Lecture 7

Franchising and Entrepreneur;

Benefits, downfall
Introduction

Like Goldsmith’s business, most franchised outlets are small,

but they have a significant impact on the U.S. economy. In the
United States alone, about 3,000 franchisors operate more than
770,000 franchise outlets and, more are opening constantly
both in the United States and around the world.

Franchises generate more than $800 billion in annual sales, account for 4.1
percent of the U.S. GDP, and employ nearly 8.1 million workers in the
United States in more than 300 industries.2 Much of the popularity of
franchising stems from its ability to offer those who lack business
experience the chance to own and operate a business with a high probability
of success.
• This booming industry has moved far beyond the traditional boundaries of
fast food and hotels into fields as diverse as mosquito spraying, used
clothing, mold detection, and pet resorts.
• Example; In 2008, Daniel Rella, Chris Couri, and Tom Darrow launched a
part-time parking lot striping business, We Do Lines, in Richfield,
Connecticut, that quickly became a full-time business. . They soon
discovered that the parking lot striping business was a $1 billion a year
industry with no national players and in 2009 began selling franchises.
• Currently with 10 franchisees, the entrepreneurs have plans to expand to
more than 100 franchises within five years. “We’ll teach you everything
you need to know,” says Rella
• Franchising also has a significant impact on the
global economy. U.S. franchisors are expanding
globally to reach their growth targets.
• What is franchising?
• franchising a system of distribution in which semi-
independent business owners (franchisees) pay fees and
royalties to a parent company (franchisor) in return for
the right to become identified with its trademark, to sell
its products or services, and often to use its business
format and system.
Franchising
• In franchising, semi-independent business owners (franchisees) pay fees and royalties to a parent
company (franchisor) in return for the right (license) to become identified with its trademark, to
sell its products or services, and often to use its business format and system.
• Franchisees, unlike independent business owners, don’t have the freedom to change the way they
run their businesses—for example, shifting advertising strategies or adjusting product lines—but
they do have access to a formula for success that the franchisor has worked out. “As a franchisee,
your role is to operate,” says franchising expert Mark Spriggs. “You have to be willing to follow
the rules.”
• Fundamentally, when franchisees buy franchises, they are purchasing a successful business model.
The franchisor provides the business model and the expertise to make it work; the franchisee
brings the investment, spirit, and drive necessary to implement the model successfully.
Cont…
• Many successful franchisors claim that
neglecting to follow the formula is one
of the chief reasons some franchisees
fail. “If you are overly entrepreneurial
and you want to invent you own wheel,
or if you are not comfortable with
following a system, don’t go down [the
franchise] path,” says Don DeBolt,
former head of the International
Franchise Association.
Types of Franchising
1. Trade-name franchising a system of franchising in which a franchisee purchases the
right to use the franchisor’s trade name without distributing particular products
exclusively under the franchisor’s name.
2. Product distribution franchising a system of franchising in which a franchisor licenses a
franchisee to sell its products under the franchisor’s brand name and trademark through
a selective, limited distribution network.
3. Pure franchising a system of franchising in which a franchisor sells a franchisee a
complete business format and system.
CONT…
• Many experts trace the roots of modern franchising to
the 1850s when Isaac Singer, founder of the Singer
Sewing Machine Company, decided to expand his
young business by granting licenses to other businesses
that would sell his company’s sewing machines in
specific geographic areas.
• Trade-name franchising involves a brand name, such as
True Value Hardware or Western Auto. Here, the
franchisee purchases the right to use the franchisor’s
trade name without distributing particular products
exclusively under the franchisor’s name.
 Product distribution franchising involves a franchisor
licensing a franchisee to sell specific products under the
franchisor’s brand name and trademark through a selective,
limited distribution network.

This system is commonly used to market automobiles

(Chevrolet, Lexus, Ford), gasoline products (ExxonMobil,
Sunoco, Texaco), soft drinks (Pepsi Cola, Coca-Cola),
appliances, cosmetics, and other products.
Cont…

These two methods of franchising allow franchisees to

affiliate with the parent company’s identity.
Cont…

• Pure franchising (also called comprehensive or

business format franchising) involves providing the
franchisee with a complete business format,
including a license for a trade name, the products or
services to be sold, the store layout, the methods of
operation, a marketing plan, a quality control
process, a two-way communications system, and
the necessary business support services.
• In short, the franchisee purchases the right to use all
of the elements of a fully integrated business
operation. Business format franchising is the most
common and the fastest growing of the three types
of franchising and accounts for nearly 95 percent of
all franchised outlets.
Case Study : Franchising in Africa Potential
Abounds but So Do Challenges
Cont….
Benefits of buying Franchise

