A contract is an agreement written up through solicitors stating the agreement. This contract has to be signed by both parties with witnesses. If one of the parties doesn’t stick to the decided agreement then they are liable for a fine or prosecution by law. The contract may have a review date or expiry date for when the contract can be abolished, renewed of altered.
In a franchise often a set rate has to be paid by the franchisee to the franchiser. In the example of The Body Shop this is set at £250,000. In return for this investment The Body Shop supplies the franchisee with a shop fit for their premises, this is consistent with all the other shops in the chain. As well as this they provide them with enough stock for the shop and the storeroom. Once this stock has been sold the franchisee can buy further stock for 25% less than the recommend retail price. The franchisee also has to pay The Body Shop 2% of its profit annually. They also receive all the advice and training they require as well as organize and provide advertising for the outlet.
The disadvantages of opening a franchise-controlled business for the franchisee are that they must follow all the rules set by the franchiser. Also the franchisee cannot sell the business without permission and the franchisee will also never own the business but they own the premises. And in the most extreme cases the franchiser can end the contract without consulting the franchisee and don’t have to pay compensation for the loss of a business.
The Body Shop controls their franchises by rules and restrictions they set by contract for the franchisees. These rules are in place to make sure that the customer gets a good service and therefore wishes to continue shopping there. If they get a good service they are more likely to endorse the company to their friends. These rules are in place because before these contracts were introduced you only have to own a British passport (and the money!) to own an outlet. This meant that the franchisees were abusing the agreements and loosing The Body Shop it’s good name.
I have summarized the rules below;
-The franchisee must only sell Body Shop products.
This is because these restrictions were put in place the franchisee’s were selling a range of different products, not all of them to the highest quality. This gave The Body Shop a bad name.
-The Body Shop sets the prices.
This is so both company owned shops and shops controlled by the franchise agreements can compete fairly.
-The Body Shop sets sales targets
This is to make sure the franchisee is doing all in their power to earn The Body Shop as much profit as they can.
-Fair treatment of employees.
This rule makes sure that all staff of The Body Shop are not treated unfairly in any way.
If the franchisee breaks this contract they may loose their franchise agreement with The Body Shop and therefore their business.
Section Two
The Body Shop has a large profit due to the amount of sales they make each year. The Body Shop’s profit for 1999, 2000 and 2001 are listed below:
(Profit = Total Revenue – Total Cost)
As the table shows The Body Shops revenue has increased in 2001 but decreased between 1999 and 2000. Yet their profit has became less every year, this could be because of many reasons. The first is the company are not as economic has they have been in the past, they are spending more on production and advertising etc. The second is that they may be buying more of their franchised shops back to company owned shops. This shows that The Body Shop cannot budget its costs to increase its profits suitably for a business of its size.
It is very expensive for the franchisee to invest in a company like The Body Shop because to get the investment fee of £250,000 and the further required premises costs, stock costs and running costs they would have to take out a very large loan and are likely to require more. They are likely to need more money and get this through an overdraft. With less they would have to pay a very large interest rate.
The Body Shop have been operating franchises since 1978 when they opened a kiosk in Brussels. The Body Shop operates in 50 countries across 12 different time zones and in 24 different languages. They sell over 1000 different products. Their biggest outlet in a shopping mall in Canada and their smallest operated from a franchisee’s living room in Malta. The Body Shop has 1917 outlets (September 2001) of which 74% are franchises. There are 299 The Body Shop outlets in England alone.
The Body Shop operates mainly in the tertiary sector but does grow some of its own ingredients and produces some of the produce we buy in their stores. They also have an agreement with a firm called Cosy which operates the rest of the secondary market for them.
The Body Shop are a common sight on high streets, shopping centres, train stations and airports all over the world. These premises are more expensive to lease and often have more direct competition in the area. But in the location where the lease is more expensive the turnover is also. There shops are located near to easily accessible areas so that deliveries from their factory in Little Hampton. They would also look at local unemployment figures to see if they could get enough staff. The Body Shop also sells products at parties, where somebody goes to the host’s home and sell products to them and their friends.
If The Body Shop wasn’t a franchised based enterprise it could be a private limited company. If it were private it would be easier to control but would not have expanded as quickly. There would probably be fewer stores with less profit and a bigger risk to themselves if it went wrong.
If The Body Shop were a Public Limited Company it would have to float its shares on the stock market. This would mean that the person with the most shares could overtake the company. If the share price dropped there would be less potential shareholders to invest and the existing shareholders may sell their as they would find it more wealthy for themselves to invest their money some where else where they would get a larger dividend or more interest.
This is why I think franchising has benefited The Body Shop the most. They still get 77% of the cost of everything brought but without the running costs, staff wages and the risk if anything happened.
Conclusion
I am looking during this section at the success or otherwise of The Body Shops decision to have The Body Shop be a mainly franchise operated enterprise. I will measure the success of the company in many different ways. I will also look at whether franchising has improved or worsened the company. I will look at my opinion on whether the agreements could be improved and whether they are fair or not.
There are many ways of measuring a company’s success this includes turnover, profit, profitability, number of shareholders and their current price, customer satisfaction, volume and the size. I will look at each and draw my conclusions of how successful their decision has been.
First I am going to look at the size of the company and whether it has increased or decreased over the past few years. The Body Shop has 1917 outlets (September 2001) of which 74% (1410 outlets) are franchises and 26% (507 outlets) Company owned stores. They also have a large factory in Little Hampton and their U.K. headquarters. If I judge the company by its size I think it has been very successful thanks to franchising. It has increased enormously.
Secondly I am going to look at the volume of sales made by The Body Shop, this is also known as market share. The volume is how much of the market does The Body Shop own, it is worked out by adding all the similar products sold each year and then work out how much the company has of it. It is given as a percentage. The company does not distribute this figure but I estimate they probably own a significant share of this competitive market. I know this because of the fact that there is a Body Shop in almost every civilized town in the U.K. and U.S. as well as many in Canada and the rest of Europe.
Now I am going to look at the turnover of the company and how much of this is converted into profit. Below I will include a table showing the turnover and profit for the last 3 years; 1999, 2000 and 2001.
(Profit = Total Revenue – Total Cost)
This table shows that the revenue of The Body Shop decreased between 1999 and 2000, it then increased by over 100% between 2000 and 2001. This shows that their sales must of increased dramatically. But yet despite this increase in revenue the percentage then becoming profit has decreased. The percentage of the revenue becoming profit in 1999 was 21.6% has dropped each year until 2001 where it is now 8.1%. This indicates that The Body Shop is not working as efficiently as it was only 3 years ago. This could be due to an increase in advertising, running costs, staff wages and general costs. As an indicator to their success it shows that they are doing very well by the amount of revenue but are failing to achieve a high rate of profit.
Looking at these different ways of measuring success I conclude that The Body Shop is achieving a good revenue, market share and increase in company size. But they are failing to run their business efficiently and achieve the highest rate of profit possible. I believe that using franchises has given The Body Shop larger profits and a bigger size than they would have achieved otherwise, this is why I believe The Body Shop has benefited the greatly from the franchises.
I think that on the whole the franchise agreements between The Body Shop and the franchisee are fairly well managed and fair. I think the franchisee should be able to buy stock at about 50% off the recommended retail price but give the company a large percent of their annual turnover e.g. 5-10%. This way The Body Shop will still be making a reasonable profit and so will the franchisee. I also think that the ‘set fee’ needed to purchase a franchise is very expensive because the franchisee still has to pay for staff, premises, running costs and stock. I also think that it is unfair that the franchiser can terminate the contract without consulting the franchisee, which is the one who does the most work.
This concludes my report on the success of The Body Shop as a franchise organization.
Looking at
as an example of a franchiser!
Bibliography
I got my information to complete this report from many different sources. I shall list them below;
www. the body shop. co.uk
Business Studies by Rene Huggert
A tour of The Body Shop factory in Little- Hampton U.K.
