What is franchising?
Franchising is a business concept where a franchisor, owner of a business, licenses another party, franchisee, with the ability to distribute goods or services using their brand name and under their specifications.
Business Format Franchising. This is the most popular form of franchising. In this form of franchising, the franchisor provides the franchisee with not only its products, services and brand name but also the entire system for operating the business. This includes: quality control, marketing strategies, operating manuals, brand standards and training. This means that the franchisor is very involved in the way the business is run.
The format is employed by most large brands such as KFC, McDonalds and Starbucks.
Product Distribution. This form of franchising focuses on the products supplied or manufactured by the franchisor. The franchisee is less restricted by the franchisor allowing them to conduct the business more freely. The franchisee has to however, agree to sell the product exclusively. This format is seen in companies such as Coca Cola and car companies such as Ford.
Management Franchising. This format focuses on the franchisee managing the business. The manager pays fees in order for him to be allowed to use the brand name and trademarks.
Industries Using Franchising
More than 100 industries use franchising as a way of marketing their business. Such industries include:
- Food industry. This industry has employed the use of franchising with great results as seen with the growth of large brands such as Burger King and Subway.
- Beverage industry. Companies that use this form of marketing in this industry range from soft drinks companies such as Coca Cola and alcoholic beverage companies.
- Health and Fitness.
- Automotive industry. Big brands such as Ford use this.
- Cleaning and janitorial services.
- Travel and tourism. Hotel chains use franchising as a way of expanding their brands.
- Retail industry. Stores such as clothing stores are able to expand their line easily through this.
- Education industry. Private teaching institutions open various branches using this business concept.
These are just a few of the large variety of businesses that use franchising a way of conducting lucrative businesses.
Advantages of Franchising
- Offers the franchisee an opportunity to own a business with the benefits of an already established brand name.
- Experience is not necessarily needed as the franchisor provides training of the brand model.
- Decreased costs as it may prove easier to secure financing for a franchise and even cost less than starting a business of your own of the same kind.
- A business can build a global presence quickly at low costs by franchising its brand.
- Motivated management. By franchising, the franchisor is able to find motivated management of their brand as the franchisee has a vested interest in the success of the business.
- Eases supervision by eliminating responsibilities such as hiring of employees allowing the franchisor to direct their efforts toward growing the business.
- Market penetration. Franchisees are able to open franchises in markets that are not a priority for the franchisor.
- Reduced risk. Franchising reduces the risk for the franchisor by putting it all on the franchisee in developing the business. The franchisee also signs leases for the location and equipment and has the liability for what happens in his location.
Disadvantages of Franchising
- Through quality control the franchisor demands consistency in the services and experiences that customers have in each location. This makes it impossible for the franchisee to make the business the way they would want.
- Services that other franchisee’s offer can reflect badly on the other franchises and affect sales.
Shared profits. The franchisee has to always share the profits with the franchisor.