Franchising - Lesson 3 PDF

FRANCHISING LESSON 3 TOPICS: Benefits and Challenges of Franchising Advantages for franchisors and franchisees Common challenges and risks Benefits and Challenges of Franchising Advantages for franchisors and franchisees Franchising offers several advantages for both franch...

FRANCHISING LESSON 3 TOPICS: Benefits and Challenges of Franchising Advantages for franchisors and franchisees Common challenges and risks Benefits and Challenges of Franchising Advantages for franchisors and franchisees Franchising offers several advantages for both franchisors and franchisees. Here’s a breakdown Advantages for Franchisors Expansion with Less Capital Investment-Franchisors can expand their brand and reach without significant capital outlay since franchisees provide the capital for the new outlets. Revenue Stream- Franchisors earn through initial franchise fees, ongoing royalties, and other service fees from franchisees. Brand Expansion and Market Penetration- Franchising allows for rapid brand expansion into new markets with local operators who understand the market nuances. Leverage Franchisees’ Local Knowledge-Franchisees bring local market knowledge, helping the franchisor to adapt the business to different regions.  Motivated Operators-Franchisees have a vested interest in the success of their franchise, often leading to more committed and effective management compared to hired managers. Reduced Operational Burden-The franchisor benefits from the operational efforts of the franchisees, reducing the need for direct management of individual outlets. Brand Loyalty and Consistency- Franchisees adhere to the brand standards and guidelines, ensuring consistency across all locations, which strengthens brand loyalty. Advantages for Franchisees Established Brand and Business Model:-Franchisees benefit from the recognition and trust associated with an established brand, reducing the risk associated with starting a new business. Training and Support:-Franchisors typically offer comprehensive training, ongoing support, and access to their business systems, reducing the learning curve and helping franchisees manage their business effectively. Marketing and Advertising Support:-Franchisees often benefit from national and regional marketing campaigns managed by the franchisor, which would be cost-prohibitive for an independent business. Proven Product/Service Offerings-Franchisees get access to a proven product or service offering, which has already been tested and refined in the market.  Access to Established Supply Chains-Franchisees can leverage the franchisor’s established supply chain, often benefiting from bulk purchasing and favorable terms. Reduced Risk-By operating under an established brand with a proven business model, franchisees face lower risks compared to starting a completely new business. Networking and Community-Franchisees often have the opportunity to network with other franchisees, sharing experiences, strategies, and solutions to common challenges. These advantages create a mutually beneficial relationship where franchisors can grow their brand and franchisees can build successful businesses with a reduced level of risk. Advantages for Franchisors: Example Expansion with Less Capital Investment McDonald’s: As a global fast-food giant, McDonald’s has expanded rapidly worldwide through franchising. By allowing franchisees to invest in new locations, McDonald’s has been able to grow its brand presence in various markets without having to fully fund each new restaurant. Revenue Stream Subway: Subway earns money from its franchisees through initial franchise fees and ongoing royalties. These royalties are usually a percentage of the franchisee's sales, providing Subway with a continuous revenue stream. Brand Expansion and Market Penetration 7-Eleven: By franchising, 7-Eleven has been able to penetrate international markets such as Japan, where local franchisees operate stores that cater to the specific preferences of the Japanese consumer, leading to tremendous brand growth. Motivated Operators Dunkin' Donuts: Franchisees of Dunkin' Donuts are highly motivated to succeed because they have invested their own money into the business. This vested interest ensures that they work diligently to uphold the brand's standards and maximize profitability. Advantages for Franchisees: Example Established Brand and Business Model KFC: A franchisee opening a KFC benefits from the brand’s worldwide recognition and the proven success of its fried chicken. This established brand reduces the risk of starting a new restaurant as customers are already familiar with and trust the product. Training and Support Marriott Hotels: Marriott provides extensive training and operational support to its franchisees. This includes training on hotel management, customer service, and marketing strategies, helping franchisees successfully manage their hotels. Marketing and Advertising Support Burger King: Franchisees benefit from Burger King’s national advertising campaigns, which drive traffic to their stores without the franchisee bearing the full cost of such large-scale promotions. Proven Product/Service Offerings Starbucks: Franchisees of Starbucks can confidently serve the company’s coffee and other products, knowing that these offerings have been highly successful worldwide and are in demand by customers. Access to Established Supply Chains Domino’s Pizza: Domino’s franchisees benefit from the company’s established supply chain, which provides them with ingredients and supplies at a lower cost due to the company’s bulk purchasing power. Reduced Risk Anytime Fitness: Franchisees of Anytime Fitness open gyms under a brand that is already known and trusted. This