The word ‘franchise’ in French means ‘privilege’ or ‘freedom’ – in essence giving an individual the ‘right’ to something – in this case the right to operate a business or licence under specific conditions. Franchising is, without doubt, the most ‘public’ of business formats. You recognize a franchise because it carries a strong brand, has a distribution mechanism that reaches far and wide, and provides a uniform product, service and image to the public. A true franchise is one that gives the right to an individual to use its trademark, but also gives him/her the complete business blueprint, training in all aspects of running the business, and ongoing support.
On a more basic level, franchising is really just an extremely good distribution method. The ‘franchisor’ or person who starts a company or develops a concept, uses others (franchisees) to duplicate his concept and distribute it on a large scale. This inter-dependency forms the basis to the business format, and its success lies in the effective implementation of certain basic but clearly defined business principles. The juxtaposed relationship between franchisor and franchisee needs to be fully understood and accepted for the overall business to succeed. The responsibilities of each side include:
How does a franchise chain start?
Usually with a good idea! An individual entrepreneur or company starts a business, runs it successfully for a reasonable length of time, has unprecedented interest in the product or service by both the consumer as well as other entrepreneurs, and decides to duplicate his successful concept. Once he registers the trademark and develops an Operations Manual, a Franchise Contract and a Disclosure Document, he is free to grant licences to others (franchisees) to trade under his trademark under the regulations and controls relating to the operation of the business, in return for fees. The effective duplication of the concept with a distinctive brand and targeted marketing ensures rapid and effective market penetration and widespread brand recognition.
What makes a franchise different from other businesses?
When you walk down a main street in any city and you recognize a host of branded fast food outlets, retail chains or beauty salons, you are looking at franchised outlets operated by franchisees. That car service outlet you take your car to be serviced, the nail bar you have your nails done or the pre-school play group are more than likely franchises. The key to the success of these franchisees is the fact that they all follow a successful formula – from the products and services they offer to the look of the stores. The buying public has more confidence in an established brand that has many outlets and a distinctive offering. With a franchise there is name recognition, buying power that greatly affects the bottom line, and ongoing support in the form of research, development, new ideas, market analysis, marketing and the creation of new products. A good franchise is tried and tested, and commercial banks and development corporations recognise the lower risk profile of franchising, and consequently prefer financing a franchisee.
Start-up business versus franchise business?
The litmus test to prove this theory would be to take the same start-up business, set it up independently, as well as through a franchise system, and monitor the results. There is no question that a Rocamama’s or McDonald’s outlet will have a greater chance of success than Joe’s Burgers. Although the success of any business ultimately depends on the person who runs it, a franchise business, with its business format system, offers a greater degree of protection from the cold winds of the free market with its support system of training, marketing and business administration. While franchises succeed because of support, they also succeed because they follow a system.
How widespread is franchising?
Since its inception in the 1950s as a business format, franchising has developed into a global phenomenon, which, if it continues to keep up with economic and retail trends, will continue to be the biggest creator of entrepreneurs, small businesses, jobs and wealth. Its maturity in first world countries has seen it broaden its base – from offering entry-level opportunities for people to start a business, to allowing them to become multi-unit operators with multiple units, and even to become multi-brand franchisees. Franchising’s expansion into third world countries has meant that it often constitutes the backbone of the economy and has introduced unique and essentially viable concepts such as social and tandem franchising to assist in grassroots development.
What are the major growth areas in franchising?
Any area of business can be franchised – from food, wholesale, retail, manufacturing or the service industry. As the innovator of new business concepts and with between 17% (South Africa) and over 70 % (the USA) going through the franchised route, the global franchise sector always considers shifting demographics to find new opportunities for growth. Whether catering to seniors and ‘baby-boomers’ who now find themselves in or close to retirement with needs, time and money at their disposal, to the millennials who now have established careers and families to take care of, franchising can provide goods and services related to their growing needs.
Do consumers want variety or cookie-cutter concepts?
There will always be fads that come and go in the marketplace but, given the size of the franchise sector and the fact that it is franchising that often casts the first stone causing the ripple effect of a trend, developing new ideas and perfecting their roll-out is what franchising is good at. While consumers want variety, they also want the familiar. By duplicating a good product or service, a franchise concept reaches out to thousands of people who feel comfortable and safe buying that product or using that service. Particularly in the current economic climate, the latest trends that are growing segments in franchising include recession-proof concepts such as auto maintenance, home repair and renovation, second-hand retailing, business-to-business services in accounting, tax and consulting. Beauty, fitness and health remains a buoyant sector aimed at all age groups, from seniors to children who look for ways to a healthier lifestyle. As the world reels from weather disasters due to global warming, ‘green’ and energy-reduction services are also on the rise as consumers become more pro-active in saving the planet.
What are some of the drawbacks of owning a franchise?
The most obvious drawback lies in the acceptance of the franchise system itself. Although, in some ways a franchisee owns his own business, he is contractually bound to adhere to the franchisor’s operational guidelines. For someone who likes doing things ‘his way’, this could prove a problem. The cost of buying into a franchise, with its structure of up-front fees and set-up costs, is often very high, and a franchisee is contracted to pay ongoing management service fees for the duration of his contract period. Restrictions may also be placed on the franchisee’s ability to sell the franchise as the franchisor has a say in the proposed buyer’s suitability.