Franchising

FRANCHISING

Meaning and definition

One of the key components of success of any business lies in its ability to reach out to customers at local, national and global level. Franchising has often been used as   a method for expanding domestic market and for entering international markets. A wide variety of goods and services are now made available to customers using this model. Franchising is used by businesses for marketing and distributing products and services.

According to International Franchise Association a franchise is a “continuing relationship in which the franchisor provides a licensed privilegetodobusiness, plus assistance in organising training, merchandising and management , in return for a consideration from the franchisee.”

As explained in Wikipedia, franchising is “the practice of the right to use a firm’s business model and brand for a prescribed period of time. ... For the franchisor, the franchise is an alternative to building “chain stores” to distribute goods that avoids the investments and liability of a chain”.

There are two parties to a franchising agreement

Franchisor: The owner of a business who provides the franchise. Generally he owns the patent / trademark and offers it to the franchisee under a licensing agreement. Depending on the agreement, the franchisor may also provide support services like service/product training, marketing, advertising, etc. The franchisor levies fees in the form of royalty.

Franchisee: The individual who acquires the right to operate the business  or  use  the trademark of the seller is known as the franchisee.

Characteristics of franchising

·           Franchise relationship is based on an agreement which lays down terms and conditions of this relationship.

·           The term of franchise may be for 5 years or more. The franchise agreement may be renewed with the mutual consent of the parties.

·           The franchisee gives an undertaking not to carry any other competing business during the term of the franchise; and the franchiser gives an undertaking not to terminate the franchise agreement before its expiry except under situations which may justify the termination of the franchise agreement.

·           The franchisee agrees to pay specified royalty to the franchiser, as per terms of the franchise agreement.

·           Franchise means selling the same product and maintaining a  similar type of shop decor (i.e. style of interior decoration) for which franchiser provides   assistance   to    franchisee in organising, merchandising and management. The franchiser virtually sets up the business for the franchisee.

·           Franchisee is supposed to follow parent company’s policies regarding mode of business operations, as per clauses in the franchise agreement.

·           Franchiser may give training to personnel working in the franchisee’s organization.

Types of franchising

There are primarily two types of franchising

a. Product/ trade name franchising: In this type, the franchisee exclusively deals with a manufacture’s product. Examples include Kidzee, French Loaf outlets, Bharat Petroleum bunks,Patanjali products, etc. Relationships like Maruti Suzuki with ABT Maruti or Hero Honda bike dealerships may be considered as franchises. However, they but should be considered more as exclusive dealerships with more operational freedom for the dealers.

b. Business format franchising: When a franchisor awards rights covering all business aspects as a complete business package to the franchisee it is called as business format franchising. This package includes training , support and the corporate name. This enables uniformity of products, services, environment across geographical boundaries with a high degree of standardisation. Examples are McDonald’s, Pizza Hut. KFC, Hot breads, Titan, Color plus, Zodiac, Lakmé beauty parlour.

Advantages of franchising

Reduced risk: The franchisee will acquire the right of running an already established business, thus eliminating the risk of starting a new business.

Business expansion: Franchising provides an opportunity to expand business at regional, national and global levels without incurring additional expenditure. Thus rapid growth of franchisor’s business is facilitated.

Cost of advertising: The cost of advertising for the franchisor will be reduced since this cost will be shared  by the franchisee. Moreover, it enables the franchisor to reap the benefits of increased visibility across regional and national boundaries.

Operational support: The franchisee is provided assistance in not only obtaining finance,but also in deciding business location , decor /design, staff training, and handling day to day operations.

Advantages of franchising

Franchising fees: The initial franchising fee and the subsequent renewal fees  can be very high in case of successful businesses. From the franchisee’s point of view, this may be a deterrent.

Fixed royalty payment: The franchisee has to make  payment  of  royalty  to  the franchiser on a regular basis. This considerably reduces the income of the franchisee.

Danger of image tarnishing: If the franchisee does not maintain standards of quality and service; there is a danger that the goodwill and image of the reputed franchiser will be adversely affected.

Lack of freedom: The franchisee does not have the freedom to run his business in an independent manner. He has to abide by management and operational policies of the franchiser, This may serve as a deterrent whether suitable to him or not.

Limitation on range of products: The franchisee cannot introduce new product lines into the business, except those permitted by franchiser. This may mean loss of business to franchisee amidst demands based on local conditions.

Conclusion

Franchising enables a franchisor to expand the existing business to wider geographical regions within the country and abroad. Franchisees, especially those who are new entrants to business,  do not have to “start from the scratch”, but work with an established business model getting the necessary operational support and guidance. In international business, franchising is the best option to enter other country markets.