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Mechanism for regional expansion and chain management of the Chinese shoe chain: A case study on the Yearcon Company in Shandong province

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Academic year: 2021

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Ning GAO

Yasuhisa ABE

(Graduate student of Kyushu University) (Kyushu University)

【Abstract】 This research deals with the mechanism for regional expansion and chain store control of a Chinese shoe company. It focuses on the following three points: 1) the history and background of the expansion of the chain store’s network via a franchise system, 2) management and support mechanisms that made it possible for franchisees to achieve high sales quotas, and 3) the relationship between the chain headquarters and franchisees and the changes in this relationship. Our research method was to interview four executives at the Yearcon’s headquarters and its regional agency, and to interview 18 owners of the company's franchises. This company signed franchise agreements with wholesalers and retailers, and it set up specialty stores that only handled its products. This company eased the financial burden of franchisees by relaxing payment terms, offering incentives based on sales, and subsidizing the startup fund. In addition, it provided storeowners with training and knowhow on store operations. Over a period of about 15 years in which it introduced its franchise system, the company rapidly expanded its network to 4,000 stores. On the other hand, looking at the relationship between the headquarters and franchisees, whereas the headquarters had previously provided full support to franchisees, it has recently been strengthening its control, and support has decreased. In other words, due to stalled sales, difficulties with profit distribution has become evident.

 

Keywords:Chinese shoe chain, franchise system, chain control, Wenzhou, Shandong province

Ⅰ Introduction

In recent years, the Chinese market has drawn much attention in the world economy. In 2010, China's GDP was second only to that of the United States. China is no longer merely a manufacturing country of products, but a huge consumer market. The output of shoe products discussed in this paper reached 13 billion pairs in 2010, accounting for 65% of the world's production. It is estimated that the domestic consumption reached from RMB 2.7 billion to 3.0 billion, ranking second in the world (as shown on the homepage of the China Leather Association). So how do China's retail chain enterprises build their sales and management network? The authors consider that this issue is of great significance in exploring the various goods circulation modes.

Before discussing the above issues, the authors would like to compare the current status of Japan's retail industry and explore the characteristics of China's retail

the Chinese shoe chain:

A case study on the Yearcon Company in Shandong province

chain enterprises. After the 1990s, Japan's retail industry began to focus on the reforms of informatization and logistics intensification. Especially after entering the late 1990s, the retail chain enterprise began to share the sales information with the wholesale industry and manufacturers; many enterprises introduced the supply chain that could minimize the circulation inventory and produce the desired product only per the demanded quantity (Hashimoto 2014: 122).

Relative to Japan, in the emerging countries such as China, the economies continue to grow rapidly. The sizes of the consumer markets and the consumers’ consumption orientations have undergone tremendous changes year after year. There is a lot of difficulty in predicting the sales volumes themselves based on the past sales information. The policies and regulations of the central and local governments have a large impact on the wholesale and retail markets. Also considering the different dialects in various regions, different

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business practices and different consumer preferences, the implementation of unified management is very difficult (Kawabata 2006; Sugino 2009). Especially for manufacturers, to ensure and maintain sales networks is a difficult problem.

Endo(2010) took the consumer market and circulation in Thailand as an example; he pointed out that in emerging countries, the income gap among consumers is huge and the markets are very diverse. It is very difficult to conduct the unified management. Although enterprises in developed countries have good brand products, they have big difficulties in expanding the sales network. Therefore, failed subsidiary startups are not uncommon in emerging countries, because they cannot adapt to the local conditions. Endo(2010) pointed out, “Even if it is a strong foreign enterprise, it should also consider the inherent local conditions; this is true for the manufacturing industry, and this is especially true in the circulation industry”. Hence, it is essential to conduct a relevant study on what means the local enterprises/ capital adopt to expand their business (Endo 2010). Takahashi(2008), using the example of one Japanese company's expanding markets in China as the likely experience for Japanese companies in general, deduced that they must have difficulty in both conducting business and recovering their money in the local market. The above issues exist due to different business practices. To find a solution to these commercial characteristics and habits in the local markets of emerging countries, the approach that is adopted by the Chinese enterprises to expand their sales network in the domestic market will provide a good reference case for the enterprises and researchers in the developed countries.

When enterprises expand into an overseas market, they often start the business in the form of branches and joint ventures. However, in the retail stage, many companies adopt the form of direct sales stores. There are three reasons for this. The first is that the operation mode needs to be highly shifted to the overseas local markets when expanding into overseas markets. Second, it is difficult to ensure that good enterprises and store owners who can enter into franchise contracts can work as partners. Finally, the franchise model has a lower profit margin, profit distribution becomes a problem,

and this is also an important reason (Kawabata 2010). In theoretical research, when studying the ways of expanding the number of chain stores through franchising and direct operations, there is a theory concerning the capital, talent and other resources of the operating theory. There is also an agency theory that focuses on the agents' role and moral hazard in franchise stores. There is also a theoretical study on the transaction costs between franchise headquarters and franchise stores (Kawabata 2010: 108-114; Maruyama and Yamashita 2010; 2012). In the agent theory, it is pointed out that the headquarters need to have a high degree of supervision ability to supervise the agents; at the same time, it also needs to supervise the expenses. How to reduce the supervision and transaction costs has become an important topic both in practice and in academic research.

In view of the existence of the above issues, when the Japanese enterprises sell clothing and other products overseas, they adopt the same mode as that for domestic sales in Japan, and often integrate manufacturing and marketing (Kawabata 2010:165-179). That is, “the company produces its own planned products, and then sends them to the direct-operating retail stores for sales.” (Ikeda 2003) This strategy is also called SPA strategy. On the one hand, when local Chinese manufacturers build their sales networks, local manufacturers often adopt the franchised store, agency store and other chain franchise modes in the broad sense, so as to build their own retail chains. In China, franchising is often used to expand the store network. There is a great inherent factor in that there are many wholesalers and retailers who run the individual business. They are capable candidates for the franchise store owner. Why do so many individual entrepreneurs exist? The authors believe this is because there are already many wholesale markets for goods purchase in China; this has lowered the threshold for purchase channels when starting their own businesses (Marukawa 2013). Moreover, with economic growth, although the per capita GDP of Chinese people has also risen, the wage level has not kept pace with this increase. In other words, there are many employees on low wages (Chen 2010). Under such circumstances, the enthusiasm for starting an individual business is very high. Therefore, so many companies are

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able to use franchising to quickly expand the distribution network, just because the entrepreneurial enthusiasm of the store owners is inherent1).

