A report to evaluate the success or failure of Initial City Links decision to Franchise.

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A report to evaluate the success or failure of Initial City Links decision to Franchise.

Introduction:

Many large and national and international retail and service businesses have expanded rapidly and in most cases this is down to the business deciding to franchise out its outlets.

What is franchising?

Franchising is a means of a business (franchisor) with a product or a service to expand but does not want to sell to consumers directly. Hence, it franchises out it outlets to business entrepreneurs (franchisee), in the form of a franchise agreement – this is a legal agreement between both parties for a set time.

This allows the franchisee to sell the franchisors products or services and the right to trade under their name and use the franchisors logo and designs.

But in return the franchisee must pay royalties; a percentage of the final profits to the franchisor and must contribute to a central pool of capital, for marketing, which benefits all franchisees.

A franchise agreement is unique in the sense of the closer inter-dependence between both parties. The income of the franchisor is dependant on the income of their franchisees. The franchisees depend on the franchisor for its market power and their brand name.

Advantages of a franchise agreement for the franchisor:

  • Expansion of the business is paid for by the franchisee; these include initial set up costs, which will include the cost of acquiring premises, machinery, equipment, materials.

  • The franchisee also has to purchase a franchise agreement from the franchisor this provides the franchisor with a lump sum payment which it can choose to invest of pay of its debts.

  • Expansion can be a much faster as the franchisor can expand without a need to fund the expansion from its own capital. This makes international expansion much easier and faster.

  • The sale of its brand image and name produces a large amount of financial capital.

  • The franchisor is divorced from the control of the retail units- therefore management issues will be dealt with by the franchisee.

Disadvantages of a franchise agreement for the franchisor:

  • The franchisor does not own the outlet so therefore the franchisor would not make the same level of profit, if it was a company owned outlet.

  • Great care needs to be taken when selecting a franchisee as choosing a poor franchisee could affect the business image and therefore harm the franchisor and other franchisees long term profits.

  • The rate of growth of the business is not dictated by the franchisor if their expansion solely depends on the franchisee. The rate of growth is instead dictated by potential franchisees, as they are the people who will purchase the franchise agreement and manage the outlets.

Introduction to Initial City Link:

Listed on the stock market in 1969 and incorporated in 1972, operating over 70 outlets in 2004, most of which are franchises in the UK, but also including some key European countries; Luxembourg and  Germany employing 6000+ employees, Initial City Link was the pioneer of next day urgent deliveries. Initial City Link is also part of the Rentokil Initial Plc. group one of largest business services organisations in the UK.

The history of Initial City link is long and complication involving a number of mergers and acquisitions, but it all traces back to two businesses Ratin and Rentokil. On the next page is the history of Initial City Link’s parent company Rentokil Initial.

City Link Transport Services Limited was founded in 1969 to provide a collection and delivery service between British Rail ‘Red Star’ stations in London and London Airport.

City Link had an unique opportunity, as under the 1968 Transport Act, British Rail (now known as Rail Track) were precluded from operating road transport services, hence City Link being established to fill the market niche of the importers, exporters, agents and airlines.

Whilst the ‘Red Star’ service was efficient and simple to use, a large number of its existing and prospective users considered it inconvenient to collect and deliver parcels from rail stations.

 Therefore as the airport service became well known requests were received to organise similar services not only for London deliveries but also at other major city centres throughout the UK. Hence 150 agents were appointed to provide a delivery service to and from London.

In order for City Link to be allowed to franchise, membership of the British Franchise Organisation was granted and following membership, a draft franchise agreement was completed and presented to the Office of Fair Trading for their approval. In February 1980 the first franchise agreements were executed, this is how the existing agents were reorganised:

  • Existing ‘agents’ were split into a two tier system; franchisees and sub-franchisees.
  • Each franchisee was allocated a specific geographical area, and this meant that the franchisee assumed control of the management and appointment of the sub-franchisees in their area.
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With rapid growth came certain problems and the backing of a larger organisation was required as more capital was required to sustain the planned development of the company, floatation was consideration, but it was finally a deal was agreed with Securiguard who acquired 100% of the share issue of City Link Transport Holdings in 1989.

And finally Securiguard was acquired by Rentokil Initial, and Rentokil Initial is determined to develop Initial City Link into its flagship business.

The decision to Franchise:

In November 1972 City Link Transport ...

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