Franchising has today, become a major business model in the retailing industry. It is now an integral part of the strategy of many retail companies and has far reaching effects on the growth and survival of the company. It is today, a method by which retailers can consider expansion at a national and even international level, and has evolved from the traditional forms and toady, touches almost all industries from automobiles to financial services. As a method of retail expansion, franchising has helped retailers like McDonald’s and Subway create an international presence in a very short span of time.
Franchising has changed many aspects of the common man’s life as it offers an opportunity for entrepreneurs and ordinary people to own a business and compete with larger establishments. Globally, franchising is expanding in many different directions and it is creating an entrepreneurial universe that is bigger than anything the originators of franchising ever imagined. The very fact that so many nations and companies continue to embrace the concept of franchising toady, is strong evidence of the viability of this proven concept of entrepreneurship. In many nations, the franchising phenomenon is creating new business life forms, building new partnerships and relationships and giving to job creation and economic growth.
This article focuses on the basic concept of franchising the evolution of franchising and the advantages of the franchise system.
The concept of Franchising:
In order to understand the concept of franchising, let us start by studying some definitions of the term franchising,.
Webster’s Dictionary defines franchise as – 1. A privilege or right granted person or a group by a government state or sovereign. 2. Authorization grated by a manufacturer to a distributor or dealer to sell his products.
According to the International Franchise association a franchise in the agreement or license between two legally independent parties which gives:
1) a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)
2) the franchisee: the right to market a product or service using the operating methods of the franchisor
3) the franchisor: the obligation to pay the franchisor fees for these rights
4) the franchisor: the obligation to provide rights and support to franchisee.
The legal definition expands this meaning – a franchise may also extend the right to sue a predetermined method for marketing products or services through outlets that use a known name or trademark. Franchising is not business or an industry but it is a method used by businesses for the marketing and distribution of their products or services.
The two parties which emerge are:
1) The Franchisor and
2) The Franchisee
The Franchisor is the provider of the franchise. Typically he owns the trademark / product / service and licenses the trademark to another party. He may provide support for the running of the franchise, which may be in the form of product / service training, advertising, marketing etc. In exchange, he receives a fee, commonly known as the royalty or franchisee fee, which would vary from industry to industry and from business to business.
The Franchisee on the other hand, is the person who pays for and purchases a franchise from a franchisor and operates a business using the name, product,, business format and other items provided by the franchisor. The franchisor helps the franchisee in setting up the business and manages it. Table below indicates the functions which may be performed by the franchisor and the franchisee.
The roles of the franchisor and franchisor:
Function: Franchisor: Franchisee
Site selection: Overseas: Owns or selects with approval
Design: Provides prototypes design: Incurs the cost
Employees: Training: Hires, supervises, pays
Products to be sold: Decides: Stocks on consignment or buys and can change the product mix only with approval
Prices: Sets / Recommends: Follows
Advertising / Promotions: Determine at a national level: Suggests local requirements
Brand Building: Builds at a national level: Follows requirements.