On the other hand, studies have pointed out that in China, when manufacturers sell products through large-scale retail chains, they are required to pay a large amount of expenses such as rebates, service charges and sales promotion expenses. Because of such business practices, the final profit of manufacturers is very low (Kawabata 2006: 163-169; Yahagi et al. 2009 :131-133; Watanabe ed. 2015:23-40). It can be imagined that such business practice is also one of the reasons prompting manufacturers to open their own stores/ franchise stores and expand sales networks.

In this context, when integrating the personal business owner into the enterprise, what kind of relationship is there between the chain headquarters and the store owner? What kind of management policy do the headquarters have? The authors consider it is an issue necessary to explore. Among the studies on retail chain enterprises in Japan, many also mention that when the companies expand their stores in various regions, the franchising mode is often used (Tsuchiya 2000; Arai and Hashimoto eds. 2004; Kaneko 2013; Komaki 2013). These studies focus on the dominant strategy of the headquarters of the chain enterprises or the realization of JIT logistics, and mainly conduct the geographical analysis of expanding store chains through these determinants. However, to better understand the geographical expansion of the retail chain

enterprises in a new country like China, the authors consider it is necessary to explore how to enlist and organize franchise stores when developing more stores2). In particular, when

discussing how headquarters and franchise store owners are building their business relationship, there are few related studies based on the characteristic backgrounds of regions. The authors consider this is also an important argument.

In summary, this paper mainly takes Yearcon company (hereinafter referred as to Yearcon), a large shoes chain store enterprise who develops stores in a franchising manner, as an example to conduct the study. Yearcon opened a large

number of stores across the country in a short time. This study focuses on its management of franchise stores, and specifically focuses on the following three points: 1. The process of relying on the franchise way to develop the sales network.

2. The management and support measures to guide the franchise stores to complete the high-amount sales targets.

3. The relationship between the chain enterprise headquarters and franchise stores as well as the changes in this relationship.

II Survey Method and Outline of Survey Object This chapter describes the survey method adopted and reasons for using it. Little research has been performed on the circulation in domestic markets of emerging countries. One of the reasons is the severe shortage of basic data led by business statistics (Endo 2010). As such an issue exists, one of the effective measures that can be considered is to conduct a detailed field survey on the enterprises that have achieved some successes in expanding the network of stores, and collect the detailed data on the basis of this.

In August 2014 and March 2015, the authors interviewed staff at the headquarters of the Yearcon and the regional agent3) that govern Shandong franchise

stores. There was a total of four interviewees, including one headquarters leader and three regional agent’s

Table 1. Summary of store owners surveyed

ID Birth

year Edu-cationO c c u p a t i o n b e f o r e b e c o m i n g franchisee Y e a r o f becoming franchisee

Quantity of stores N1 1962 M Driver → Shoe sales 2000 4 N2 1962 M Shoe sales 2000 2 N3 1963 H Government official → Shoe sales 2002 2 N4 1970 H Shoe sales 2002 2 N5 1964 H Shoe sales 2007 3 N6 1975 H Shoe sales 2001 2 N7 1959 M Workshops owner → Shoe sales 2001 1 N8 1977 M Worker → Shoe sales 2007 3 N9 1963 M Shoe sales 2005 2 N10 1992 H Shoe sales 2011 2 N11 1969 H Shoe sales 2000 2 N12 1958 H Government official → Shoe sales 2002 6 N13 1972 M Shoe sales 2001 2 N14 1970 H Shoe sales 2001 3 N15 1973 M Owner of grocery stores → Shoe sales 2006 2 N16 1982 M Workers → Shoe sales 2014 2 N17 1976 H Shoe sales 2005 1 N18 1974 H Shoe sales 2003 2 Usage M: Middle school graduated H: High school graduated Source: The interview of the store owners.

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leaders (hereinafter M1 indicates the headquarters leader, and M2 ~ M4 indicate the agent leaders). The interviews were carried out mainly in terms of management methods of franchise stores. Meanwhile, the interviews were also targeted at the franchise store owners in Shandong Province (hereinafter referred to as N1 ~ N18, Table 1). When selecting the franchise store owner as an interviewee, in consideration for the feasibility of the survey and the coordination of owners, the authors mainly chose store owners whose annual sales in the previous year were above the average level. The following issues were raised in the interview: the process by which these store owners joined the company, the contractual conditions and operation mode for goods purchase and inventory transfer, and what the help and support obtained from the headquarters comprised of. The individual store owner’ s satisfaction about these policies of the company was also investigated. Finally, to accurately grasp the support policy for franchise stores issued by the headquarters, the authors also analyzed the contracts signed between the headquarters and the franchise store owners.

Here, the authors would like to explain the meaning and background of the words "franchise chain mode" and "franchise store" used in this article. The study of Kawabata (2010) shows that when manufacturers and enterprises of the circulation industry and other

industries expand into markets in emerging countries, they often adopt the franchise mode. It is necessary to explain the term “franchise” here. In Japan, the general franchise contracts should meet the following three conditions (Yamashita 2013):

1. The activity occurred between two independent capitals.

2. The headquarters shall provide not only goods for the franchise store, but also operation methods.

3. The franchise stores pay royalties and other fees to the headquarters.

In Japan, that manufacturers only provide trademarks and products to exclusive stores is sometimes excluded from the definition of franchise. Stores in this case are referred to as special stores, or agency stores (Kawabata 2010:41-45). However, in the United States, the birthplace of the franchise chain mode, this form of providing trademarks and commodities only is also known as the franchise chain. Furthermore, Yamashita (2013) pointed out that in Japan “the headquarters does not charge a part of the turnover as royalties from stores, but take the store's wholesale purchases from the company as the main source of profit” is also included in the scope of franchise chains.

When Yearcon signs a contract with a franchisee store, it grants the trademarks and the right of using/selling the company's goods to the store. Moreover, Yearcon

Fig. 1 Number of stores in each provincial region of Yearcon

(The number of stores and the average number of stores per one million population)

Note: The positionings of the spots indicate the locations of the seats of government in each province and autonomous region. Source: Baidu map information (2014:9) and 2014 population information.

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provides the guidance and operation method for the franchisee stores to a certain extent, and thus it can be called as the franchise store. In this article, the authors used the same franchise stores as used by the company to define these stores. At the same time, the rules formulated at the time of signing the contract are collectively referred to as the "franchise chain mode". The following is a description of the Yearcon as the survey object, and the survey area overview and positioning. In China, large shoe-making companies are actively expanding the number of stores. One of the reasons is that the shoes are a product that attach great importance to trying-on, and as a traditional channel, store sales still occupy a very important position for all the major manufacturers, despite the popularity of E-commerce in China nowadays.

Wenzhou, Chengdu, Quanzhou, Guangzhou and other places are regarded as shoe hubs of China. Among them, after the reform and open-door, the economy in the Wenzhou4) region of Zhejiang Province (Fig. 1)

developed rapidly with the local capital-based private enterprises at the forefront, and Wenzhou has become one of the important areas driving China's economic development. The reason why private-owned enterprises in this region can make such rapid development is mainly that the private enterprises can make full and effective use of the resources of their friends from their hometown and often in the same industry. Using these resources, they purchase raw materials or establish their sales channels. In this region, even small companies that have just started up can use the sales network formed by counterparts in their hometown and sell their products across the country. There are a variety of wholesale markets in various parts of Wenzhou. As long as enterprises make sale/wholesale of their products here, they do not have to worry about circulation. Wenzhou merchants all over the country purchase goods here, and then sell the goods all over the country (Watanabe 2004).

The headquarters of the large shoe manufacturing enterprise, Yearcon are located in the Wenzhou region, which has a strong shoe-making tradition. The company began production and sales of shoes in the 1980s when the company did not have its own specialized brand. By 1995, the company was operating stably, and formally

established itself and created its current brand (based on Yearcon's promotional documents). From 2000, the company developed rapidly, and the turnover kept rising. Thus, the company successfully developed to the present scale. By 2015, it had built a sales network with more than 4,000 exclusive stores across the country and occupied a very large share in the market of medium-class, high-end and business shoes for men. Because it is a non-listed company, it did not openly disclose its sales amount and profits. However, according to the statements of M1 and M2, the sales of one brand of the company are already ranked top in the shoe industry5).

The company sold its products through franchise stores and direct-sale stores across the country, and has achieved huge sales. One point needs to be added, that the shoes have the above-mentioned features of emphasis on trying-out. Therefore, the company did not input too much effort into E-commerce, but rather sales in brick and mortar stores.

In the following, the authors analyzed the Yearcon's development in domestic regions of China. The company has opened its own stores in 31 provinces, municipalities directly under the rule of Central Government and autonomous regions in mainland China. As shown in Fig.1, the majority of stores are in the following provinces and autonomous regions (listed in hierarchical order from the province with the biggest number of stores): Jiangsu Province (251 stores), Zhejiang Province (222 stores), Shanxi Province (211 stores), Sichuan Province (205 stores), Anhui Province (194 stores), Shandong Province and Henan Province (192 stores). As the company's establishment is later than that of other large shoe companies, the company firstly focused on the domestic market instead of that overseas. The company especially focused on the medium-sized cities and townships where other large shoe companies had not opened stores. In relation to the average density of stores in all Chinese provinces, per one million people, this company have a high number of stores in small and medium-sized cities, and vast inland rural areas (Fig. 1). The development process of Yearcon in the whole country was as described above. In this article, as the research object to explore the company's store development method and background, the authors chose Shandong region, where there are numerous stores and

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the business practices and cultural backgrounds are quite different from that of the headquarters. There are many people engaged in industry and commerce in both the Shandong and Wenzhou regions, and each region has formed one of the most famous business groups in China. However, the strategic development and business practices of Wenzhou businessmen and Shandong businessmen are quite different (Zhou and Zhang 2013), and there are many local shoe producers themselves in Shandong Province. Despite this innate condition, the company still has developed as many as 192 stores in Shandong Province, and the number of these stores exceeds the store number of local shoe manufacturers (based on Baidu maps and the publicly-disclosed data by each company). Moreover, the proportion of franchise stores in Shandong is almost 65%, while the remaining 35% plus stores are the direct-sale stores opened by the regional agent (M4). Therefore, Shandong Province is a very suitable area for the analysis of how Yearcon, headquartered in Wenzhou region, assists franchise stores and provides the operation mode for the development of stores nationwide.

III Introduction about the Owner and Management of Franchise Mode

1.About the franchisee store owner

To achieve the above research objectives, this chapter will explore how Yearcon can adopt the franchise mode to expand its sales network and its management system. First this chapter will introduce the resumes of the franchise store owners interviewed and their processes of becoming the owner of the franchise store. In terms of age, most of these store owners were born in the years between 1960 and 1970, and the majority of them were 40-50 years old when being interviewed. It was very difficult for most of them to receive higher education in their time, and many of them began to work after graduating from junior high school. Viewed from the previous job before becoming a store owner, there were people who had never touched the shoe industry, such as truck drivers, grocery store owners and factory workers, etc., but there were more people who were already engaged in shoe wholesale and selling shoes. Many store owners started their business in the early

1990s. At that time, the policy of reform and open-door had just been implemented and the supplies were still relatively scarce. As long as the goods arrived, the goods could be sold quickly. However, after entering the late 1990s, with the economic development, as the living standards of consumers in Shandong Province were also rising, the quantity of daily necessities were slowly able to meet the market demand, and the competition began to be more and more intense. On the other hand, the consumers also began to pay more attention to quality, and their awareness of brands gradually increased. Under such circumstances, many fashion-oriented industries, including the company, have begun to establish chain stores nationwide to develop their own sales network to enhance their brand image while avoiding the involvement of low-price competition. The specific approach is to establish and expand exclusive stores that sell their own goods only.