reduces the risk of business failure compared to starting a new, independent gym with no brand recognition. Networking and Community The UPS Store: Franchisees of The UPS Store often network with each other through company conferences and online platforms, sharing best practices and tips for success. This sense of community and shared knowledge helps each franchisee improve their operations. These examples show how franchisors can effectively grow their brand and revenue, while franchisees gain access to established systems and support, reducing the risks and challenges of running a business. Common challenges and risks Franchising, while offering numerous benefits, also presents several challenges and risks for both franchisors and franchisees. Below are some common challenges and examples to illustrate them: Challenges and Risks for Franchisors Maintaining Brand Consistency Challenge: As a franchisor, ensuring that all franchisees adhere to the brand’s standards can be difficult. Inconsistent quality or service at one location can damage the brand’s reputation across all locations. Example: McDonald's has had issues in the past with some franchisees not adhering to the strict food preparation and service standards, leading to customer dissatisfaction. To address this, McDonald’s conducts regular audits and provides training to ensure consistency.  Loss of Control Challenge: Franchisors may struggle with a lack of direct control over the day-to-day operations of franchisees, leading to potential deviations from the brand’s standards and practices. Example: Subway has faced challenges with franchisees who, in an attempt to cut costs, may use cheaper ingredients or alter the menu, which can negatively impact the brand’s image. Legal and Regulatory Compliance Challenge: Franchisors must navigate complex legal and regulatory environments in different regions. Non-compliance can lead to lawsuits, fines, or even the closure of franchises. Example: 7-Eleven has encountered legal issues in Australia, where some franchisees were found to be underpaying workers. The franchisor had to take action to ensure compliance with local labor laws.  Franchisee Disputes Challenge: Disagreements between franchisors and franchisees over fees, operational issues, or contract terms can lead to legal disputes, damaging the relationship and the brand. Example: Dunkin' Donuts has had legal battles with franchisees over issues like franchise termination and renewal conditions, which have sometimes resulted in lengthy court cases and negative publicity. Market Saturation Challenge: Expanding too quickly or in the wrong locations can lead to market saturation, where too many franchises are competing in the same area, reducing profitability for all. Example: Quiznos expanded rapidly in the early 2000s, leading to market saturation in some areas. This oversaturation contributed to the decline of the brand, as franchisees struggled with low sales and high competition.  Challenges and Risks for Franchisees High Initial Investment and Fees Challenge: Franchisees often face high upfront costs, including franchise fees, equipment, and setup expenses. This can be financially burdensome, especially if the business takes time to become profitable. Example: McDonald's franchisees must invest a significant amount of money (often over $1 million) to open a new restaurant. If the location doesn’t perform well, the franchisee may struggle to recoup the investment. Limited Operational Freedom Challenge: Franchisees must adhere to the franchisor’s established systems, processes, and branding, which can limit their ability to innovate or adapt the business to local conditions. Example: Starbucks franchisees must follow strict guidelines on store layout, product offerings, and marketing strategies. This limits their ability to customize their stores to better fit local market demands.  Ongoing Royalty and Marketing Fees Challenge: Franchisees are typically required to pay ongoing royalties and marketing fees, which can eat into profits, especially in the early years of operation. Example: Subway franchisees pay a percentage of their gross sales as royalty fees, along with a separate fee for advertising. For some low-performing stores, these fees can make it difficult to achieve profitability. Risk of Franchisor Failure Challenge: If the franchisor faces financial difficulties or goes out of business, the franchisee’s investment is at risk. The franchisee may be left without support or the brand recognition they relied on. Example: Quiznos franchisees were severely impacted when the parent company faced financial difficulties and eventually filed for bankruptcy. Many franchisees were left without support, leading to store closures.  Territorial Disputes Challenge: Franchisees may face competition from other franchisees in nearby territories, especially if the franchisor does not clearly define or protect exclusive territories. Example: The UPS Store franchisees have sometimes faced challenges when new stores are opened too close to existing ones, leading to competition and reduced customer base for both locations. Dependence on Franchisor’s Decisions Challenge: Franchisees are highly dependent on the franchisor’s decisions regarding marketing, product offerings, and pricing. Poor decisions by the franchisor can negatively impact all franchisees. Example: Taco Bell franchisees were affected by the parent company’s decision to discontinue popular menu items, which led to a decline in customer traffic and sales at some locations. These challenges highlight the importance of careful planning, due diligence, and a strong relationship between franchisors and franchisees to mitigate risks and ensure mutual success.