Franchising Boom PDF
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International University of Japan
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This document provides an overview of the franchising boom, including the economic impact of franchising in the United States. It details the elements of franchising and how it functions in Japan. The document touches on the different perspectives of franchising, providing a wide-angle look from different global positions.
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The Franchising Boom âš« More than 3,800 franchisors operate more than 750,000 outlets in the United States âš« Each year, franchises produce goods and services that are worth \$710 billion, 2.3% of the U.S. GDP âš« Franchises employ one in every 7.8 million workers in the U.S. in more than 300 majo...
The Franchising Boom âš« More than 3,800 franchisors operate more than 750,000 outlets in the United States âš« Each year, franchises produce goods and services that are worth \$710 billion, 2.3% of the U.S. GDP âš« Franchises employ one in every 7.8 million workers in the U.S. in more than 300 major industries âš« Economic impact of franchising on the U.S. economy: \$2.1 trillion âš« A new franchise opens somewhere in the world every 8 minutes **Franchising** A system in which semi-independent business owners ( franchisees) pay fees and royalties to a parent company ( franchiser) 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. **Element** **The Franchiser** **The Franchisee** --------------------------- ----------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- **Site Selection** Oversees and approves; may choose site Chooses site with franchiser's approval **Design** Provides prototype design Pays for and implements design **Employees** Makes general recommendations and training suggestions Hires, manages, and fires employees **Products and Services** Determines product or service line Modifies only with franchiser's approval **Prices** Can only recommend prices Sets final prices **Purchasing** Establishes quality standards and suppliers Must meet quality standards and purchase only from approved suppliers **Advertising** Develops and coordinates national ad campaign; may require minimum level of spending on local advertising Pays for national ad campaign; complies with local advertising requirements; gets franchisor approval on local ads **Quality Control** Sets quality standards and enforces them with inspections; trains franchisees Maintains quality standards; trains employees to implement quality systems **Support** Provides support through an established business system Operates business on a day-to-day basis with franchiser's support Franchising in Japan âš« There is no uniform definition of a franchise in Japan âš« However, there are three relevant definitions with regard to franchise businesses âš« First, the Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973 -- MSRCPA) defines a 'chain business' as a business that, pursuant to an agreement with uniform terms and conditions, continuously sells or acts as an agent for sales of products and provides guidance regarding management, and primarily targets medium and small retailers. âš« In addition, a 'specified chain business' is defined as 'any chain business the agreement for which includes clauses which permit its members to use certain trademarks, trade names or any other signs, and collects joining fees, deposits or any other money from the member when becoming a member'. âš« If a franchise business falls under this definition, the regulations of the MSRCPA apply. Franchising in Japan âš« Second, the Guidelines Concerning the Franchise System (Franchise Guidelines) under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No. 54 of 1947 -- Anti-Monopoly Act) provide that: âš« The franchise system is defined in many ways. However, the franchise system is generally considered to be a form of business in which the head office provides the member with the right to use a specific trademark and trade name, and provides coordinated control, guidance, and supports for the member's business and its management. âš« The head office may provide support in relation to the selling of commodities and the provision of services. In return, the member pays the head office. Franchising in Japan âš« Third, the Japan Franchise Association (JFA) defines a franchise as: âš« A continuing relationship between one business concern (called a Franchisor) and another business concern (called a Franchisee) where a Franchiser and a Franchisee enter into a contractual agreement, the Franchiser granting the Franchisee the right to use the signs representing the Franchisor's business, which signs include the Franchisor's logo, service mark, trade name and others as well as the Franchisor's management know-how, and to conduct the product sales and other businesses which bear the same image as the Franchisor's; âš« the Franchisee paying the consideration to the Franchisor in return, providing the fund required for the business, and operating the business under the Franchisor's guidance and assistance. Franchising in Japan (Japan Franchise Association data) Types of Franchising âš« Trade-name âš« A franchisee purchases the right to use the franchisor's trade name without distributing particular products exclusively under the franchisor's name âš« Product distribution âš« A franchisor licenses a franchisee to sell its products under the franchisor's brand name and trademark through a selective, limited distribution