Not long after Yearcon was founded, it made use of the sales network formed by Wenzhou natives all over the country, and sold the goods country-wide. By the time its business was on the right track, Yearcon had strengthened cooperation with these fellow wholesalers, and signed regional agent contracts that govern sales at the provincial or municipal level, and granted them tremendous rights in trademark use and product sales. For example, the regional agents can open and operate direct-sale stores within their governing range in the name of the headquarters6)(Fig. 2).

In its second year of creating the brand, that is 1996, the company published the policy of introducing franchise chains, and started to recruit willing franchisees. By the turn of the millennium, when the plan was really implemented, the number of stores started to increase rapidly. As mentioned above, the company devoted itself to medium-sized provincial cities, towns and townships where other shoe chain enterprises had not

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yet expanded a large number of stores. As a result, the company quickly expanded the market share to the extents that single brand sales achieved top ranking. It is noteworthy that Yearcon used Wenzhou natives to distribute their shoes all around the country. They then, encourage local people who had already been selling Yearcon products to become store owners in their franchise.

Why did Yearcon adopt the strategy of directly integrating the original wholesalers /retailers involved in business with the company into the company itself? In the view of the authors, it is because of the following background and reasons. Viewed from the headquarters of the company, that Yearcon develops the various stores to become franchise stores selling its products only, can ensure the stability of the sales network, and also can improve its own brand image and influence. There are a lot of benefits. M1 said that in order to implement this policy, the company has made a number of provisions: severe penalties are imposed on franchise stores that violate the guidelines and display other branded products in stores, and fairly generous supportive policies are applied to the franchise stores that implement the guidelines. Specifically, for example, if it is found that a store sells other branded products, the store owner will first be given a warning; if there is still no rectification, the contract may be terminated to cancel the business operation qualification of the store owner, or the company may reduce or cancel the economic support and preferential policies to the store (M4). In the actual interviews with store owners, this point is also verified. The store owners N1 and N2 said that in the sale of other manufacturer’s goods, the warning notice was issued to them, or dual punishments of warning and canceling the economic preferential policies were performed.

Meanwhile, it is also very beneficial from the store owner's point of view. Compared to operating several unknown manufacturers' products, it is better to open an exclusive store selling the products of a specific manufacturer with a certain reputation. In this way, the store appearance and shop fittings will be more advanced, and the unit price of goods and profit margins will increase. As a result, from the several large domestic brands, they selected Yearcon, that always has business

dealings. Furthermore, compared with the chain enterprises in the developed countries, the store owners do not have to pay high royalties, which to some extent eliminates the psychological burden of franchisees. However, operating only one manufacturer's product inevitably leads to the disadvantage of fewer available products. At that time, some store owners also thought that operating a number of brands would be more conducive to the enrichment of products than operating only Yearcon’s products, and the customers would have more choices when buying. They were more inclined to this business model. For example, N5 selected franchisee mode after selling other branded goods for about two years. N1, 6, 13 and 17 held a negative attitude to the signing of the franchisee contract and opening the exclusive store at the beginning. However, after entering into the second half of the 1990s, like other well-known brand manufacturers adopting the same franchise mode as Yearcon, these independence store owners were left with the choice of either becoming franchise stores of large chain enterprises or that of operating a few unknown brands independently. In this situation, they finally chose to become a franchise store of Yearcon. Through signing franchise contracts with the company, when the contract was concluded and during the subsequent co-operation/ negotiations with the company headquarters, it was relatively easy for the store owner to obtain favorable contract terms. In fact, to bring these wholesalers and franchisees in-house, Yearcon set a relatively low contract threshold at the time of signing, which helped improve the number who joined. For example, in Shandong Province:

1.The terms of the contract are renewed once a year, which is shorter than the average franchise contract period.

2. The deposit for concluding the contract is set at a relatively low level of RMB 10,000.

If there is no breach of contract during the period, the guarantee fund will be returned in full after the contract expires (according to the contract signed between Yearcon’s regional agent and N5). Furthermore, as also mentioned in the next chapter IV, while Yearcon provides such contractual conditions, it also provides the store owner with a wide range of subsidies and support. At the same time, the company also sets very high sales

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targets and requirements for franchise store owners. By such means, the sales of Yearcon have been greatly improved.

2.Setting sales goals and standards

In this section, the authors will introduce the sales targets and ordering criteria set by Yearcon for franchise stores, and also introduce the attitude held by franchise stores to these sales targets and ordering requirements. To increase sales, the company sets its next-year sales target at the end of each year. The sales target is determined according to the sales of the current year and market forecasts for the following year. Store owners are required to determine the purchase quantity based on these sales targets. The agent of Shandong Province, according to this policy of the headquarters, requires that each owner must buy at least 80% of the quarterly sales target in the first purchase of each quarter. The agent of Shandong Province adopts the guidelines of non-delivery for owners who fail to order the specified minimum quantity. For the store owners who order the specified quantity of goods or exceed the target, if there are some unsold goods at the end of the quarter, such goods can be exchanged for other goods of the same value. However, the exchangeable stock is limited to 20% of the total purchase value. Yearcon has been continuously expanding its market by about 2010, and has adopted a strategy of substantially increasing its sales targets each year. N4 expressed the view that the sales target from 2003 to 2010 was significantly increased, mirrored by the sales of a store when it opened in 2000 amounting to only RMB 200,000, but which had reached nearly RMB 4.5 million at the time of this interview. However, the growth rate for this target began to decline after 2011 and by 2013 the target was only slightly higher than that in the previous year. Most of the store owners still hold a positive attitude towards this system where the headquarters determine the sales target, and the purchase quantity of 80% target value is set as the minimum standard. N6 and N18 are the two best-selling store owners who can achieve more than 130% sales targets each year, so there is no dissatisfaction from them with this system. N2,4,5,8,9 and 11 think that the target was too high and difficult to achieve at the very beginning. However, with the

