Franchising

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Franchising, in the economic sense of the word (distinct from the right to vote; or suffrage) is the formal arrangement that allows a dealer the rights to sell products from a company in exchange for revenue and cooperation. Franchising has become a very popular style of business and its reach has rapidly increased since mid-twentieth century. There are different franchise agreements for different companies, but each agreement adheres to certain franchising rules and the rules of the country in which the franchise is situated, regardless of country of origin.

Contents

As with most business forms, there are advantages and disadvantages to franchising. The greatest disadvantage is loss of control over the business, as there may be strict practices the franchisee is obligated to follow. Advantages include a guaranteed market and ease of start up. Franchising has gained global acceptance, with many countries around the world having their own international franchises. Expanding into the global community has become a new way to invest in and discover business opportunities in foreign markets. Thus, while it may be criticized as leading to uniformity, convenience to both consumer and business owner are major benefits to the community. When franchises form a sizable, but not complete, portion of the business market, there is still room and need for creative entrepreneurs and other independent businesses to provide the diversity that consumers enjoy.

Overview

Franchising is an arrangement whereby a supplier, or "franchiser," grants a dealer, or "franchisee," the right to sell products in exchange for some type of consideration. It is a business arrangement, involving a contract between a manufacturer or another supplier and a dealer, that specifies the methods to be used in marketing goods or services. Various tangibles and intangibles, such as national or international advertising, training, and other support services are commonly made available by the franchiser, and may indeed be required. The franchiser generally requires audited financial statements, and may subject the franchisee or the outlet to periodic and surprise spot checks. Failure of such tests typically involve non-renewal or cancellation of franchise rights. A business operated under a franchise arrangement is often called a chain store, franchise outlet, or simply franchise. Franchising has given thousands of people the opportunity to own their own business.

There are different types of franchising commonly discussed in association with businesses. In the first arrangement, a manufacturer arranges their product to be sold in various stores. This is one of the oldest practices of franchising. The next arrangement has a producer licensing their products to distributors, who in turn sell their product to retailers. An example of this would be soft drink companies licensing their products to bottlers, who in turn supply the stores. A third franchising arrangement involves a franchiser supplying incomplete products, such as brand names or techniques, to retailers. This allows the franchiser careful control of marketing strategies. The term "franchising" can also be used to describe business systems which may differ from the normal parameters of businesses and chain stores. For example, a vending machine operator may receive a franchise for a particular kind of vending machine, including a trademark and royalties, but no method of doing business. This is called product franchising or trade name franchising.[1]

History

Early instances of franchising can be seen in Germany in the 1840s, where major ale brewers granted permission for different taverns to sell their own brew. The first true franchising contract and agreement came in the 1850s, with Isaac Singer, who made improvements to an existing model of a sewing machine, and wanted to increase the distribution of his machines. His effort, though unsuccessful in the long run, was among the first franchising efforts in the United States. Many of the stipulations in his contract are still used today.

Franchising was proven successful with John S. Pemberton's franchising of Coca-Cola.[2] Other early American successful examples include the telegraph system, which was operated by various railroad companies but controlled by Western Union,[3] and exclusive agreements between automobile manufacturers and operators of local dealerships.

Modern franchising came to prominence with the rise of franchise-based food service establishments. This trend started as early as 1919, with quick service restaurants such as A&W Root Beer.[4] In 1935, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modern restaurant franchise.[5] The idea was to let independent operators use the same name, food, supplies, logo, and even building design in exchange for a fee.

The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson started franchising motels.[6] The 1950s saw a boom of franchise chains in conjunction with the development of America's Interstate Highway System. Prior to the 1950s and 1960s, few restaurant chains existed, most franchises were automobile, gasoline, and soft drink related. In the 1950s and 1960s, fast food restaurants, diners, and motel chains exploded. From these two decades and onward, franchises took a huge leap forward and increased dramatically with every successive decade.

Legal aspects

The Franchise Agreement is a standard part of franchising and is considered a fluid document. It is the essential contract signed by the franchisee and the franchiser that formalizes and specifies the terms of the business arrangement. It is crafted to meet the specific needs of the franchise, with each having its own set of standards and requirements.[7] Different franchise agreements address different issues. Some examples are:

  1. Granting a license to an individual or firm to operate a retail, food, or drug outlet where the franchisee agrees to use the franchiser's products, name, services, promotions, display methods, and other company support.
  2. The right to market a company's goods or services in a specific location or territory, which right has been granted by the company to a franchiser or franchisers.
  3. Issues over the specific territory or outlet involved in the agreement.
  4. The right of an advertiser to exercise an option to sponsor the franchise.
  5. The right for a company to provide cable television for an area.

