Recognition
A growing number of franchise operations reach into many different countries. Some , however, operate only in one city. Regardless, the franchised outlets (shops, stores, restaurants and so on ) enjoy widespread consumer recognition because all units are basically alike. The franchisor usually provides the franchisee with a blueprint for construction and insists on standardized operation of all outlets. The standards are spelled out in the franchisor’s operations manual and franchising agreement and are backed up with standardized forms and control procedures.
Management Training and Assistance
Many franchisors operate training schools for franchisees. McDonald’s franchisees go through a two-year training course, and for a good deal of that time the trainees work 20 hours a week --for no pay-- at a local McDonald’s restaurant. Trainees also rotate through classes at regional company locations. That training is followed by a two-week advanced course at Hamburger University at McDonald’s headquarters. McDonald’s representatives also visit franchisees at their place of business to give them ongoing training and assistance.
Economies in Buying
A franchisor makes or buys ingredients and supplies in large volume and sells them to the franchisees would pay if they made or bought them on their own because of the economies of large-scale production and buying.
Financial Assistance
Usually a franchisee puts up a certain percentage of the cost of land, buildings, equipment, and promotion. The franchisor helps with the rests. The franchisor might make a direct loan to the franchisee. Franchisors also often help franchisees to secure loans from various types of lenders and sell supplies to franchisees on credit. In some cases the two parties agree on a joint venture. The franchisee does not pay back the money put up by the franchisor. Instead the franchisor becomes a part-owner of the business.
Promotional Assistance
Franchisors often supply their franchisees with in-store displays, radio scripts, and publicity releases. Franchisors also can help franchisees develop promotion programs.
Franchisor Benefits
Franchising’s benefits to the franchisor include (1) recognition, (2) promotional assistance , (3) franchisee payments, and (4) franchisee motivation.
Recognition
A franchisee benefits from being able to use the franchisor’s name and products. The franchisor benefits by expanding the area over which the trade name is known. A franchisor may be able to achieve national and international recognition very quickly.
Promotional Assistance
A local franchisee pays a lower rate for a newspaper ad than does a national franchisor. Both benefit from sharing the cost. This is called cooperative advertising. Also, franchisors can team up with franchisees to use local radio and TV advertising rather than blanket network coverage.This avoid coverage in areas that do not have a franchisee. Localized promotion can suit customer tastes in a given area and tie in with local events.
Franchisee Payments
The franchising agreement sets out the amount and type of payments the franchisee will make to the franchisor. Most franchisors charge the franchisee an initial fee to buy into the franchise. This fee is often determined by the market size of the franchisee’s territory. Most franchisors also receive a periodic royalty, which is a set percentage of monthly or annual sales or profits, usually from 2 percent to 30 percent. Another type of franchisee payment is the advertising fee, which
helps cover the franchisor’s cost of advertising the business throughout the franchisee’s market area.
Franchisee Motivation
As owners, franchisees retain their profits. A franchisee is therefore more likely than a hired manager to accept long hours and hard work.
Summary and additional points for advantages of franchising
To franchisor
- Distribution can be expanded without increasing capital investment.
- Greater community acceptance of product or service when franchisee ownership offered to local people.
- Marketing and distribution costs can be shared by franchisees. In addition, some operating costs may be transferred to franchisee.
- Fees often collected each month from franchisee.
- Sales of supplies and materials to franchisee can be profitable.
- Control over quality of product can be maintained via franchise agreement.
To Franchisee
- Management, training and decision-making assistance can be made available by franchisor.
- Less risk with market-tested products and popular products.
- Preestablished promotion and advertising programs provided.
- Being part of a large and reputable system of retailers.
- Possible financial aid, e.g. trade credit
Drawbacks to Franchising (Disadvantages of franchising)
Whether franchising is for you depends on your willingness to work, your ability to find good franchise opportunity, and your ability to buy into the operation. Many people have succeeded as franchisees. Keep in mind, however, there are some drawbacks to franchising:
To the franchisee
No freedom to make decisions (No autonomy and less independent)
The fanchisees lack independence and usually give up much freedom in making managerial decisions because the franchisor retains a great deal of control. The franchisor’s contract can dictate every aspect of the business: decor, design of employee’s uniforms, types of signs, and all the details of business operations. For example, obligatory purchases of supplies and materials from franchisor or approved suppliers, even if better prices available elsewhere. All Burger King French fries taste the same because all Burger King franchisees have to make them the same way. In fact, there is little room for creativity for a franchisee.
Profit must be shared with the franchisor
Franchisees pay with a one-time franchise fee and continuing royalty and advertising fees, collected as a percentage of sales. As shown in Table 4.4, a MacDonald’s franchisee pays an initial franchise fee of about $22,500, an annual fee of 3.5 percent of gross sales (for advertising), and a monthly fee of 12 percent of gross sales. Table 4.5 shows how much money a franchisee needs to start a new franchise for selected organizations.
Some problems encountered by franchising
Sometimes a franchise is so successful that the franchisor opens its own outlet nearby or grant franchise to other franchisees operating nearby. Such practice will saturate the market and cause direct competition. In such case, the franchisees receive no geographical protection. On the other hand, poor performance by some of other franchisees might harm the image of your business.
Very often, franchisors make policy decisions without consulting their franchisees. In some cases, the franchisor cannot live up to commitments.
To the franchisor
The disadvantages include:
- It is difficult to exercise control over franchisees who are operating their shops at long distance.
- Excessive credit extensions to franchisees will cause trouble to the franchisor.
- The franchisor has to pay a huge amount of training expenses.
Types of Franchising Arrangements.
Franchising arrangements fall into three general categories. In the first approach, a manufacturer authorizes a number of retail stores to sell a certain brand-name item, This franchising arrangement, one of the oldest, is prevalent in sales of passenger cars and trucks, farm equipment, shoes, paint, earth-moving equipment, and petroleum. About 90 percent of all gasoline is sold through franchised independent retail service stations, and franchised dealers handle virtually all sales of new cars and trucks. In the second type of arrangement, a producer licenses distributors to sell a given product to retailers. This arrangement is common in the soft-drink industry. Most national manufacturers of soft-drink syrups-- The Coca-Cola Company, DR Pepper Co., Pepsi Co., The Seven-up company, Royal Crown Company Inc.- franchise independent bottlers who then serve retailers. In the third form of franchising, a franchisor supplies brand name, techniques, or other services, instead of a complete product. Although the franchisor may provide certain production and distribution services, its primary role is the careful development and control of marketing strategies. This approach to franchising, which is most typical today, is used by Holiday Inns Inc., Howard Johnson Co., AAMCO Transmissions, McDonald’s, Dairy Queen, Avis Inc., The Hertz Corporation, KFC Corporation, and H& R Block, to name a few.
Remark: Only 5 to 8 percent of franchised businesses failed during the first two years of operation, whereas approximately 54 percent of independent businesses fail during that time period. Too rapid expansion, inadequate capital or management skill can cause failure. Thus, for example, the Dizzy Dean’s Beef and Burger franchise is no longer in business .
S. K. H. CHAN YOUNG SECONDARY SCHOOL PATRICK S. W. KWAN