company's help and their own hard efforts, they achieved the goal, and now feel grateful that the headquarters set such a goal. Especially with N2, 5 and 11, their turnover in recent years exceeded the sales target. Furthermore, N3 is now able to achieve the minimum standard sales volume with sales growing in recent years. Consequently, N3 is very confident about future sales. Although the sales target has now been reached, N1 did not achieve its goal for several previous years. Of course, there are other store owners like N7 who cannot reach the sales target. To do so, a lot of franchise stores sell products at a low price, which has a certain adverse effect on building the brand image. For example, many franchise stores purchase at RMB 200-300 (if the goods are from the company's inventory in the previous year, it may be lower than this price), so a retail price of RMB 400-600 (double the purchase price) is a general rule of the industry. However, to dispose of the leftover goods, there is also the case that the goods are sold at a price close to the purchase price. The goals and standards set by the company quickly improve the overall sales performance, but there is no specific requirement for sales prices. From the perspective of improving the company's brand image, the formulation of goals and standards such as above did not work significantly.

The interviewees selected in this paper are store owners who have good sales performances. Many comments the authors heard are that the headquarters set the very high sales targets, but also give a lot of support and generous rewards to the franchise stores. The next chapter will introduce the various sales-promotion incentives and support systems that Yearcon adopted to increase the sales enthusiasm of store owners.

IV Support System for Franchise Stores

This chapter will explore the support system for franchise stores offered by Yearcon in respect of economic incentives and education/ training. The interview with the leader M4 shows that many store owners had limited funds in the early stages of opening franchise stores. For this, the company headquarters focused on the financial assistance for franchise store owners when stipulating the management system. Next, the two systems of reward and payment after delivery

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the headquarters gave a lot of support to the franchise store, and the store owners got a great benefit from it. Hence, few people refused to pay for the goods. Therefore, the headquarters and regional agents have "trusted"7) the store owners after seeing the payment

ability and willingness of payment through years of business transactions, and then implement the policy of payment after delivery.

In the interviews with the store owners, this transaction mode is also verified. For example, N1 runs several stores at the same time, and increases the limit of its arrears when opening the fourth store. Also, in the case of N5, because his child needed a lot of money to study abroad, he sometimes could not pay on schedule. At this time, the situation was explained to the headquarters, and the headquarters deferred his payment deadline. 2.Rewards system

Among the financial support to franchise stores from the company headquarters, the reward system implemented since 2003 is a very important one. This system is that the headquarters distribute rewards according to the sales volume of the regional agents; after receiving these rewards, the agents allocate the rewards to franchise stores according to the specific situations in different places. For franchisees whose sales exceed the sales target, they will receive the rewards according to the sales volume. Specifically, if the sales volume exceeds the sales target, RMB 4 is awarded per pair of shoes exceeding the primary target. If the sales volume is from 115% to 130 % of the sales target, RMB 6 is awarded. And if the sales volume exceeds 130% of the sales target, RMB 8 is awarded. In other words, the maximum reward for exceeding sales targets is RMB 8 per pair of shoes. The reward payment method is to offset the goods payment. The purchase price of a pair of shoes is mostly between RMB 200 and 300, which means that the reward for a pair of shoes sold in excess of a sales target is from 1.3% ~ 4.0%.

The specific situation of each franchise store is as follows. N6 and N18 are the stores which have good sales performance, and have received rewards of more than RMB 500,000 in a year. Even if some stores cannot match such good performances of the aforementioned two stores, performance a little above the average can will be introduced.

1.System of payment after delivery

As mentioned above, many franchise store owners of the company were wholesalers and retailers who operated several brands previously. At that time, the business practice of this industry in Shandong Province was payment after delivery. When cooperating with these owners, the headquarters of Yearcon allowed the regional agents to retain such trading habits.

If the order arrears are within the maximum limit of RMB 300,000, generally goods are allowed to be delivered to the store owner first and the payment is collected afterwards. However, depending on the length of the transaction period with the store owner and the sales performance, this maximum limit amount can also be adjusted. The order arrears are settled once every six months, where the store owner must pay the arrears before the specified deadline (June to July and January to February), which means that there is a maximum credit period of six months for goods.

Of course, for this mode of payment after delivery, there is the risk of not receiving payment. Such a risk is borne by the regional agents, while the regional agents earn the profits by selling the goods to the store and getting the price difference. Therefore, when regional agents sign the franchise contract with store owners, the regional agents often choose those who have had business dealings and good sales performances, or who are recommended by related personnel of Yearcon, as a partner (M3). This was also confirmed in the interview with store owners that all store owners had business dealings with Yearcon previously or were recommended by a person involved with Yearcon. During this interview, the authors did not encounter the case that anyone did not have any connection with the company and directly become the store owner. M3 stated that it is easier to cooperate with those who have already dealt with business, and their business capabilities and personalities are more trustworthy.

Therefore, from the point of view of regional agents, they trust the payment ability of the store owners to a certain extent. The regional agents think that, even if there is a delay in payment, eventually the owners will pay for the goods. According to the interview with M3,

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still be awarded from RMB 50,000 to RMB 100,000 (M2). For example, N5 is a store owner with an above average performance, earning him a reward of nearly RMB 100,000 in 2014. Judging from the frequency that performance meeting targets can be reached, in addition to N6 and N18, with N1, 2, 4, 5 and 12, a total of 7 persons have been rewarded almost every year since the system was established in 2003. N8 and N9 can occasionally get the rewards. In 2014, N3 won its first reward since its franchise store was opened in 2002. In contrast to these good performance store owners, because the sales performances of N7 and N10 were just average, they did not get rewards. Most of the surveyed store owners are those whose sales performances are above the normal level, so many of them can get the reward. On the whole, the company policy of favoring good performance store owners is also obvious.