Many countries have their own copyright and antitrust laws which vary how franchising works between different countries. Some of the above may be adjusted depending on where the franchise is located or where the businesses are involved.

Advantages and disadvantages

Advantages

As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: From site selection to lease negotiation, training, mentoring, and ongoing support as well as statutory requirements and troubleshooting.

After their brand and formula are carefully designed and properly executed, franchisers are able to expand rapidly across countries and continents, and can earn profits commensurate with their contribution to those societies. Additionally, the franchiser may choose to leverage the franchisee to build a distribution network.

Franchisers often offer franchisees significant training, which is not available for free to individuals starting up their own business. Franchises provide a guaranteed market, since for many consumers franchises offer a consistent product or service which makes life easier. They know what to expect when entering a franchised establishment, even when it is newly opened.

Disadvantages

For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, and marketing, the franchisee is required to follow the system and get approval for changes from the franchiser. For these reasons, franchisees and entrepreneurs are very different.

A franchise can be expensive, mainly because of standards set by the franchiser. The franchisee often has no choice as to signage, shop fitting, or uniforms, and may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The franchisee may also be contractually bound to spend money on upgrading or alterations as demanded by the franchiser from time to time. In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses."[8]

Another problem is that the franchiser/franchisee relationship can easily cause conflict if either side is incompetent (or not acting in good faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchiser's brand by providing inferior goods and services, and an incompetent franchiser can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.

Contemporary franchising

Franchising has expanded greatly in the international community. Outside of the United States, more than three hundred and seventy franchise companies are in operation in forty thousand outlets. Canada, Japan, Europe, the United Kingdom, and Australia are all the biggest beneficiaries of franchises. Franchising has become an important way of entering foreign markets that may have been closed off otherwise. By tailoring the franchise for each new market in accordance with local tastes, customs, and traditions, most franchises are able to flourish in markets that have very different cultures than their country of origin.[9]

The biggest issue facing global franchising is the adjustment in business practices and business laws in the new market. For example, local contract law, antitrust law, trademark law, child labor laws, and employee laws vary from country to country, and businesses found in violation of these laws are shut down.

Global franchising is flourishing, however, and the current trend points to an increase in franchising at all corners of the map. This continuing franchising ensures growth of the franchises and the chance for new business investments and opportunities. The importance of franchising is beginning to be discovered, as high schools and colleges all over the world are implementing new business curricula that many students are required to take for graduation. New technology demonstrates new ways to deliver and experience franchised products, and many businesses are beginning to take advantage of this. These developments suggest that franchising will continue to be a popular method of doing business in all markets in the coming years.

Current franchises

Here is a short list of some currently active franchises:

  • Best Buy, active in the United States and Canada.
  • Target, active in the United States and recently India.
  • Trans World Entertainment, active in many countries around the world, including Europe and Asia.
  • Walmart, active in North and South America, Europe, Asia, and Australia.
  • Molly Maid, active in North and South America, Japan, and the United Kingdom.
  • McDonald's, active on nearly every continent.
  • Subway Restaurants, active in eighty six different countries.

Notes

  1. Roger Blair and Francine Lafontaine, The Economics of Franchising (Cambridge University Press, 2005). ISBN 978-0521772525
  2. Encyclopedia of Business, Franchising. Retrieved September 8, 2007.
  3. Smithsonian Institute, Western Union Telegraph Company Records. Retrieved September 8, 2007.
  4. A&W All American Food, A&W Restaurant History. Retrieved September 10, 2007.
  5. Robin Allen, Foodservice’s Theory of Evolution: Survival of the Fittest. Retrieved September 10, 2007.
  6. Department of Financial Institutions, A Brief History of Franchising. Retrieved September 10, 2007.
  7. United States Federal Trade Commission, Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures. Retrieved September 9, 2007.
  8. New Rules, Formula Business Restrictions. Retrieved September 8, 2007.
  9. O.C. Ferrell and William Pride, Marketing Concepts and Strategies (Houghton Mifflin Company, 2006). ISBN 978-0618474455

References

  • Barkoff, Rupert. 2005. Fundamentals of Franchising. American Bar Association. ISBN 978-1590314098
  • Blair, Roger and Francine Lafontaine. 2005. The Economics of Franchising. Cambridge University Press. ISBN 978-0521772525
  • Ferrell, O.C. and William Pride. 2006. Marketing Concepts and Strategies. Houghton Mifflin Company. ISBN 978-0618474455
  • Khan, Mahmood. 1999. Restaurant Franchising. Wiley. ISBN 978-0471291947
  • Norman, Jan. 2006. What No One Ever Tells You About Franchising: Real-Life Franchising Advice from 101 Successful Franchisors and Franchisees. Kaplan Business. ISBN 978-1419506130

External links

All links retrieved November 12, 2013.

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