Franchises

● Franchising is another form of external growth that is becoming

increasingly popular for businesses that wish to expand globally.
It involves the following :
○ An original business, known as the franchisor, that
developed the business concept and product, then sells to
other businesses the right to offer the concept and sell the
product.
○ Businesses, known as franchisees, buy the right to offer
the concept and sell the product. In other words, the
franchisee sells the products developed originally by the
franchisor. The franchisee usually also has to be consistent
with, and in some instances identical to, the original
concept developed by the franchisor.
● A business that starts to franchise is the franchisor. It is often a
rapid form of growth because the franchisor does not actually
have to produce something new.
● There are many examples of franchises in different areas of
business, including :
○ Dominos - Fast Food
○ Budget - Car Hire
○ Marriott - Travel
○ Kumon - Education
○ Benetton - Clothing
○ Patanjali - Cosmetics
○ Spar - Food stores
● In the case of Mariott :
○ Marriott International Inc. is the franchisor. They are a
worldwide operator and franchisor of hotels and related
lodging facilities.
○ Its franchisees include Westin; Ritz-Carlton; Bulgari; W
edition; Le Meridien, etc.
 ○ Marriott International was founded in 1967, making it one of
the biggest and most successful franchises to exist.

● However, not all franchises were successful. For example;

Subway’s franchises were considered to be one of the biggest
franchising fails in the history of business.
○ In 2016, Subway's US location count dropped by 359. It
lost another 909 locations in 2017. It dropped another
1,108 locations in 2018.
○ Declining sales and shifting trends have played a role in the
closures, with Nation's Restaurant News reporting that the
chain's system sales dropped by 3.6% in 2018.
○ A large part of Subway's problem is the chain's unique
franchise model, which encourages franchisees to open
thousands of inexpensive locations around the world - often
dangerously near existing Subway shops.

○ With declining sales and too many locations, many Subway

franchisees are struggling to make a living.

○ It only costs $116,000 to $263,000 to open a Subway

location today, making it one of the least expensive
franchises in the restaurant industry. For comparison, it
costs $1.3 million to $2.2 million to open a McDonald's
franchise.

○ ‘The low cost and ease of opening helped Subway grow at

a rapid pace after cofounders Fred DeLuca and Peter Buck
opened the first Subway shop in the late 1960s. But, by the
 '90s, many felt the chain was growing at an irresponsible
pace.

What is the role of the franchisor?

● The franchisor will provide :
○ The stock
○ The fittings
○ The uniforms
○ Staff training
○ Legal and financial help
○ Global advertising
○ Global promotions

What is the role of the franchisee?

● The franchisee will:
○ Employ staff
○ Set prices
○ Set wages
○ Pay an agreed royalty on sales
○ Create local promotions
○ Sell only the products of the franchisor
○ Advertise locally

Advantages and Disadvantages of the Franchisee:

Advantages Disadvantages
The product exists and is usually Has unlimited liability for the
well known. franchise
The format for selling the product Has to pay royalties to the
is established. franchisor
The set-up costs are reduced. Has no control over what to sell
The franchisee has a secure Has no control over supplies
supply of stock
The franchisor can provide legal, Makes all the global decisions
financial, managerial and
technical help

Advantages and Disadvantages of the Franchisor:

Advantages
Gains quick access to wider
markets
Makes use of local knowledge
and expertise
Does not assume the risks and
liability of running the franchise
Gains more profits and the sign-
up fees
Disadvantages
Loses some control in the day-to-
day running of the business
Can see its image suffer if the
franchise fails or does not
perform properly.