3.Other economic support policies

The company also has other corresponding economic support policies. For example, there is a system in which the headquarters will pay a certain rent for the new store if the franchise store owner can meet certain conditions when opening a new store. Specifically, when opening a new store, if one year's rent is more than RMB 300,000 (more than RMB 200,000 in rural areas such as towns and villages), the purchase price will enjoy a discount equivalent to 20% of the annual rent. Moreover, the headquarters will also bear the cost of showcases and signboards of the new store (M3, N5). When N5 began to operate his franchise store in 2007, the purchase amount reached about RMB 1.2 million. Meanwhile, he also received the various subsidies from the headquarters. For example, in addition to the annual sales incentives of about RMB 20,000, there was a one-off rent subsidy of about RMB 50,000 and showcase and signboard subsidies of about RMB 20,000 each to help pay towards opening the new store. It can be calculated that this store owner received total subsidies equivalent to 9.2% of the first year's purchase cost when opening a new store. In addition, there are support policies for sending and redeploying sales staff from headquarters when necessary (M3, N5).

4.Education/ training support policies

Although many store owners have a wealth of business experience as described above, they do not have systematic knowledge due to their education background. Therefore, to improve the management ability of each store owner and manager, the headquarters of Yearcon recruits relevant experts and lecturers through the regional agents, and conducts training once every several months (M1). In 2013, the training was no longer just to listen to the corresponding courses. After the course was over, leaders were also selected from the store owners in all regions, and they conducted daily online exchanges through SNS. They mainly exchanged some skills and experiences of sales management. To make these online-exchanged sales techniques and skills more penetrating, the responsible person will also call the store owners at a fixed time, and conduct more specific guidance and exchange. Moreover, the company also recognizes and commends the stores that complete the sales target each month, and share good experiences in sales, so as to mobilize the sales enthusiasm of store owners. Through such a series of initiatives, the turnover of various stores has risen considerably compared with other companies in the same industry (M3).

To sum up, Yearcon has provided considerable support for franchise stores through the headquarters providing funds and deferring the payment period of goods to franchise stores when franchise stores expand store networks. These are quite distinctive features. Furthermore, Yearcon also conducts training to provide business guidance, and dispatch staff to provide operational guidance and personnel support. Through these preferential policies, the headquarters have established long-term trust relations with franchise stores. Sometimes, considering the store owner's personal circumstances, the headquarters will further extend the payment period of the goods. As a result, franchise store owners are highly loyal to the enterprise, and actively participate in the training organized by Yearcon in response to the policies.

V Changes in the Support

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stores, Yearcon extends the payment deadline of goods to provide economical and operation support, flexibly responds to it by considering the actual situation of each store owner, and wins the trust and loyalty of the store owners, so that turnover has been greatly improved. However, although this method has achieved remarkable results in increasing its turnover, it has some drawbacks in improving its profitability. As described above, the franchise fee for franchise stores is very low at RMB 10,000, but in reality, some store owners failed to pay the fees (M3). Because the company permits deferment of payments for goods, it is offset by franchise fees if there is a payment delay. In fact, even if the store owners make the payment for the goods within the deadline, as there were goods for the next season to be purchased, the regional agents are always in a state of continuously lending the working capital.

In recent years, the company has begun to attach importance to these issues, and strengthened the management of franchise stores. In 2015, the headquarters updated the contract with franchise stores through regional agencies, and the contents of the contract became more favorable to the headquarters. Specifically, in the settlement of payment, the headquarters imposed one of two payment agreements. Either the franchisee had to pay immediately, or the payment could be deferred for a maximum of 6 months, with a monthly interest charge of 1% incurred (according to the contractual content between the regional agency and N5).

In the meantime, the rewards for the sales volume that exceeds the sales target in the previous year have also decreased. Rewards have decreased to a maximum of 67.5% of the purchase amount. Yearcon has also canceled the clause that stated, with the increase in sales exceeding the sales target, the incentive rewards for each pair of shoes sold also increased.

In addition, Yearcon has also canceled the clause in the new contract that said the franchise stores that had reached the order goals by 2014 could exchange part of their inventory with that of the headquarters. More than that, the headquarters also require franchise stores to add a certain percentage of the company’s inventory of the previous year when franchise stores purchase new goods (N5 is required to add inventory per 15.6%

of the total purchase quantity) and the stores that fail to meet this requirement will no longer be paid incentive rewards.

That the headquarters provide less support for franchise stores is inseparable from the background that the domestic market has become gradually saturated. The headquarters also foresaw that future sales will not be significantly increased. In fact, since 2010, it's been obvious that, China's market size is no longer expanding, in addition to low-cost-oriented E-commerce becoming increasingly popular. In the future, E-commerce will have an impact on the company's physical store sales (M3)8).

It is difficult to increase sales, the profit distribution between headquarters and regional agents has become difficult, and so you can imagine that the headquarters have to cut the support for franchise stores at this time. It is also pointed out in the interview to the headquarters administrator M1, there are difficulties in distributing profits between the headquarters and regional agencies. As a result, some administrators think that they should review the method of developing stores through regional agencies and make direct contracts with franchise owners. Yearcon has adopted a generous preferential strategy for its franchise stores and has adopted a business strategy of creating high sales volume to offset its low profit margins. However, whether this strategy will still have vitality in the future is a question worth considering.

Moreover, with the continuous expansion of the number of chain stores, the headquarters also have a greater say in the franchise stores, which can explain why the headquarters can mandatorily require that the franchise stores had to add part of the company's inventory last year when purchasing new goods. As the company's sales network has expanded and consolidated, the headquarters have also increased the binding force on the franchise stores, and there is also an increase of operational risks in franchise store itself.

In summary, Yearcon has been successful in expanding its store network and enhancing its franchise store management. However, as the scale of this chain operation expands, the disadvantages are also revealed. Yearcon listened to the feedback comments from franchise stores, so as to understand the needs of consumers, and then effectively applied these comments

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on product development and improvement. Now, with the expansion of the scale of the chain operation, the headquarters have bigger power in the franchise store, resulting in the issue that the comments and needs of the franchise stores are more and more difficult to be adopted and concerned about. For example, the franchise stores feedback to the regional agents that they "hope to develop the more fashionable products that attract the attention of consumers". The agents fed back this advice to the headquarters. The reply of the headquarters was "in order to ensure the sales volume, the company currently focuses on the production of some conservatively-designed products, and cannot meet this requirement at this stage". The results are that the headquarters did not adopt the suggestion of franchisees.

Inside the fashion industry, it is an important issue on how to realize the difference in design with other companies and increase the added value of products. Chon (2015) pointed out that among the manufacturers of fashion industries, market research places great emphasis on the close contact with the sales-point in product development and the co-planning links. Yearcon actively listened to the needs and opinions from the franchise stores in the early days of establishment, and appropriately adapted to the market demand. However, viewed from the situation in recent years, with the expansion of the enterprise scale, the comments and other information from store owners cannot be properly fed back to the company. It is conceivable how this company is going to rebuild the information exchange system with franchise stores in the future is going to be an important issue, so as to realize the differentiation with other companies’ products based on maintaining the existing scale in the future.

VI Conclusion

In the above, this study mainly took Yearcon as an example to explore the background of how to expand the sales network by the franchise mode, how to establish a franchise store management system, and other issues. As can be seen from the survey results, Yearcon forbids the franchise stores to sell the products of other shoes manufacturers, sets very high sales targets, stipulates

that franchise stores have the obligation to complete the sales target, and has a very high standard and requirements for sales of franchise stores. On the other hand, for reliable store owners with sales performance, Yearcon considers their actual operation and living conditions, and provides financial assistance and assigns staff when store owners open new stores. Yearcon pays corresponding rewards according to the amount of sales, adopts the policy of payment after delivery, gives great economical help, and also imparts knowledge of store operation as well as provide education and training. In this way, Yearcon started from the original shoe-production without its own sales network, and quickly built and expanded its sales network in the country. Instead of focusing on improving the profit margins of product sales as is common in mature markets such as Japan, the company responded to the rapidly expanding Chinese market by 2010, and adopted the following policy to ensure profits: taking the initiative to provide goods and defer payment collection, and increasing the sales volume to reduce cost of finished products. As a result, within the short 15 years after introducing franchise mode, the company has formed a nationwide coverage network of more than 4,000 stores.

The above-discussed store expansion mode of chain enterprises can also be seen in Japan and other countries (Tsuchihashi 2002a, b). Considering the large market environment in China around 2000, the authors consider that this expansion mode has rationality. The market background under which the company adopted the above store expansion mode, has the following several features. Until around 2010, the Chinese market size continued to expand, the product sales network established through large retail chain enterprise needed to pay high rebates, commission charges and sales-promotion fees, etc.; there were many people in China who have their own company or store and have entrepreneurial enthusiasm. Yearcon took these people with entrepreneurial enthusiasm as franchise store owners, and integrated them into the company, thereby expanding its scale of chain operation. However, in the early days of starting business, many store owners do not have a lot of money and their education level is not high. Therefore, after fully investigating the payment ability and integrity of the store owners, the company

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flexibly responded to the situation in the following manner: adopting the policy of payment after delivery, and providing a lot of economical preferential policies to expand the store network.

In particular, it should be pointed out that the company permits franchise stores to defer payment after receiving the goods, which quickly boosts sales. On the other hand, there is the risk of non-payment. Hence, the headquarters examine the payment capacity and credibility of store owners based on the past experience of cooperation, and bestow the regional agents with the responsibility and authority to ensure their judgments are respected.

After the regional agents grasp the store owner’s operating conditions, personality and family status, if they can tell whether the store owner can meet the condition that "even if sometimes there is late payment but eventually the store owner will and can make the payment", the regional agents will continue to consider whether to proceed with future cooperation. Such an investigation is difficult to be performed and can be difficult for determination by international chain enterprises that is responsible for expanding markets in emerging countries. Endo (2010) pointed out in Thailand's case that it was very difficult for retail chain enterprises to expand global business in emerging countries, and this was probably one of the reasons. On the other hand, this expansion mode of Yearcon is a thorny subject for the company when it comes to benefits distribution. In addition to that the company implements the generous support policy for franchise stores, the company grants the right of trademark use and the right of product sales to the provincial agents, and also grants them the right to choose the franchise store owner. Therefore, part of the profits will be distributed to them. Even though there is a very high quantity of stores and very high sales volume, the ultimate profit ratio that headquarters can get is very low. Theoretically, granting management authority to regional agents will reduce the cost of monitoring the franchise stores, but the very real result is that the profit margin of the headquarters selling goods through agent will be reduced.

Therefore, there has been a sign of change in the mode of store expansion and franchise store management

in recent years. Specifically, because the sales of the entire chain system started to grow slowly, there is a tendency for the headquarters to provide less support and implement stronger management for the franchise stores. Moreover, in such a change of relationship, it becomes harder and harder for the headquarters to hear the demands for goods and comments from the franchise store, and the trust built between the headquarters and the franchise stores is also diminished. Yearcon, which used to boost its sales by adopting the strategic measure of supporting its stores to increase the number of stores, is now at a crossroad as to if it is necessary to change this policy.

What is the difference between the franchise mode of the company and that adopted in Japan and other countries? The authors consider the difference can be summarized as follows. Firstly, headquarters solicit people in Wenzhou to become regional agents in other regions across the country, and invest them with authority and responsibility. Secondly, the company provides franchise stores with a lot of financial support and establishes the incentives system. Thirdly, based on these above measures, the company has quickly expanded the quantity of stores in a short time. On the other hand, viewed from the profit distribution perspective, the headquarters’ profit margin is very low. It can be said that Yearcon adopted a business model based on the continuous expansion and growth of market size and amount of sales. However, the great development potential of the Chinese market could be foreseen in 2000, and the authors consider this approach has some rationality and can be a good case study when investigating the ways in which the retail chain enterprises in emerging countries expand their stores.

As one of the topics to be explored in the future, whether the practice adopted by Yearcon to grant very large powers and interests to regional agents and franchisees is also applicable to industries other than shoe industries. It is necessary to continue to pay close attention to this issue. Because research shows that when Chinese manufacturers sell their products through large-scale retail chain enterprises, there is a big reduction in the interest of manufacturers due to the business practices of giving high rebates, commission charges and

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sales-promotion fees, etc., (Kawabata 2006; Yahagi et al.2009; Watanabe ed. 2015). Because there are such regional business practices, this may explain why manufacturers of products such as home appliances, still maintain a lot of direct-sale stores, special stores and agents, etc., although home appliance chain stores have become mainstream channels of sales in developed countries. Finally, combined with the trend of the company and other Chinese footwear chain enterprises after the survey ended in 2015, we would like to review the future research arguments and look ahead.