• A franchisee gets the opportunity to own a small business relatively quickly and, because of
the identification with an established product and brand name, often reaches the break-even
point faster than an independent business would. Still, most new franchise outlets don’t break
even for at least 6 to 18 months.
• a new business owner cannot afford to make many mistakes. In a franchising arrangement,
the franchisor already has worked out the kinks in the system by trial and error, and
franchisees benefit from that experience.
• “A great franchisor has developed all of the tools that you need to start a business,” says Lori
Kiser-Block, president of a franchise consulting firm. “They’ve developed the marketing
system, the training and operation system, the brand, and the marketing tools you need.
They’ve made all of the mistakes for you.”
• For many first-time entrepreneurs, access to a business model with a proven track record is
the safest way to own a business. Still, every potential franchisee must consider one
important question: “What can a franchise do for me that I cannot do for myself?” The
answer to this question depends on one’s particular situation and requires a systematic
evaluation of a franchise opportunity. After careful deliberation, one person may conclude
that a franchise offers nothing that he or she could not do independently, and another may
decide that a franchise is the key to success as a business owner.
A BUSINESS SYSTEM

1. One of the biggest benefits of buying a franchise is gaining access to a

business system that has a proven record of success.
2. In many cases, the business system that a franchisor provides allows
franchisees to get their businesses up and running faster than if they had tried
to launch them on their own.
An Example; Fran Lubin, who left the corporate office of Goddard School, an early
education franchise, to become a Goddard franchisee, recalls, “I understood that the
business was mine to run. Goddard was there to help me and to provide multiple
resources and a proven system, but it was up to me to take all of those things and to
make my business successful.”
Cont… 3. Using the franchisor’s business system as a guide,
franchisees can be successful even though they may
have little or no experience in the industry.
According to Jerry Perch, director of franchise
development for Express Oil Change, the franchisor
looks first for candidates who are financially
qualified. The company does not require franchisees
to have experience as mechanics; instead, the ideal
candidate is someone with business skills whom the
franchisor can train to operate a million-dollar
business successfully. (activities+training)
2. Management Training and Support
• Franchisors want to give their franchisees a greater chance for success than
independent businesses and offer management training programs to
franchisees prior to opening a new outlet. Many franchisors, especially well-
established ones, also provide follow-up training and consulting services.
• This service is vital because most franchisors do not require franchisees to
have experience in the industry. These programs teach franchisees the
fundamentals they need to know for day-to-day operations as well as the
nuances of running their businesses successfully. After John Grassia and
David Smith retired as pilots for large airlines, they embarked on their
second careers as franchisees when they opened an Express Oil Change near
Orlando, Florida.
 • Express Oil wants its franchisees to succeed and offers them the support
they need to achieve success. Grassia says that Express Oil is proactive in its
support, noting that if franchise officials see a franchise struggling in a
particular area.
• Training programs often involve both classroom and on-site instruction to teach
franchisees the basic operations of the business. McDonald’s is famous for Hamburger
• Franchisors offer these training
University, where franchisees and their employees go to learn the proper systems and
programs because they realize that procedures for operating a restaurant successfully.
their ultimate success depends on their • Training involves classroom instruction from 19 faculty members from around the
franchisee’s success.
world, hands-on activities, simulations of events that franchisees are likely to
encounter, and computerized e-learning modules at one of seven Hamburger
University centers around the world. More than 275,000 people have graduated from
Hamburger University, earning their degrees in Hamburgerology.
3. Brand Name Appeal

• A franchisee purchases the right to use a nationally

known and advertised brand name for a product or
service. Thus, the franchisee has the advantage of
identifying his business with a widely recognized
trademark, which provides a great deal of drawing
power, particularly for franchisees of established
systems.
• Customers recognize the identifying trademark, the
standard symbols, the store design, and the products of
an established franchise.
• Because of the franchise’s name recognition, franchisees
who have just opened their outlets often discover a
ready supply of customers ready to purchase their
products or services
Cont…

Guillermo Perales, who owns 398 franchises

One of the basic tenets of franchising is cloning from seven different companies, ranging from
the franchisor’s success. From franchisees’ Arby’s and Burger King to Del Taco and T-
perspective, one of the most important functions Mobile, is one of the most successful franchisees
that a franchisor performs is promoting and in the United States and understands the
enhancing the company’s brand because a stellar necessity of proper brand management. “It’s very
brand perception among customers and potential important for the franchisor to take care of the
customers translates directly into sales for brand,” he says. “We [franchisees] all have a lot
franchisees. riding on this business. Good management of the
brand is essential”.
4. Standardized Quality of Goods and
Services

