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What is Franchising ? | Meaning, Types, Importance, Limitations

Franchising
Contents :
  • Meaning of Franchising.
  • Definition of Franchising.
  • Characteristics of Franchising.
  • Types of Franchising.
  • Importance of Franchising.
  • Limitations of Franchising.


What is Franchising ?

Introduction :

Franchising is an agreement between two entities where the owner (franchisor) of a company grants the right to the other party (franchisee), to use its trade or trademark and also specific business processes and techniques for producing and marketing goods or services. In general, the franchisor lists all the terms and conditions to the franchisee on the basis of which the entire business is conducted. The franchisor provides all these facilities to the franchisee in return of a fee. For this purpose, the franchisee willing to do a business then provides the required time and capital to the franchisor in order to utilize all the available resources. Hence, it is a relationship between the franchisor and franchisee, who are individual business entities, may be in form of sole proprietorship, partnership or corporations.


Definition of Franchising :


According to the International Franchise Association (IFA) :
"Franchising is a continuing relationship in which the franchisor provides licensed privilege to do business, plus assistance in organising, training, merchandising and management in return for a consideration from the franchisee".

The franchising model considers only those business firms who are well-established and have goodwill in the marketplace. A company having this can then permit others to use its trade name and business system. A franchise can be successfully executed with simple businesses as they can be easily imitated, like coffee shops, fast food outlets, printing and copying outlets, etc. The franchisor holds a strict control over the processes and activities of the franchisee so as to maintain the goodwill and quality of products/services in the market.

Franchising


Characteristics of Franchising :


Following are the distinct characteristics of franchising :

1) Well-Established Business : 
A franchise is a well-established and successful business which seeks to expand its market share with the help of a local representative.

2) Needs Limited Investment 
The investment required for entering a franchise is reasonably low as it is already established by the franchisor.

3) Easy Entry in New Markets : 
It is very easy for a franchisor to enter a new market as the company has already established its reputation and goodwill in other markets.

4) Business has Large Establishments : 
Generally, franchise is a large-scale establishment which operates globally through a network of local representatives in different market segments.

5) Facilitates in Diverting Business Risks 
The owner of a company can diversify his risks by setting-up various outlets in different markets across the world.

6) Results in Large Turnover : 
The management of franchisor and service ability of franchisee benefits the society and results in high sales volume. The turnover is also influenced by the brand name and hyper publicity.

7) Division of Labour and Specialisation : 
In franchising, division of labour and specialisation is followed. Where the franchisor focuses on the production system, at the same time, franchisee is responsible for distribution and services at unit. This work pattern is beneficial for both, i.e., the franchisor and the franchisee.

8) Allows Use of BI and Name and Trademark :
In a franchise, the franchisee is free to use the trademark and brand name of the franchisor for managing and developing the franchise business around the world.

9) Business is Based on Mutual Agreement : 
franchising business is based on certain terms and conditions or a mutual agreement on which the franchise business is based upon. This agreement is held on the basis of mutual understanding between the franchisor and the franchisee. The agreement must be drafted in detail to avoid any kind of disputes.

10) Long-Term Relationship to Meet Success : 
long-term relationship between the franchisor and the franchisce is essential for the successful functioning of a franchise business. It ensures the growth and profitability of business in future. Other than this, it also enables the franchisor to sell a franchise more effectively, implement the necessary changes into the system, and motivate the franchisee and its staff members to maintain and improve the quality of products and services.

Types of Franchising :


Various types of franchising options are as follows :

1) Product Franchise : 
Product, franchise is the most elemeniary and simple form of franchise. In this kind of set-up, a franchisor can be seen as a distributor, who distributes the goods to the retailers with a believe that the retailer is having die authority to sell the products and goods in a specific location. In common practice, these kinds of markets are associated with a certain geographical locations. Car dealership, gas stations and many fashion and FMCG organisations can be seen as a typical example of this category. The older examples of franchising are the product franchise in England and Germany, the beer franchises which are running since early 1800s and are still functional.

2) Manufacturing Franchise : 
Manufacturing or processing franchise is the second form of franchise system which is quite often derived from first type of franchise. In this type of franchise, a certain type of element or particular specification is provided by the franchisor, which is used by the franchisee in the production of the goods. Medicine and soft drinks are the typical examples of this type of system. Other examples are companies having a retailer's label can manufacture private label goods, and companies having license of a designer label can manufacture fashion apparels.

3) Business-Format Franchise :  
Business-format franchise is the third form of franchise which was developed in the post-war scenario of mid 1950s. In this type of system, an extensive, detailed, operating setup is provided to the franchisee by the franchisor. Each franchisee should follow all the rules and norms of the franchisor; else franchisor has a right to withdraw the franchises. These franchises can be food centres, restaurants, travel agencies, etc.
For example, Pizza Hut, MçDorialds, Holiday Inn, 24-7 convenience store, etc. Business-Format Franchise is the most common form of franchise which is very prevalent in Australia and is considered as a mature sector. In 1999, total 708 franchises were operating in Australia, out of which 677 were using business-format franchise. This is the most widely used franchise format worldwide. The commonly used formats of franchising are as follows :

i) Manufacturer-Retailer Franchise : 
In this kind of format, the retailer is given the authority to sell the products and services of a certain franchisor, e.g., petrol pumps, bike dealership, etc.

ii) Wholesaler-Retailer Franchise : 
In this format, the retailer has a right to distribute the products of the wholesaler, e.g., Health Mart, Max, medical outlets, Titan watches, etc.

iii) Service Sponsor Retailer Franchise : 
In this format, a service organisation provides the license to any retailer to serve its customers on the behalf of franchisor, e.g., VLCC centres, Lakme salons, etc.

Importance of Franchising :


The importance of franchising is discussed below :

1) Proven Market for Product or Service : 
well-known market already exists for the franchiser's products or services. Facts and figures about the performance of existing franchises can be easily attained from the franchisee. This helps the franchisor to make future projections and decisions. However, it is not a similar case for newly established franchises.

2) Services Provided by the Franchisor : 
franchisor provides several valuable services to the franchisee. Some of the franchisor's services are as follows :

i) Assistance in Location Selection : 
franchisor often provides assistance to the franchisee in selecting an appropriate location for doing business. It is very important for the success of a business, especially off-reserve businesses in service and retail industry. Usually, a franchiser possesses considerable knowledge and expertise in site selection which can be utilised by the franchisee for business development.

ii) Purchase Construction of Site, Buildings and Equipment : 
Franchisor provides assistance in purchase and construction of business site, buildings or equipment. This also saves a lot of time and money.

iii) Provision of Financing: 
Many franchisors financially support their franchisee by providing the required capital. The association of franchisor and franchisee also helps in obtaining financial support.

iv) Standardised Methods of Operating: 
All the standard procedures and methods for operating a franchise is provided by the franchisor. It mainly includes standards for customer service, control system, cost accounting, etc.

v) Advertising : 
Sometimes, franchisors also provide advertising-related services by advertising nationwide. This type of promotion significantly benefits the franchisee, as it may prove to be very costly and difficult for the franchisee to advertise separately.

3) Advantages of Purchasing : 
The franchisor purchases large inventories for franchisee. In these Cases, the franchisees need not have to purchase several items as they are already provided by the franchisor, which results in cost savings.

4) Advantages of Training : 
New franchisees are often trained by the franchisors. These trainings can be in the form of thorough training sessions or instruction manuals. This has a positive impact on the growth of franchisee's business.

5)Advantages of Marketing and Management :
Franchising business offers a product which is already known and tested in the. market. Customers believe the franchisees due to the goodwill and brand name of the franchisors. Hence, it is easy for franchises to launch and manage a product in the market. The opportunity of having accessible marketing image of the franchise business would be one of the best benefits of selecting a franchising method. This is the reason why most franchisors put all their efforts and abilities in promoting, advertising and marketing of their names, logos, product and services.

6) Quality Control Standards : 
There are certain quality control standards which are imposed by the franchisors on the franchisee. These standards are essential for maintaining the quality of the products, thus, maintaining the goodwill of the business in the market. The franchisee also identifies these standards as essential guidelines for developing and maintaining high standards and considers these as a key reason for the success of business.


7) Less Operating Capital Requirement : 
Usually, franchisees require very less capital for establishing their business. They do not have to spend much on the infrastructure of the business as it is provided by the franchisor at a nominal cost. Having a prior knowledge about the market also helps the franchisee to spend less on inventories, as they are already aware of what product is in demand and what is not.

8) Growth Opportunities :
Several growth opportunities are provided to new franchisees by the franchisors in the form of setting up initial franchise unit and further purchasing additional franchise locations. Because of this, franchisee faces no competition from other franchisees or other outlets in a certain geographic area. This facilitates the new franchisee to start and develop new stores within the specified locations.

Limitations of Franchising :


Different limitations of franchising are as follows :

1) Lack of Independence : 
When a franchisee sign a contract of franchise with a firm, some kind of assistance and help is expected from the franchisor. The franchisor will analyse the performance of business to ensure the realisation of franchise agreement. This constrains the liberty and freedom of the franchisee.

2) Cost of the Franchise : 
There is a particular price for acquiring a franchise which includes a start-up fee and royalties based on operations. A person has to pay a specific amount of money either as a fee or has to create the infrastructure in order to take the franchise of a business organisation.

3) Unfulfilled Promises : 
In most of the cases, the franchisor provides services like training in operational skills and marketing activities. But, in some cases, such a support is not provided by the franchisor.

4) Constraints of the Contract : 
There may be several clauses of franchise agreement which can limit the liberty of franchisee. They are stated as follows :

i) Product or Service Offered : 
The franchisee may not have the right to sell the product of any other manufacturer.

ii) Line Forcing :
The franchisee has to maintain the whole range of product line produced by the franchisor despite the fact that many products may not be having any market in the area covered by the franchisee.

iii) Termination : 
Without facing the penalties, a franchisee cannot surrender the franchise and he is also not permitted to transfer franchise to his family member or friends and is restricted to sell the product of other companies.

iv) Demand Saturation : 
It has been observed that in many locations, a franchisor gives many franchise which results in the saturation of demand for a certain franchisee and thus many franchisees which are working in that area face financial drawback. A franchisor will try to sell as many franchises as possible irrespective of the success of individual franchisee in a location if franchisor receives huge initial fees with no royalties.

v) Security : 
In case of any violation of agreement conditions, the franchisor has the authority of either terminating the agreement before the contract period is over or not renewing it once it is terminated.

vi) Price of Merchandise : 
Sometimes, the franchisor sells products to the franchisee at higher prices than all the other places. But the franchisee is bound to buy products from the franchisor as per the agreement conditions.

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