Easy Way franchisee.

"It's a bit tiring being the boss, but it's steady, and the money you make is your own, which gives you a great feeling of achievement," says Wang. "Although the economy is weak this winter and turnover is down 20%, we can still maintain daily revenues of about eight or nine thousand NT dollars, with profits of about 60%. In the summer, our high season, sales will be much better. Before, when I was just collecting a salary, I could only dream about this!"

For franchisees such as Mr. Wang, not only must they pay a one-time franchise fee of NT$50,000 to NT$300,000 for training and know-how, they must also buy the franchise decor, signage, and store equipment from the franchisor.

After the store opens, the rights and obligations of both parties are quite simple: all materials used within the franchise store must be purchased from the franchisor; and for new products the franchisor's head office must provide training. The head office must also hold occasional promotional activities, for which it can request "sponsorship fees" for the franchisee's participation.

In addition, the franchisor can send a representative for periodic store inspections, to check the store's cleanliness, service, and workflow. At the same time it can examine whether the franchisee is selling unauthorized products, such as products without the franchise brand, which requires more expensive branded cups, plates, and napkins. It would also check if the franchisee is using an outside source of cheaper, lower quality meat products, tea bags, etc. to ensure that the brand's reputation and overall quality are maintained.

A unique selling proposition

Providing wholesale supply to franchisees is the largest source of revenue for most franchisors. But to have hundreds of franchisees willingly purchase franchisor products day in and day out is not an easy proposition. A franchisor must have its own unique methods.

When Easy Way opened its first store in the area of Tunghai University 10 years ago, it created a storefront that immediately attracted the eyes of the passerby.

"At the time we saw students at roadside food stands eating ice refreshments and fruit juices. Flies were everywhere, ice was all over the ground, and it took forever to get a plate of shaved ice," laughs Fu Hsin-chin, president of Easy Way. At the time he and cofounder Kuo Wun-ho thought about taking a new approach that offered the convenience and low price of a vendor cart, yet was as clean and sanitary as a storefront. With this concept they came up with their 500 cc ice beverage model, which they have since rolled out across all of Taiwan. Their stainless-steel counters, automatic sealers, in-store preparation for take-out, and prominent giant cup sign have changed the face of ice drink retailing in Taiwan.

"We had just opened the first store and already many people were asking us to teach them our methods," remembers Fu Hsin-chin. However, he felt the time was not right and had to refuse all requests. Within five years, he opened five stores. By the time he started his franchise, he had compiled a thick operating manual which standardized and systematized store operations, from opening the doors and starting the machines early in the morning, to closing up and turning out the lights at night. The result was amazing; there was even one record month he opened 40 franchise stores. With success, his franchisees became ever more confident, to the extent that some franchisees have opened more than ten stores.

At present, Easy Way has over 500 franchise stores, and stands at the forefront of Taiwan's ice refreshment market. The past few years have seen many imitators who have flooded the market, but Easy Way still advertises its imported tea leaves and select tea bags, and each month five or six new franchise stores open, which proves the old Chinese saying, "the older the ginger, the spicier it gets."

Selling know-how

Wayoung Aquapure Technical Co. was thrust into the limelight last year when its "Water of Taiwan" bottled water was used at a state banquet. This franchisor of water vending machines and Waterlife stores that sell its Da Ya Pure Water is a strong representative of Taiwan's franchise industry.

Currently Wayoung has over 1,300 automatic water vending machines throughout the island. More than 60 are 100% owned and operated by the company, the reason being, according to Lin Yi-chun, president of Wayoung, that "a franchisor should own a certain number of stores in order to have a first-hand understanding of current market conditions." A franchisor should avoid staying behind the scenes too long to prevent a weakening of its ability to open new stores.

"We're not selling water; we're selling purified water know-how." Wayoung's water vending machines are franchised through a franchise arrangement. Wayoung is responsible for maintaining equipment and changing filters; the franchisee is only responsible for looking after the premises, and collecting money. Revenues are split 40%-60%, with the franchisee receiving 60%.

Lin remarks that a 40% cut for the franchisor is reasonable since Wayoung started out as a material supplier, specializing in importing activated charcoal reverse osmosis filters, which are the key component for purifying water.

"Some specially prescribed materials may only add 1% to the cost, yet the water purifying effect is noticeably high with higher oxygen and energy value added," says Lin. "With this key technology Wayoung can go anywhere and tap into the local water supply to produce purified water to sell. This allows us to have a profit base anywhere, no matter if it's through a vending machine, a household water dispenser, or the bottled water market."