network, with no method of doing business âš« Pure ("business format") âš« A franchisor sells a franchisee a complete business format and system 00 13 Franchising Basics âš« Franchisee gets the right to use all of the elements of a fully integrated business operation âš« Essence of what franchisees purchase from the franchisors âš« Experience âš« Key Question âš« What can a franchise do for me that I cannot do for myself? Benefits of Franchising âš« Management training and support âš« Start-up âš« Ongoing âš« Brand name appeal âš« "Cloning" âš« Standardized quality of goods and services âš« National advertising program âš« Franchisees contribute 1% to 5% of sales Benefits of Franchising âš« Financial assistance âš« Only 20% of franchisors offer financial assistance to franchisees âš« SBA -- Franchise Registry âš« Proven products and business formats âš« Centralized buying power âš« Site selection and territorial protection âš« Important issue: Territorial encroachment âš« Greater chance for success Drawbacks of Franchising âš« Franchise fees and ongoing royalties âš« Average upfront franchise fee = \$25,147 âš« Royalties range from 1% to 11% of franchisees' sales âš« Average royalty = 6.7% of sales âš« Strict adherence to standardized operations âš« Restrictions on purchasing and price âš« Approved suppliers only Drawbacks of Franchising âš« Limited product line âš« Contract terms and renewal âš« Average term = 10.3 years âš« Unsatisfactory training programs âš« Market saturation âš« Less freedom -- âš« "No independence" âš« "Happy prisoners" Ten Myths of Franchising 1\. Franchising is the safest way to go into business because franchises never fail 2\. I'll be able to open my franchise for less money than the franchiser estimates 3\. The bigger the franchise organization, the more successful I'll be 4\. I'll use 80 percent of the franchiser's business system, but I'll improve upon by substituting my experience and know-how 5\. All franchises are the same Ten Myths of Franchising 6\. I don't have to be a hands-on manager I can be an absentee owner and still be very successful 7\. Anyone can be a satisfied, successful franchise owner 8\. Franchising is the cheapest way to get into business for yourself 9\. The franchiser will solve my business problems for me; after all, that's why I pay an ongoing royalty fee 10\. Once I open my franchise, I'll be able to run things the way I want to Pre-contractual disclosure âš« Under the MSRCPA, when a franchisor intends to negotiate a franchise agreement with a prospective franchisee, the franchisor must provide written documents describing the prescribed items and explain the contents of the written documents to prospective franchisees. âš« There are no regulations regarding the frequency of updating disclosures. Detecting Dishonest Franchisers âš« Claims that the contract is "standard; no need to read it" âš« Failure to provide a copy of the required disclosure documents âš« Marginally successful prototype or no prototype âš« Poorly prepared operations manual âš« Promises of future earnings with no documentation âš« High franchisee turnover or termination rate âš« Unusual amount of litigation by franchisees Detecting Dishonest Franchisers âš« Attempts to discourage your attorney from evaluating the contract before signing it âš« No written documentation âš« A high pressure sale âš« Claims to be exempt from federal disclosure laws âš« "Get rich quick" schemes, promising huge profits with minimal effort âš« Reluctance to provide a list of existing franchisees âš« Evasive, vague answers to your questions The Right Way to Buy a Franchise âš« Evaluate yourself - What do you like and dislike? âš« Research your market âš« Consider your franchise options âš« Get a copy of the Franchise Disclosure Document (MSRCPA) for the franchise and read it! âš« Talk to existing franchisees âš« Ask the franchiser some tough questions âš« Make your choice Factors That Make a Franchise Appealing âš« Unique concept or marketing approach âš« Profitability âš« Registered trademark âš« Business system that works âš« Solid training program âš« Affordability âš« Positive relationship with franchisees Trends Shaping Franchising âš« Changing face of franchisees âš« Better educated with more business acumen âš« Multiple-unit franchising âš« 52% of franchisees operate multiple outlets (and growing) âš« International opportunities âš« McDonald's earns 70% of its sales internationally Trends Shaping Franchising âš« Smaller, nontraditional locations âš« Intercept marketing: putting a franchise's products or services directly in the paths of potential consumers, wherever they may be âš« Conversion franchising âš« Owners of independent businesses become franchisees to gain the advantage of name recognition Trends Shaping Franchising âš« Co-branding (piggyback or combination franchising) âš« Two or more franchises team up to sell complementary products or services under one roof âš« Refranchising âš« Franchisors sell their company-owned outlets to franchisees âš« "While 81 percent of McDonald\'s locations worldwide are currently owned and operated by franchisees, the company wants to increase that percentage to about 90 percent by the end of 2018." Trends Shaping Franchising âš« Multi-unit franchising âš« IFA: 20% of franchise owners are multiple-unit owners âš« Typical multiple-unit franchises own five outlets âš« Area development and master franchising âš« Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time âš« Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees
