Overview
The food and beverage (F&B) market is competitive in Hong Kong as residents have a diverse palate and are eager to embrace new food trends. Local franchise competition is strong, while international brands are also popular. U.S. brands such as McDonald’s, Pizza Hut, Starbucks, Subway, Mrs. Fields Cookies etc. have been in Hong Kong for a long time. U.S. franchises that have found recent success in Hong Kong are trendy urban brands like Shake Shack and Five Guys.
Besides international franchises, local and regional companies have expanded through the franchising model. Homegrown brands like Japan Home Centre, Sam Gor Tam Jai, Kung Wo Tong and Quality Dry-clean are seen throughout the city. In recent years, the premium coffee and tea trend has captured the attention of regional franchises such as Arabica, Flash Coffee, and Share Tea. However, the franchising sector has also seen its share of exits from the market. Hard Rock Café, for example, has tried and failed to get a foothold in Hong Kong multiple times in recent decades.
As a free market, Hong Kong does not have any specific law governing the offer and sale of franchises. Any disputes arising from franchise agreements will be subject to the common law. Franchising in Macau is regulated through provisions of the Macau Commercial Code (MCC) in which Article 680 provides a list of information the franchisor must provide in writing to a prospective franchisee. As to the respective obligations of the parties in Macau, articles 686 of the MCC provides a general duty of good faith and fair dealing.
According to the Hong Kong Franchise Association, there are about 75 franchise operators in Hong Kong with less than 50 percent foreign owned. Of these franchise operators, 43 percent are in the catering business, 20 percent in retailing and 37 percent in services such as learning center, laundry, and dry cleaning.
As the Hong Kong market is relatively small, the most common type of franchise agreement for U.S. franchisors is area development. A Hong Kong franchisee normally prefers to operate all franchised units in Hong Kong directly rather than sub-franchising. It is also common for Hong Kong area developers to partner with U.S. franchisors to jointly develop franchises in China through equity participation from the franchisors. There is also a growing trend for master franchisees and area developers in Asia to establish franchise operations in Hong Kong covering Macau and some parts of China. These non-resident Hong Kong franchisees are keen to expand their territory beyond their home country for economies of scale and to explore opportunities in Mainland China.
American franchisors will find strong competition in Hong Kong due to the maturity of the market. They need to tailor products and services to local cultures, consumer tastes, packaging, and to regularly fine tune their product offerings and services. Most foreign franchise brands prefer well-established local companies with retail and management experience to be their master franchisees in Hong Kong. Conglomerates such as Maxim’s Group, Dairy Farm Group and Li & Fung Group operate big brands such as Starbucks, Shake Shack, 7-Eleven, Ikea, and Toys “R” Us on a franchise basis.
Leading Prospects
- Healthy food and beverages
- Bakeries/desserts
- Children sports academies, STEAM education
- Computer design/development programs (Coding and Robotic)
- Car care and maintenance services
Opportunities
Hong Kong investors are very selective with franchise concepts. They are sensitive to new market trends and demand in the region. Hong Kong’s consumers favor high-end, innovative, and unique new products. They do not mind waiting in line for hours to purchase niche brand products with international recognition. Premium cake shops such as Lady M and Dominique Ansel have done well despite COVID restrictions.
High rents and costs have always been major considerations when entering Hong Kong, but since COVID, commercial space rental prices have declined 30-40 percent and landlords are more flexible toward tenants, which has created business expansion opportunities for some franchisees. This flexibility could give franchisees more time to learn about and adapt to local market conditions.
During the fifth COVID wave, which lasted four months in the first quarter of 2022, several large traditional fitness centers closed, which paved the way for expansion of other new fitness concepts. U.S. brands such as Anytime Fitness and Snap Fitness have opened centers in numerous suburbs, offering 24-hour gym access while taking advantage of relatively abundant commercial real estate choices.
Current Market Assessment: Hong Kong has a unique edge in serving the growing franchising business in Asia due to its foot traffic, access to produce (Hong Kong is one of the main re-export markets for food items), availability of industry talent, and role as a global cultural and trading hub. Foreign franchisors may consider starting their franchise businesses in Hong Kong as a base to finetune their operation to fit local tastes and preferences before expanding to Mainland China and other parts of Asia. U.S. franchise firms are well-perceived, especially in operational procedures, marketing, and providing high quality products and superior customer service.
Market Challenges/Obstacles: Finding a master franchisee is one of the biggest challenges, as Hong Kong is a relatively small market. Potential franchisees will usually request the inclusion of other Asian countries beside Hong Kong as part of their territory. Also, Hong Kong is a mature market, especially in the food and beverage sector.
Franchisors interested in the Hong Kong market need to build flexibility into their contract terms and be ready to make changes to appeal to local flavors. To maximize success, they should consider establishing a single unit franchise operation at the initial stage to test the market before increasing the number of stores, as Hong Kong anticipates the loosening of COVID travel restrictions.
Resources
Trade Show:
Hong Kong International Franchising Show
Dates: Canceled in 2022 due to COVID, 2023 date is to be determined
Venue: Hong Kong Convention and Exhibition Centre
Themes: Catering/Non-Catering (Retail, Education, Cleaning, Health & Beauty, Entertainment, Business Services)
Trade Association:
Hong Kong Franchise Association (http://www.franchise.org.hk/en/index.html)
For more information about this industry sector, please contact:
U.S. Commercial Service, Hong Kong
Email: Office.Hongkong@trade.gov