Chapter 16

Franchising Is Big Business

Hospitality Today
An Introduction

Eighth Edition
Competencies

1. Explain what is franchise.

2. Describe types of franchises.
3. Summarize the history of franchising and
explain how franchising works.

Slide 2
What Is Franchising?

• Franchising is the authorization given by a

company to another company or an individual
to sell its unique products and services.
• Franchising is a marketing or distribution
system.
• Under franchising, the franchisor grants an
individual or company the right to conduct
business according to the franchisor’s
guidelines, for a specified time and in a
specified place, for a fee.
Slide 3
Franchisors and Franchisees
• The franchisor is the franchise company that owns
the trademark, products, and/or business format
that is being franchised.
• The franchisee is the individual or company
granted the right to do business under the
franchisor’s name.
• The franchisee may be a single-unit owner or have
a multi-unit franchise. As the term suggests, a
single-unit owner has the right to open and
operate one franchise unit. It does not exclude
that individual from buying additional single units.
Slide 4
Franchise Rights
• Franchise rights vary considerably.
• Most franchisors grant franchisees the right to
use the franchise name and its distinctive
trademark, logo, architecture, and interior
design.
• Some franchisors also sell their method of
operation, or designate territories in which the
franchisee may operate.
• In some cases, the franchisor may grant the
franchisee the right to sell the franchisor’s
products.
Slide 5
Types of Franchises

• Product or trade-name
• Business format

Slide 6
The Product or Trade-Name Franchise

• The product or trade-name franchise is a

supplier-dealer arrangement whereby the
dealer (franchisee) sells a product line provided
by the supplier (franchisor) and, to some
degree, takes on the identity of the supplier.
• This is the type of franchise that exists in the
automobile, gasoline service station, and soft
drink industries.
• The majority of total franchise sales in the
United States are from product or trade-name
franchising.
Slide 7
Business Format Franchises
• Business format franchises are characterized by an
ongoing business relationship between franchisor and
franchisee that includes not only the product,
service, and trademark but the entire business
concept itself.
• Restaurants make up the majority of business format
franchises.
• The majority of the growth in franchising has been in
the business format franchise category.
• Besides restaurants and hotels, this category includes
non-food retailers, personal and business services,
real estate services, and other service businesses.
Slide 8
Early Franchises
• In 1851, I. M. Singer & Company used franchising to
develop a network of sewing-machine dealers
throughout the United States. Since people did not
know how to use these new sewing machines, the
dealers also provided service in the form of sewing
lessons.
• Early automobile manufacturers came up with a
solution similar to the Singer company’s: they
established dealerships to sell and service their cars.
• The first Coca-Cola franchise was granted in 1899.
Franchising was necessary because Coca-Cola was
packaged in a unique glass bottle that consumers paid
a deposit for and returned to the company.
Slide 9
The Introduction of
Business Format Franchising

• The business format franchise in the hospitality

industry was pioneered by Howard Dearing
Johnson, founder of the Howard Johnson Company.
• Johnson started his chain in 1925 and by 1928 had
two thriving ice cream parlors. He wanted to open
a third but had no more capital to invest, so he
convinced a friend to build the restaurant and
offered his assistance.
• Despite Johnson’s success, franchising did not
catch on in the hospitality industry until the early
1950s.
Slide 10
Initial Franchise Fees

Initial franchise fees are calculated by assigning a

monetary value to the following:
• The franchisor’s goodwill
• The value of the new franchise unit’s trading
area or territory
• The average cost of recruiting a franchisee
• The cost of training a franchisee
• The cost of signs, ads, plans, and other aids

Slide 11
Other Franchise Fees

• Royalty fees
• Advertising and marketing fees
• Training fees
• Pre-opening support fees
• Reservation system fees

Slide 12
The Initial Investment
• The initial investment required to establish a
successful franchise can be substantial due to
the cost of real estate, construction, property
taxes, and other expenses.
• Franchisors want to be sure that their
franchisees will have enough capital to operate
their units until they start making a profit, so
some franchisors require their franchisees to
have a minimum personal net worth.
• This amount varies from franchisor to
franchisor.
Slide 13
Franchise Regulations

• Franchising is regulated in the United States by

the Federal Trade Commission and a number of
states.
• In those states with special regulations, a
franchisor must register with the proper state
authority before offering a franchise for sale
within the state.
• State and local restrictions take precedence if
they are more demanding than federal
requirements.
Slide 14
Advantages for Franchisees

• Site-selection • Training
assistance • Opening support
• Credit • Promotional
• Construction assistance
expertise • Economies of scale
• Fixtures and • Ongoing support
equipment assistance

Slide 15
Site-Selection Assistance
• The first advantage for franchisees is that their
franchisor will help them select a good site for
their business.
• Almost all successful franchisors know exactly
what kinds of sites work best for their franchises.
Sometimes the franchisor selects the site, buys or
leases the land, puts up the building, and then
leases it to the franchisee. If not, franchisors
almost always approve sites.
• Some franchisors offer prospective franchisees
help with site acquisition and site and market
assessment.
Slide 16
Credit

• Some franchisors may help provide financing to

qualified applicants.
• This help can be in the form of offering loans or
guarantees, locating potential lenders, or
preparing a loan package or business plan that
can be shown to a bank or another potential
lender.
• Some franchisors even have lease programs that
allow prospective franchisees to lease units
with an option to buy them.
Slide 17
Construction Expertise

• Most franchisors supply franchisees with

architectural and floor plans for the franchise
building.
• Some franchisors also help the franchisee
employ the builder and supervise the
construction.
• Since most franchisees do not have experience
in this area, the assistance of a construction
professional can mean considerable savings.

Slide 18
Training
• Classroom and on-the-job training is a major
part of most franchise programs.
• Forty-nine percent of all franchisees list training
as their main reason for buying a franchise.
• Many franchisors have extensive training
programs because it is in their best interest to
see that franchisees meet franchise standards.
• Most hotel franchisors provide training at their
headquarters; training may also be conducted at
individual hotels by field representatives.

Slide 19
Promotional Assistance
• Help with advertising, sales, and public relations is
one of the main strengths a franchisor can offer a
franchisee.
• Most franchisors charge franchisees a marketing or
advertising fee that is used to purchase television
time, radio spots, and newspaper ads; support
promotional efforts on social media; and produce
other promotions such as coupons, sweepstakes, or
contests.
• Some franchisors help franchisees with cooperative
advertising plans, offer ongoing sales incentives,
and sponsor awards for superior sales and quality.
Slide 20
Disadvantages for Franchisees

• Restrictions
• Unwanted products or procedures
• Unwanted advertising
• Unprotected territories
• Cancellation
• Inadequate training

Slide 21
Restrictions

• A major disadvantage of franchising is that most

franchise contracts restrict franchisees a great deal.
• A franchisor’s success depends on having consistent
quality throughout the system. This means that
franchisors must strictly enforce their standards.
• These restrictions mean that some franchisees
cannot be as creative as they’d like to be. They
can’t come up with their own advertising campaigns
or introduce new menu items without permission
(and permission is seldom granted).

Slide 22
Slide 23