First of all, from the perspective of the trend of shoe chain brands in the United States and Japan, it is different from the overall situation of the fashion industry that SPA-type enterprises prevail. One of the mainstream functions of retail chain enterprises is purchasing goods from different manufacturers and then selling them in stores opened by direct marketing or franchising. The main reason is that, compared with clothes, the backbone of the fashion industry, the average annual purchase amount of shoes by customers and the annual sales volume of companies are lower, and it is difficult to guarantee and maintain a considerable and stable income with SPA strategy. As a result, although some companies still retain the chain retail sales of products planned/developed by them, the others adopt the strategy of selling products with other brands at the same time.

Among Chinese footwear chain enterprises, companies like Yearcon that adopt the strategy of selling products developed/produced by them in their own outlets or franchises are the mainstream, that is, the majority of enterprises, operate in a way similar with SPA. On the other hand, there have also been enterprises like “Belle”, the largest company in the industry, that have adopted the strategy of acquiring the sales rights of famous brand shoes overseas on the basis of their own products and then selling them in their own outlets. In addition, there are enterprises that pay more attention to improving the brand image and high added value of products than to expanding sales.

However, there are not many Chinese shoe chain enterprises that can carry out product planning/ development to achieve product differentiation with other companies and thus sell such high value-added

products. Although there are also examples of agency sales of overseas brand products, there is a management problem that the overall sales through agency are indeed increasing while the sales of self-own products are shrinking.

Many Chinese shoe chain enterprises started as manufacturers and greatly increased the number of retail stores to expand their sales network. Therefore, there is still great uncertainty in whether enterprises can realize the brand mixing strategy like Europe, America and Japan.

As a result, in the long run, Chinese shoe chains might have to make changes in business strategy. According to the above survey, more detailed empirical analysis will be carried out in other papers in the future and will be taken as a research topic.

Acknowledgements

 I wish to thank all interviewees, who have supported this research with their great kindness and knowledge. 本稿は『経済 地理学年報』63-3 号に掲載された論文「中国靴チェーン A 社の地 域的拡大メカニズムと加盟店管理-山東省での展開を事例として -」をある程度加筆したものを,経済地理学会の許可を得た上で, 英訳して投稿したものである.

Notes

1)The data from the year 2000 show that there are about 19.37 million enterprises in the circulation industry in China. Among them, about 18.17 million enterprises are self-employed enterprises, and only about 1.2 million enterprises are those operated by legal persons (about 6.2%). Moreover, there are only 30,000 enterprises with a certain scale (Miyauchi 2009: 51). 2)Tsuchihashi (2002a, b) also pointed out that in the building

of enterprise chain networks, it is quite necessary to focus on the relationship between manufacturers, wholesalers and retailers, and explore the system of forming and maintaining this relationship.

3)Yearcon establishes branches in Shandong Province, and the regional agent retain their right of operation. When the company expands business across the country, the company sets the province as the management unit and signs contracts with the regional agents and then the regional agents sign contracts with franchise stores in the region.

4)Wenzhou region is one of the few regions in China to export large numbers of overseas Chinese. Nowadays, this region has also become an investment target by these overseas Chinese. There are detailed introductions in the documents prepared by

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Yamashita ed.(2014).

5)Baili is the biggest shoe chain developing business with multiple brands. In addition, there are companies such as Daphne, Aokang, Hongqingting which had nearly the same number of stores as Yearcon. Including Yearcon, they are the five major shoe chains.

6)The headquarters open the direct-sale stores only in some areas of Wenzhou (M1).

7)Yamamoto (2005) pointed out that the specific content of "trust" for partners means trust in both "affordability" and "willingness to pay".

8)When the survey was conducted in 2015, the number of stores with a decrease in turnover began to increase as compared with that in the previous year (M3).

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中国靴チェーンの地域的拡大メカニズムと加盟店管理

-意爾康社の山東省での展開を事例として-

高 寧・阿部康久

本研究では,浙江省温州市に本社がある靴チェーンの意爾康社の加盟店店舗の山東省での地域的拡大メカニズムと加盟店管理について, ①フランチャイズ方式による店舗網拡大の経緯,②加盟店に高いノルマを達成させる管理と支援の仕組み,③チェーン本部と加盟店の関 係性やその変化,という点に着目して検討した.研究手法として,意爾康社本部や地域代理商の幹部 4 人と加盟店オーナー 18 人にインタ ビューを行い,オーナーになった経緯,商品調達の際の契約条件や取り決め,本部から受けている支援内容やその変化等について調査を行っ た.同社では以前から取引があった卸売・小売業者等とフランチャイズ契約を結び,同社製品のみを扱う専門店を開設していった.また, 全国に展開している温州出身者の地域代理商に判断を委ねながら,加盟店に対して売掛金の支払い猶予,奨励金の支給や開店資金の支援 等により経済的な支援を行っていった.加えて店舗運営のためのノウハウの提供も行っていた.中国では,起業家意識が高く企業や店舗 等を経営する人々が多いが,同社が採用した手法は,このような人々を組織化する際には有効であり,フランチャイズ方式を導入して 15 年程度で,全国に 4,000 店もの店舗網を形成できた点は特徴的である.その一方で,本部と加盟店の関係をみると,以前は本部による加 盟店への支援が充実していたが,近年では支援の縮小と管理の強化がみられ,販売額の増加が頭打ちになる中で利益配分の難しさが顕在 化している. キーワード:中国靴チェーン,フランチャイズ方式,加盟店管理,温州,山東省

Table 1.  Summary of store owners surveyed ID Birth  year   Edu-cation O c c u p a t i o n   b e f o r e   b e c o m i n g franchisee Y e a r   o f becoming   franchisee Quantity of stores
Fig. 1  Number of stores in each provincial region of Yearcon (The number of stores and the average number of stores per one million population)
Fig. 2  Concept map of Yearcon’s operating system

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