Franchising a Hong Kong Business: Setting Pricing and Discount Policies That Comply with Competition Law

When opening an existing Hong Kong business to franchising, head office often wants consistent prices and simultaneous promotions across all outlets to simplify marketing and management. However, franchisees are usually independent operators: a brand licence alone does not make them company-owned branches. Before building a franchise network, draw a clear line between brand standards and pricing decisions, so that routine operational instructions do not become arrangements that restrict competition.

1. Understand which laws apply in Hong Kong

Hong Kong has no legislation specifically regulating franchising, nor any general franchise registration requirement, statutory franchise disclosure period or mandatory franchise code of conduct. The filing and related disclosure requirements under mainland China’s Regulations on the Administration of Commercial Franchises do not automatically apply to franchise arrangements operating solely in Hong Kong.

The absence of franchise-specific legislation does not, however, give head office unrestricted control over franchisees’ prices. Franchise agreements are governed by common law contract principles and applicable general legislation. Of particular relevance here is the Competition Ordinance (Cap. 619). Its First Conduct Rule prohibits agreements between undertakings, concerted practices and decisions by associations of undertakings that have the object or effect of preventing, restricting or distorting competition in Hong Kong.

Requiring franchisees to observe fixed or minimum resale prices may constitute ‘resale price maintenance’. Whether an arrangement is unlawful depends on its object, effect and specific context. It is not correct to say that all uniform pricing is unlawful, nor is an arrangement necessarily safe simply because the contract describes it as ‘protecting the brand’. Any relevant clauses should be reviewed by a Hong Kong lawyer with competition law expertise before franchisee recruitment begins.

Consumer-facing discount advertising must also comply with the Trade Descriptions Ordinance (Cap. 362), including avoiding false or misleading price claims.

2. Make recommended retail prices genuinely optional

Head office can offer pricing guidance, but a ‘recommendation’ must be more than a label. If franchisees risk losing supplies, rebates, training or renewal opportunities for not following a recommended price, the arrangement may still be coercive in practice. Applying pressure through operations manuals, messaging groups or point-of-sale systems does not remove the legal risk.

The policy should distinguish between:

• Brand standards: Product specifications, service requirements and the use of logos, addressed through the relevant licensing and operating terms.
• Pricing guidance: Recommended selling prices, cost assumptions and calculation methods supplied by head office, with a clear statement that these do not guarantee profitability.
• Final decisions: Franchisees set their own selling prices based on their costs and operating circumstances, without being penalised for departing from recommendations.

For example, head office can explain a product’s ingredient costs, packaging costs and preparation time, allowing franchisees to estimate their own gross margins. It should not replace genuine pricing independence with requirements such as ‘prices must not fall below the recommended price’ or ‘discounts require head office approval’. Maximum prices are not automatically safe either: if pressure or incentives turn them into fixed prices in practice, the arrangement still needs assessment.

Before launching the franchise, test whether authorised franchise outlet staff can change prices in the point-of-sale system. If the contract permits independent pricing but the system locks prices, the policy and actual practice are at odds.

3. Replace blanket promotions with clear participation arrangements

Seasonal promotions are particularly likely to expose problems: marketing materials are printed first, and head office then tells every outlet that it must follow the promotional price. A more prudent approach is to present the campaign before advertising it, allowing franchisees to understand the costs, subsidies and operational requirements before deciding whether to participate. Voluntary participation is not, however, a blanket exemption from competition law; the campaign’s design still needs review.

Each proposal should specify at least:

• Which products, channels and periods the promotion covers;
• Who bears the cost of discounts, and how subsidies are calculated and settled;
• How franchisees confirm participation, and the procedure for making changes before advertising is released;
• How advertising will clearly identify participating outlets and applicable restrictions.

For example, if only some franchise outlets participate in a meal deal, advertising should not state that it is ‘available at all outlets’. Whether membership vouchers, delivery-platform offers and in-store discounts can be combined should also be explained before launch, rather than leaving staff to make their own interpretations on the spot.

Head office should avoid allowing franchisees to discuss collectively their outlets’ future prices, discount levels or dates for price increases. Even within the same franchise network, they may compete with one another for customers. Franchise meetings can cover service improvements, but should not become a forum for coordinating prices.

4. Embed pricing boundaries in contracts, systems and team practices

Competition law risks are not confined to formal agreements. They can arise from a regional manager saying, ‘Every other outlet has followed the price, so you must too.’ Head office should review franchise agreements, operations manuals, promotion forms, system permissions and staff scripts together to ensure they are consistent.

Start with a tabletop exercise: suppose one franchisee refuses to join a promotion, while another complains that a nearby franchise outlet’s prices are too low. How would head office respond? The proper process should not be to require everyone to align their prices. Instead, it should confirm each outlet’s pricing autonomy, check the accuracy of advertising and refer any questionable restrictions to legal advisers for assessment.

If head office obtains transaction data to calculate turnover-based fees, it should limit the purposes for which the data is used and who can access it. It should not forward one outlet’s future pricing plans to other franchisees. When analysing market performance, it should also assess how recent, detailed and identifiable the data is, and avoid using comparative reports to push outlets into matching prices.

Keeping policy versions, campaign invitations and participation confirmations can help demonstrate how procedures work in practice. Documentation cannot, however, remedy conduct that is itself restrictive. If potentially coercive pricing practices are identified, stop applying pressure, preserve records and seek legal advice.

Practical takeaway: Start by checking one franchise agreement, one promotional proposal and one set of point-of-sale permissions to confirm that franchisees’ pricing independence exists in practice, not just on paper. Brand consistency should be built through products and service, rather than relying solely on identical prices across all outlets.