Evolution of Franchising

The roots of the word franchising can be traced back to the French word ‘Franchise’ which means to grant powers to a peasant or self. The English verb to ‘enfranchise’ also means to free from slavery bondage, legal obligation. In the middle ages, a franchise was a privilege or a right. At that time, the king would allow business to be conducted on his land. In essence, the king was giving someone the right to a monopoly for a certain type of commercial activity.

Over the centuries the franchising concept continued to evolve along with the economies of the nations of the world. In the 1840s, in Germany, certain major ale brewers granted franchises to certain taverns the exclusive right to sell their ale. This was the beginning of the concept of franchising as we know it today. In 1851, the Singer Sewing Machine Company began granting distribution franchises for their sewing machines. Singer had written franchise contracts, which were the forerunners of modern franchise agreements. In the 1880’s cities began to grant monopoly franchises to street car companies and utilities for water, sewerage, gas, and electricity.

Around the turn of the century the oil refinery companies and the automobile manufacturers began to grant the right to sell their products. Over the years franchising as a format has evolved, again influenced by various socio-economic conditions prevalent in various parts of the world. A significant change in franchising was witnessed post World War II and during the so called baby boom years.

The modern era of franchising began in the 1950s when Ray Kroc, a milkshake machine salesman, first discovered a San Bernardino, California drive in restaurant operated by the McDonald brothers. Impressed with the crowded parking lot and the tasty French fries, Kroc bought the rights to franchise the business, and went on to build one of the most successful companies in the history of American business. And he did it through franchising. The reasons for franchising: The reasons for franchising in those days were no different that what they are today. Expansion of any business is risky and requires significant investments of capital and human resources (people) to run the locations. Franchising limits the risk factor of growth, allows expansion to occur without the vast amounts of operating capital and potentially cerates an attractive profit picture for the franchise owner, at the unit or operating level.

Types of Franchising:

The basic objective of franchising is the expansion of a business, by furthering the distribution of products/services. By virtue of this fact, franchising at a very broad level can be divided into two formats. The first type being a product /trade name franchise and the second type a business format franchise.

Under product / trade name franchising the franchisee concentrates on one manufacturer’s product, and there by acquires the manufacturer’s identity to some extent. Typical examples are automobile dealership and gas service stations.

Business format franchising has been defined as the granting of a license for a predetermined financial return, by a franchising company (the franchisor) to its franchisees entitling them to make use of a complete business package, including training support and the corporate name, thus enabling them to operate their own businesses with exactly the same standards and format as the other units in the franchised chain. Examples of business format franchising include restaurants convenience stores and personal and business services.

A franchise system may be a single unit franchise a master franchise or a regional franchise. Under a unit franchise the franchisee is granted the right to operate one unit or outlet of the franchised business – a unit franchise. This is simplest and most common form of franchising. A single franchisor may have more than one unit franchises.

Under the concept of master franchise, the franchisee is granted the rights to a substantial territory – usually a whole country. The master franchise then may set up unit franchises. The master franchisee in this case, acts like the franchisor. When in a geographically large area, a franchisor or master franchisee may decide to divide the territory up into separate regions and grant a master franchise for each separate region, it is then known as a regional franchise. The various relationships that can exist within franchising are illustrated below:

Franchisor > Master > Regional > Unit Franchise

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