For a long time already jewelry franchising has been a sought-after pattern of doing business in the jewelry industry of China. The global financial business has turned this model even more popular as franchising gives a chance to lower bankruptcy risks for newly established businesses and reduce start-up investments. However, if earlier jewelry brands were frantically promoting their franchise opportunities, now facing the recession they one after another are seeking shelter under the umbrella of larger industry players. Small-scale retail jewelry brands are even ready to reject their little-known names and using franchising resolve their economic problems arising from falling sales and stay afloat.

The brand becomes an ever more influential force in the Chinese jewelry market. This can be seen having visited, for instance, the offices of some of the Shenzhen jewelry companies promoting franchising. If in the past sales departments offering franchising contracts were mostly empty, now the situation is changing as more and more retailers are readily entering into talks with high-profile jewelry companies trying to take a “brand on lease.” The more hyped a brand is the more eager queues are lining up to get it. It is not by chance that general managers and executives of Chinese jewelry companies when asked about their future just all to a person say their priority target for 2010 and further is bolstering and promoting their own brands.

Zhang Weifeng, Marketing Director of Delicacy Forever Jewellery: “In 2010 one of the main aspects of our work is to carry out actions aimed at expanding our advertizing activity in the Hubei Province to promote our diamond brands in the local market.”

Chen Shaojin, Executive Director of the Shanghai branch of Hua Chang: “In 2010 we put our major emphasis on shaping up an image of our brand. A turning point which, on the one hand, will give a powerful impact to “brand strategies” and on the other hand will be a stimulus for expanding channels is the application to include our brand in the national system called “Famous Brand of China” and also to pass selection for the China Time-Honored Brand Status.”

“The consumer psychology of Chinese buyers is such that they first of all pay attention to a brand, and the more it is famous, the more attractive it is for our consumers. Hong Kong brands are very successful in the Chinese domestic market. Many large-scale Chinese jewelry manufacturers who were initially engaged only in making and processing jewelry goods later received instructions from their management “to make brands.” Today I can't tell that they managed to achieve this to a full extent,” remarked Mu Qiang, senior adviser to Homeland Flying specialized in brand-consulting for jewelry companies, during the program run by the First Jewelry Channel of China devoted to the current situation and development of Shenzhen brands. Mu Qiang has a record of successfully implemented projects aimed at developing brand-strategies of many jewelry trademarks, and now he is also a permanent adviser to several top-class jewelry brands. The program anchor man simply calls him ‘Teacher Mu’

From 2000 to 2006 franchising entered into a phase of fast development in China, writes one of the web sites of the authoritative goodjob.cn portal. Many businessmen have joined the wide flow of those wishing to franchise. However besides the Commercial Franchising Regulations issued by the Ministry of Commerce of the People’s Republic of China there were no other legislative documents regulating this sphere of business. In this context franchising operations generated a number of various questions - for example, with regard to trade marks, patents, technologies and know how, intellectual property rights, trade secret contents and "instigators" of unfair competition in the Chinese market. Right now the issues related to protection of intellectual property still stand high in China, the world market of clones.

From 2006 jewelry trademarks, irrespective of their size and value, offered their own franchising patterns. Some international brands also used franchising as a way to penetrate the Chinese market. One such example was TESIRO, the Belgian diamond brand, which in March 2006 plunked down $100 million for acquisition of an 85-percent stake in Tong Ling, a jewelry company from the Jiangsu Province. Xinhua wrote that the new company was going to spend $1 billion within 3 years to open 300 retail stores in China tailored as franchising outlets. “TESIRO-Tong Ling will use business models based both on direct activities and franchising. In the first-level cities we shall work directly whereas in the second- and third-level cities our business will be based on franchising,” Chen Dongzun, the company’s general manager said. He also noted that TESIRO’s franchising license costs approximately ¥5 million (more than $730,000).

Big brands chose franchising for the several reasons. Besides the need for support and contacts on the spot, the important purpose was also financing. The franchiser had an opportunity to use the funds received from the franchisee for further operations to expand his/her business in the Chinese market. Due to the difficulties induced by the crisis some of the small retail jewelry brands have been compelled to resort to franchising in a SOS mode. Purchasing power here is re-aligned to buy goods more protected from price instability. It would seem that gold jewelry is a worthy example of goods indemnified against the world’s falling financial markets. Besides, it is an integral attribute of the Chinese wedding. Jewelry items are one of the most preferred acquisitions in Chinese mass consumption. Nevertheless, despite the high potential of the consumer market the picky attitude of buyers to the quality of goods and the big significance given to a brand’s popularity have created competitive hurdles for many small jewelry brands they never faced before.

In many medium and small towns and even in district centers jewelry retailers complained during a survey performed by the Jewelry Lab research blog that business was not going very well: despite the lower prices for goods they sold they found it very difficult to compete with branded heavyweights already present in the local market. As they said, their jewelry design was lagging behind fashion, their stores looked obsolete, their advertizing missed the target, while their sales staff did not possess necessary knowledge and was not affable enough with buyers.

“Consumers will prefer to pay more money and get a jewel of a well-known brand. Though we have a quality certificate, nevertheless all customers go to big jewelry names to buy their jewelry pieces. They will always treat little-known or insufficiently widespread trademarks with some doubt. In this situation our business finds it very difficult to work” – this was the opinion expressed by the owner of a small provincial jewelry store.

The well-known modern trend of large and medium-size Chinese brands to expand their presence embracing the markets of second- and third-level cities may result in disappearance of the small jewelry retailers sector consolidating those retailers under franchising programs offered by their big brothers. On the one hand, this will lead to a market shared between several dozens of the most powerful representatives of the industry. Wars between brands and competition between jewelers will inevitably bring about better quality of jewelry and improvements in the Chinese legislation regulating intellectual property protection. Something will be won by buyers as well. Taking into account the bent of Chinese consumers for flashy names and the tough time being survived by the entire industry, franchising may become a life buoy for smaller jewelers which may help them overcome the time of change so loathed in China.

On the other hand, China is a huge country, where people differ very much both socially and culturally from one province to another. Large-scale business patterns ran-in in megacities are by no means always applicable in outskirt market areas. Even if they are successful somewhere like Heihe, the profit margin of such a franchising project will be considerably altered in comparison with its performance indicators displayed in big cities. Those wishing to strike a franchising relationship should take this into account since the business model of a certain brand has been formed in a particular economic climate and to carry it over to some other region and to another environment will require additional calculations and fine tuning to local specifics.

Potential brand erosion is another minus of franchising. This situation may arise with a high degree of probability if a not too responsible or professional franchisee, however managed to accumulate a certain capital during the prolific period of economic uplifts in China, will not be overly meticulous to execute the franchiser’s guarantees already used to in the market. “Almost” is a cult word in China. This will result in consumers’ undermined loyalty and trust to goods produced by the brand in question. After all, not only the profit of some franchisee outlet, but the brand’s own reputation depends on how franchising programs will work. Hence, large business models will be faced with the necessity of forging flexible franchising projects easily built in the local environment, in the first place, and secondly, they will have to exercise a rather tough local control. Control measures will also be indispensable to spot a move when the franchisee having successfully mastered the business model offered by the franchiser may start turning into the latter’s competitor. For China it is a traditional scenario.

Olga Patseva, Editor of the Rough&Polished Asian Bureau in Shanghai