"A franchisor must have a unique product or technology that is not easy to imitate, it must gain the experience of operating many stores, and it must weather years of market scrutiny for it to survive. These are the three conditions that a good franchisor must fulfill," says AFPT consultant Kui Shih-ping.

Wanted: the first franchisee

While one can rely on theory, luck and persistence are also important. Such is the case of Haoli Food Enterprises president Peng Kuo-chung, whose latest catchphrase is "It's a new vendor cart era" and who is attracting market attention.

The 45-year old Peng went through many businesses from early on, piling up his share of debts; his family started calling him "the cockroach you can't beat to death." Eventually he began working for the head office of Hsiang Chi Cheng chicken shops, where he observed for the first time the power of the franchise. "It's a great idea-let a lot of other people make money for you!" Afterwards the Hsiang Chi Cheng chicken shops fell apart due to poor management control and Peng turned to shwarma vendor carts.

Peng remembers how uncomfortable he was the first half year of operating his first vendor cart. Customers would come up to his cart and he couldn't lift his eyes due to embarrassment. However, he was determined not to fail. Once he got his business on track he turned over daily operations to his parents, and he started going door to door promoting his business and searching for franchisees.

"Everyone would ask, 'how come I've never heard of your shwarma vendor carts? How many stores do you have now?'" Peng recalls that no one wanted to be the first franchisee. He searched many months to find his first taker.

For the next three years Peng was a "one-man franchisor." No matter if it was in the north or in the south, if someone desired to become a franchisee he would guarantee delivery of supplies at least once a week.

From buying the meat, to cutting and marinating, to delivery, Peng did it all. Always on the road, he would talk to himself when lonely, or slap himself when falling asleep. It was always late when he returned home.

"To let the franchisees make a profit and help their businesses continue, we didn't charge much for materials. Sales were low, and we were selling cheaply-only making NT$10 a catty. No matter how you calculate it, it wasn't worth it," Peng recalls. However, for the sake of his dream and hope for future revenues, he gritted his teeth and persevered.

It is said that fortune smiles on those who work hard. Since 1994, Haoli's shwarma vendor carts have increased to over 600. The company has expanded its offerings from one product flavor to seven, including black pepper, garlic, and more, plus soup and beverages. Haoli always strives to improve the selection and variety offered by its small vendor carts. Last year Haoli added over 150 new franchisees, and it has already become the leading vendor cart franchisor in Taiwan.

Unexpected results

Over the past two years No. 3 Mom's Stinking Pot shops have appeared on many streets and lanes throughout Taiwan, and they have already become something of a local franchising legend.

The first No. 3 Mom's Stinking Pot special franchisee in northern Taiwan, Wu Chung-hsien, recalls his franchising experience. Until two years ago, he had driven a taxi for ten years, spending each day enclosed in his narrow, stuffy cab. Just as he was beginning to feel life had lost all meaning, a customer of his father's encouraged him to try stinking pot. It turned out that this customer was the sister of No. 3 Mom's Stinking Pot's founder, Mr. Chang.

"To tell you the truth, the first time I tried it, I didn't think it was that great," admits Wu. The reason he became a franchisee was that he was attracted by the catchy store name and the old-style low tables and chairs. At the time No. 3 Mom's Stinking Pot only had two franchise outlets and did not have a clear concept of franchising. The down-and-out Wu followed the equally down-and-out founder, Mr. Chang, learned the recipe for stinky beancurd and intestine soup stock, and headed north to try his luck. Out of the blue, the unusual store name attracted the media's attention and became a popular catchphrase, and within a short two years, franchises in north Taiwan had already exceeded 100 outlets.

Interestingly enough, at the time Mr. Chang lacked capital. There was no money to buy meat products or packaging materials for franchisees; there were no standard store signs or decor. Even the franchise fee was collected by "on-the-spot negotiations." Learning the franchise was a master-disciple affair, and after learning the ropes franchisees were on their own.

For this reason, even though there are many No. 3 Mom's Stinking Pot shops in Taiwan, each store has its own decor, and the flavor of each store's food is different. The head office of Mr. Chang, "CEO and chief bottle-washer," still does not inspect his franchisees or conduct promotional campaigns. Yet, surprisingly, he still attracts followers, which goes to show that legends can be created purely by chance.

