Franchising is a form of retail business used by organizations to expand their business through partners who in turn run the organization’s business. The organization becomes the franchiser and the partner is the franchisee. In a franchise arrangement the franchisee pays the franchiser a sum of money and is allowed to exercise the rights under the franchiser’s guidance. In the start-up, the franchiser often covers the franchisee with a guaranteed income.
Franchising has a two-fold purpose: it enables the franchisee reduce risks as he operates with the proven knowhow and brand of the franchiser. The franchiser is benefited by using the franchisee’s resources to expand his business. It involves creating a network of interdependent business relationships that allowing many to share a store brand.
There are two major types of franchising that are prevalent today in retailing. They are product/trade name franchising and business format franchising.
Product/Trade Name Franchising Here the franchisee requires the trade name, trademark and or product from the supplier or manufacturer
Business Format Franchising This type of franchising permits the franchisee to use the franchiser’s products/services, trade name, trademark and, the prescribed business format. These franchisees have the identity of the franchiser company in their retail environment.
Types of Franchise Agreements
The following are the key methods of franchise arrangements made globally.
Direct Franchising Format In this franchising the franchiser grants the franchise to a franchisee by the execution of a contract and has direct control over the franchisee. The franchiser specifies operating guidelines and the policies of the franchiser, the consideration being a periodic royalty. He also provides process manuals, shares expertise, monitors and controls the operations. The advantage is that of getting a readymade and established business format that can be replicated. But the franchisees will have to work strictly within specified compartments with little room for flexibility in operations.
Subsidiary Franchising Wherever laws and regulations allow foreign organizations to set up their subsidiaries in India, franchising is done through a subsidiary. The franchiser controls the subsidiary directly. The major advantage is that the franchiser is present in the country as a corporate body. The franchise rights for retailing and dealerships are given by the subsidiary office in India, which controls all the processes in retail and distribution.
Regional Franchising or Multiple Franchising Here the franchiser offers franchise rights to a franchisee only for a region or an area. There are separate franchisees for each area or region in the country. This is also known as multiple franchising when more than one franchisee is given the franchise rights for the same brand. Such agreements offer the franchisee the right to open a multiple number of outlets.
Unit Franchising The franchiser offers rights to a franchisee to open and run just one store through an exclusive agreement which involves many franchisees. It is very difficult to monitor compliance to specified standards and processes. The strength of this format is that each franchisee pays full attention to his store and its performance.
Master Franchising Here, the franchiser grants the franchise rights to an entire country or territory and the franchisee is permitted to open franchise outlets and grant sub-franchises to others. Two agreements are generally involved — one that is entered into between the franchiser and master franchisee and the other between the master franchisee and sub-franchisees.
Franchise Operations Arrangements
Franchiser Owned and Franchisee Operated The franchiser owns or ha the property lease so that it is sure of the location’s security for a long time. The capital investments are made by the franchiser, but the operations are handled by franchisee following the norms and standards agreed upon. Commission is generally lower in such arrangements.
Franchisee Owned and Franchisee Operated The franchisee is responsible for all investments and the operations as well. Only the expertise and guidelines are provided by the franchiser. The product offerings are often sold on an outright or on a consignment basis to the franchisee who gets more commission under this arrangement.
Key Success Factors in Franchising
Pre-Tested Model Franchising earns good results if done by organizations after creating a brand and testing. Retail organizations ought to look at establishing a Company-Owned and Company-Operated (COCO) model successfully before seeking expansion by taking the franchise route.
Transfer of Knowledge The franchisers, who provide their valuable inputs gained by their rich experience in retailing which includes training, store design and advertising and promotion, will produce good results.
Single Face to Customers The franchisee has to carry on his operations by playing the role of the principal brand. The store’s image elements and product portfolio have to be carefully maintained. This also includes the upkeep of various standards in the areas of customer service, store presentation, operating processes and store personnel skills which will enable the transfer of the total brand experience to the customer. This seamless integration of the franchiser and the franchisee to present one single ‘face’ to the customer will ensure successful store operations.
Win-Win Situation The franchiser gets a partner in the franchise to establish his business and shares with the franchisee such tested technologies, product offerings and processes. Sharing investments and returns through mutually agreed means will enable the growth of both the franchiser and the franchisee, covering the risks at the same time
Ownership and Responsibility Franchisees fail when the franchise retail business is not owned by the franchisee. They often feel that the franchiser has the responsibility of ensuring success. So there must be clearly defined responsibilities for both franchiser and franchisee.
Review Regular reviews of performance and planning actions for implementation by both parties will ensure successful franchise operations. Besides, such periodical reviews will bring to light gaps in any area of deliverables on the part of either the franchisee or the franchiser that have to be dealt with urgently.
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