Franchising

Franchising

 A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor 

 Franchisee

   An entrepreneur whose power is limited by a contractual agreement with a franchisor

Franchisor

The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party 

The 20 Fastest-Growing Franchises in 2003

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1. Subway
2. Curves
3. 7-Eleven Inc.
4. Kumon Math & Reading Centers
5. Jan Pro Franchising Int’l., Inc.
6. The Quizno’s Franchise Co.
7. Jani-King
8. Coverall Cleaning Concepts
9. Liberty Tax Service

1       10.  Jazzercise Inc.

11. RE/MAX Int’l., Inc.
12. Jackson Hewitt Tax Service
13. Choice Hotels Int’l.
14. WSI Internet
15. Dunkin’ Donuts
16. Action Int’l.
17. Baskin-Robbins USA Co.
18. Great Clips, Inc.
19. Rezcity.com
20. The UPS Store

     The Pros and Cons of Franchising

Advantages

·         Proven line of business

·         Pre-qualification of franchisee

·         Training

·         Franchisor-provided

·         Financial assistance

·         Franchisor assistance

·         Operating benefits

·         Franchisor-aided

Limitations

·         Franchise costs

·         Initial franchise fee

·         Investment costs

·         Royalty payments

·         Advertising costs

·         Restrictions on business operations

·         Loss of independence

·         Lack of franchisor support

·         Franchisor Controls on Franchisees

·         Restricting of sales territory

·         Requiring site approval and imposing requirement on the outlet’s appearance

·         Restricting the goods/
services that can be sold

·         Requiring specific
operating hours

·         Controlling advertising

Franchising Agreements

·         Franchise contract

–The legal agreement between franchisor and franchisee

·         Franchise

-The privileges conveyed in the franchise contract

·         Multiple-Unit Ownership

–The holding by a single franchisee of more than one franchise from the same company

·         Area Developers

–Individuals or firms that obtain the legal right to open several franchised outlets in a given area

·         Piggyback Franchising

–The operation of a retail franchise within the physical facilities of a host store

·         Product and Trade Name Franchise

–Grants the right to use a widely recognized product or name

·         Business Format Franchise

–Provides an entire marketing system and ongoing guidance from the franchisor

·         Master Licensee

–An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory

Evaluating Franchise Opportunities

·         Selecting a Franchise Opportunity

–Personal observation

–Advertisements

·         Investigating the Potential Franchise

–Information sources

·         Independent, third-party sources

–Federal Trade Commission

–Internet

–Franchise consultants

·         Franchisors themselves

–Disclosure documents

·         Existing and previous franchisees

Legal Considerations in Franchising

·         The Franchising Contract

–Signed with legal counsel present

–Contains a termination and transfer provision

–Contains a statement of rights to renew contract

Franchise Disclosure Requirements

•         Rule 436 of the Federal Trade Commission

–        Uniform Franchise Offering Circular (UFOC)

•         A document accepted by the Federal Trade Commission as satisfying its franchise disclosure requirements

–        Litigation and bankruptcy history

–        Investment requirements

–        Conditions that would affect renewal, termination, or sale of the franchise

•          http://www.ftc.gov/bcp/franchise/netrule.htm

Franchising Internationally

•         Very well accepted

•         Entrenched deeply within USA & Western Europe

•         Fairly well structured in terms of framework

•         In USA:

–        $1 Trillion is spent each year on goods bought at franchised outlets

–        One out of every 12 business establishments is a franchised business

–        A new franchise business opens every 8 minutes of every business day

–        50% of retail trade is through franchised outlets

•         High growth areas are South-East Asia, Latin America & the Middle East

•         US franchisors lead the way in International expansion

Franchising in India

•         Acceptability growing by the day

•         Fairly conventional industry spread

•         Approximately 600 franchisors spread across industries like education, retailing, professional services, healthcare etc

•         Over 40,000 franchisees

•         Annual turnover from Franchising – anywhere between Rs.8000-Rs.10,000 crores

•         Total investments made by Franchisees – over Rs.5000 crores

•         Over 300,000 people directly employed by franchised businesses

•         Variety of hybrid formats in practice

•         Number of International franchises already existing, more coming in

Brief Sectoral Analysis

•         IT Education – Down for the moment but surely not out; likely to re-emerge through IT Enabled Services

•         Retail – Going strong but getting hurt because of the real estate markets

•         Vocational / Preparatory Education – Fundamentally strong because of huge population base and high competition in public examinations

•         F&B – Low level of activity currently but attractive long-term potential

McDonald's in India 

•         Professional Services – Low level of activity currently but attractive long-term potential

•         Every year, Rs. 50,000 crores worth of food produce is wasted in India because of lack of proper infrastructure for storage and transportation

•         has spent more than six years setting up in India

•         Involves procurement, warehousing, transportation and retailing of perishable food products, all under controlled temperatures.