Building a sound reputation in

business can take many years, but
destroying a good reputation
Because a franchisee purchases a
takes no time at all. If some
license to sell the franchisor’s In many cases, the franchisor
franchisees are allowed to operate
product or service and the conducts periodic inspections of
at substandard levels, the image
privilege of using the associated local facilities to assist in
of the entire chain suffers
brand name, the quality of the maintaining acceptable levels of
irreparable damage; therefore,
goods or service sold determines performance.
franchisors normally demand
the franchisor’s reputation.
compliance with uniform
standards of quality and service
throughout the entire chain.
 Case Study 2: John
Schnatter: Papa John’s

• John Schnatter, founder of Papa John’s, a fast-growing pizza franchise with more than
4,400 outlets in every state and 34 global markets, makes personal visits to some of his
franchisees’ stores four or five times each week to make sure they are performing up to
the company’s high quality standards.
• Franchisees say Schnatter, known for his attention to detail, often checks pizzas for air
bubbles in the crust or tomato sauce for freshness. “Pizza is Schnatter’s life, and he takes
it very seriously,” says one industry analyst.
• Maintaining quality is so important that most franchisors retain the right to terminate the
franchise contract and to repurchase the outlet if the franchisee fails to comply with
established standards.
5. National Advertising Programs and
Marketing Assistance
• An effective advertising program is essential to the success of every franchise operation.
Marketing a brand-name product or service across a wide geographic area requires a far-
reaching advertising campaign. A regional or national advertising program benefits all
franchisees, and most franchisors have one. In fact, one study reports that 79 percent of
franchisors require franchisees to contribute to a national advertising fund (the average
amount is 2 percent of sales).
• Typically, these advertising campaigns are organized and controlled by the franchisor, but
franchisees actually pay for the campaigns. In fact, they are financed by each franchisee’s
contribution of a percentage of monthly sales, usually 1 to 5 percent, or a flat monthly fee.
• For example, franchisees at Subway, the sandwich chain with more than 42,000
restaurants in 107 countries, pay 4.5 percent of weekly gross sales to the company’s
national advertising program. Subway pools these funds and uses them for a cooperative
advertising program; doing so has more impact than if franchisees spent the same amount
of money separately.
Cont…
• Many franchisors also require franchisees to spend a minimum amount on local
advertising. In fact, 41 percent of franchisors require their franchisees to invest in
local advertising (once again, the average amount is 2 percent of sales).
• Some franchisors assist franchisees in designing and producing local ads. Many
companies also help franchisees create marketing plans and provide
professionally designed marketing materials, including outdoor advertisements,
newspaper inserts, posters, banners, brochures, directmail pieces, and platforms
for social media and mobile marketing campaigns.
• Both Google and Facebook now offer marketing features that enable franchisors
and franchisees to collaborate on social media promotions and are designed to
increase companies’ reach by promoting posts on news feeds for a flat rate.
Cont…
• Nearly 27 percent of e-commerce Web traffic now originates from mobile devices such
as smart phones and tablets. 23 As mobile marketing becomes more prevalent,
franchisors are developing mobile apps that make it easy for customers to purchase
from their franchisees.
• LaVida Massage, a chain with more than 50 franchises in the United States and Canada,
recently unveiled a mobile app that allows clients to schedule massages at its
franchised locations, view their operating hours, and read about message therapists’
qualifications and specialties.
• Domino’s Pizza, a pizza franchise with nearly 11,000 outlets in more than 70 countries,
is the leader in mobile marketing in the pizza industry, with 35 percent of its online
sales originating from mobile devices.
• Domino’s mobile app, which has been downloaded by more than 10 million customers,
allows customers to place their orders in just seconds and includes a “Pizza Tracker,”
that permits customers to monitor their pizzas’ progress (“Our expert pizza maker,
Antonio, put your pizza in the oven at 7:08 p.m.”) and know when it will arrive. The
latest version includes a Siri-like virtual assistant named Dom that enables customers to
speak their orders (I’d like a large pepperoni pizza with extra cheese”) without having
to type them in
6. Financial Assistance

• Purchasing a franchise can be just as expensive (if not

more so) than launching an independent business, and the
recent upheaval in the financial markets has made many
lenders hesitant to fund business start-ups, including
franchises.
• A study by FRANdata (FRANdata is the industry
leading market research and advisory firm focusing
on the franchise ecosystem) shows that the funding gap
between the capital that franchises need to grow and the
capital that lenders actually provide has averaged nearly 9
percent per year for the last several years (see Figure 7.5).
In one year alone, that lack of funding translated into the
“loss” of 2,200 outlets that franchisees could not open and
would have added $6.1 billion to U.S. GDP.