Offer a dream and work together

As a franchise takes off, many players go from having nothing to attaining success, and a foundation gradually forms. Many then have a personal breakthrough and begin to upgrade their business. Two years ago, in addition to their shwarma vendor carts, Haoli started the reasonably priced Teppanyaki Room storefront franchise to sell steak and rice, baked rice and noodle dishes, and hot and cold beverages. Last year, the leader in breakfast franchises, My Warm Day, opened ET Cafe, which uses Japanese decor and offers Italian coffee and quick meals-a concept it started franchising at the beginning of this year.

"Any enterprise must upgrade its offerings to provide a better dream for its franchisees," remarked Wang You-chia, vice-president of Super Mill Enterprise Co., which owns the My Warm Day breakfast franchise. Over the past two years many middle-aged professionals have joined the My Warm Day franchise. Their aspirations are much greater than the middle-aged housewives of years before. They often request that the head office do just a little more to help them get ahead. This is the reason My Warm Day is trying the new coffee and quick food concept.

For Taiwan's established Easy Way, the past few years have seen a dedicated effort to penetrate the mainland China market. However, the mainland is flooded with imitations and price competition is intense. Within a few months a RMB6 cup of take-out pearl milk tea will have local competitors selling it for "one cup RMB1, buy five, get one free." For this reason, Fu Hsin-chin decided to enter the China market with a large-scale, up-market, food and beverage, multi-use storefront. Already there are over 60 special franchises, and their performance has been impressive.

"There are many business opportunities in China, but there are pitfalls everywhere," says Wang Kuo-an, president of Kid Castle Educational Institute, who is now vigorously developing the market for English daycare centers in China. In order to win, Taiwan businesses must strive to raise entry barriers, and make it difficult for locals to knock off an imitation. With this in mind, over the past three years Kid Castle has invested NT$170 million to develop a complete set of English learning materials including a website, CDs and VCDs, a magazine, teaching materials, etc. Kid Castle uses these materials in 400-plus kindergartens and tutoring schools, and they are also used in the English classes of a fifth of Taiwan's elementary schools (600-plus), but most important, it is keeping an eye on the huge market of China's 590,000 elementary schools and 180,000 kindergartens.

Asia's franchising powerhouse?

"The eras of heavy and light industry have passed. The future will depend on the vitality and ability of commerce to stimulate consumers and shake up the economy. For this, the franchise and chain industry provides a shortcut to promoting the rapid modernization of business," observes AFPT chairman Lin Yi-chun.

For the strongest commercial capabilities in Asia, one must first look to Singapore, Hong Kong and Taiwan. However, the territories of Singapore and Hong Kong are quite small. Local franchise brands can open at most 30 or possibly 40 stores, making it difficult for a franchisor to accumulate the know-how required for large-scale operations.

Only in Taiwan is the population large enough, and the local chain and franchise brands as many and as varied. The profits gained are also not necessarily less than those of foreign franchises such as MacDonald's or 7-11. Add to that, Taiwan brands come from the same culture and carry the same advantages as on the mainland, so it is easy to see how Taiwan can become "Asia's franchising powerhouse."

However, Lin would like to remind industry players that time is of the essence. Within three years, the mainland commercial environment will have gradually become more mature and Taiwan players will find it more difficult to establish themselves there. Over the past few years, no matter the type or the scope, almost all franchisors have made the trip to investigate the mainland market to find that niche that would let mainland franchisees make money for Taiwan.

It appears that chains and franchises are not only ports in the storm during a rough economy, but it is also possible they have helped Taiwan create advance troops for a new economic miracle.

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With so many different types of franchise business to choose from, where does your second career path lie?

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To attract the crowd, franchisors are creative. Easy Way is the first to use a beverage sealing machine. The company is still one of Taiwan's top franchisors.

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In line with today's growing emphasis on health, "purified water" has become a hot franchising category. The photo shows a Wayoung water processing station. The company is Taiwan's number one purified water franchise.

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With many selections and freshly prepared food, Haoli's shwarma already has over 600 franchisees. The firm represents a "new vendor cart era."

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A Western-style breakfast fast food chain. In earlier years franchisees were mainly housewives. Now they are the middle-aged unemployed and young people who can't find a suitable job. Their numbers are getting larger and larger.

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No. 1 Mom, No. 2 Mom, Younger Uncle, Older Uncle. . . look carefully, this "No. 3 Mom's" is the real Stinking Pot! The photo shows Wu Chung-hsien from the popular north Taiwan stinking pot restaurant franchise.

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The Kid Castle educational organization has over 100 foreign teachers. The past few years, with the mainland market in mind, the company has invested heavily in developing children's language products.