Scarb Eesbm6e PPT 06

CHAPTER 6
Franchising and the

Entrepreneur
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Franchising Boom
 Franchising has gained tremendous
growth in Pakistan during the last
decade. Well-known names like
McDonald’s, Subway, Papa John’s,
Domino’s, Burger King, Dunkin
Donuts, Kentucky Fried Chicken,
Hardee’s, Nandos, Pizza Hut and many
more have become household names.
Ch. 6: Franchising and the Entrepreneur Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6-2
Contd…
 Most of the growth in the franchise
industry during past few decades have
taken place in the food business, where
the present market size for
internationally franchised outlets is
estimated more than PKR 1.2 billion
(USD approximately 24 million) in terms
of annual sales (Source: World
Franchise Associates).
 Retail and clothing franchise
businesses are also high in popularity
in Pakistan. Some of eminent names
are Debenham’s, Nike, Levi’s, The Body
Shop, Toni & Guy, Next, Mothercare,
Mango, Adidas, etc.
 Yasin Paracha, Managing Director of Team-A
Ventures (Pvt) Ltd, a franchisee, is very
positive about the employment possibilities
of retail franchising, “This creates immense
number of jobs; the average requirement per
1,000 square foot, of retail space is around
six, which means Dolmen City, with a
leasable area of 650,000 square feet will
provide jobs to around 4,000
people!” (Tribune, 2012).

Franchising
A system of distribution in
which semi-independent
business owners pay fees
and royalties to a parent
company in return for the
right to become identified
with its trademark, sell
its products and services,
and use its business
format and system

Franchising
Franchising provides a proven system to
follow.
That’s S.Y.S.T.E.M as in
“Save Yourself Time, Energy and Money.”
It gives a structure to follow. Franchisors can
only be successful if their franchisees are
successful.
This makes for a win-win relationship that is
unique in the business world.

The Franchising Relationship
Element The Franchiser The Franchisee
Site Selection Oversees and approves; may choose site Chooses site with franchiser’s approval
Design Provides prototype design Pays for and implements design
Employees Makes general recommendations and Hires, manages, and fires

training suggestions employees
Products and Services Determines product or service line Modifies only with franchiser’s approval
Prices Can only recommend prices Sets final prices
Purchasing Establishes quality standards and suppliers Must meet quality standards and purchase
only from approved suppliers
Advertising Develops and coordinates national ad Pays for national ad campaign; complies with
campaign; may require minimum level of local advertising requirements; gets franchisor
spending on local advertising approval on local ads
Quality Control Sets quality standards and enforces them Maintains quality standards; trains employees
with inspections; trains franchisees to implement quality systems
Support Provides support through an established Operates business on a day-to-day basis with
business system franchiser’s support
FIGURE 6.1
Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association,
National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.
Difference between
franchising and licensing
 In a franchising model, the franchisee uses another
firm's successful business model and brand name to
operate what is effectively an independent branch of
the company. The franchiser maintains a
considerable degree of control over the operations
and processes used by the franchisee, but also
helps with things like branding and marketing
support that aid the franchise. The franchiser also
typically ensures that branches do not
cannibalize each other's revenues.
Contd…
 Under a licensing model, a company sells
licenses to other (typically smaller) companies
to use intellectual property (IP), brand, design
or business programs. These licenses are
usually non-exclusive, which means they can
be sold to multiple competing companies
serving the same market. In this arrangement,
the licensing company may exercise control
over how its IP is used but does not control
the business operations of the licensee.
Ch. 6: Franchising and the Entrepreneur Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 10
Types of Franchising
 Tradename
 Product distribution
 Pure (Business format)
Early Franchise Entrants
 1898 - Automobile Manufacturers

 Division of responsibilities:
- manufacturers - design & production
- dealers: sales & service
Coca Cola Company
 1886 : coca-cola invented

 1899 : Thomas & Whitehead 600-word contract
promised to open a bottling plant

• 1901 : no capital to open the bottling plant …?
• 1919 : 1,000 franchised Coca-Cola bottlers

Gas Stations
 1930’s - Depression Era Franchising

 First example of Conversion Franchising
 Taxation of all company-owned gas stations
 Why pay that? …. let’s FRANCHISE
 Also quicker local response to price changes

Fast Food Fifties

1960’s, 1970’s, 1980’s,
1990’s

Franchising Timeline
 1898 - General Motors, …Ford
 1899 - Coca-Cola
 1930 - Gas Stations
 1952 - KFC: 13,433
 1955 - McDonalds: 30,823
 1964 - 7-Eleven: 31,680
 1974 - Subway: 26,197
 1980 - Mail Boxes Etc. 5,760
 1995 - Curves: 9,882
 2001 - Geeks On Call: 305

Franchising Basics
 Franchisee gets the right to use all of
the elements of a fully integrated
business operation.
 Essence of what franchisees purchase
from the franchisors: Experience.
 Key Question: “What can a franchise do
for me that I cannot do for myself?”
Benefits of Franchising
 A business system
 Management training and support
 Start-up
 Ongoing
 Brand name appeal

 “Cloning”
 Standardized quality of goods and
services
 National advertising programs
 Franchisees contribute 1% to 5% of sales
 Financial assistance
 Only 20% of franchisors offer direct
financial assistance to franchisees.
 SBA – Franchise Registry
 Proven products and

business formats
FIGURE 6.3 Franchisor Financial Assistance
Source: The Profile of Franchising 2006, International Franchise Association (Washington, DC: 2007), p.
70.
 Centralized buying power
 Site selection and territorial protection
 Important issue:
Territorial encroachment
 Greater chance for success
Drawbacks of Franchising
 Franchise fees and ongoing royalties
 Average upfront franchise fee = $25,147
 Royalties range from 1% to 11% of
franchisees’ sales
 Average royalty = 6.7% of sales
 Strict adherence to standardized

operations
 Restrictions on purchasing
 Approved suppliers only
Drawbacks of Franchising (continued)
 Limited product line

 Contract terms and renewal
 Average term = 10.3 years
 Unsatisfactory training programs
 Market saturation
 Less freedom –
 “No independence”
 “Happy prisoners”
Ten Myths of Franchising
1. Franchising is the safest way to go into
business because franchises never fail.
2. I’ll be able to open my franchise for less
money than the franchiser estimates.
3. The bigger the franchise organization, the
more successful I’ll be.
4. I’ll use 80 percent of the franchiser’s
business system, but I’ll improve upon by
substituting my experience and know-how.
Ten Myths of Franchising (continued)
5. All franchises are the same.

6. I don’t have to be a hands-on manager.
I can be an absentee owner and still be very
successful.
7. Anyone can be a satisfied,
successful franchise owner.
Ten Myths of Franchising (continued)
8. Franchising is the cheapest way to get into

business for yourself.
9. The franchiser will solve my business
problems for me; after all, that’s why I pay an
ongoing royalty fee.
10. Once I open my franchise,
I’ll be able to run things
the way I want to.
The Right Way to
Buy a Franchise
 Evaluate yourself - What do you like and
dislike?
 Research your market.
 Consider your franchise options.
 Get a copy of the Franchisor’s FDD – and
read it!
 Talk to existing franchisees.
 Ask the franchiser some tough questions.
 Make your choice.
Factors That Make a
Franchise Appealing
In addition to the text
 Unique concept or marketing approach
 Profitability
 Registered trademark
 Business system that works
 Solid training program
 Affordability
 Positive relationship with franchisees
Trends Shaping Franchising
Multiple-unit franchising-a method of
franchising in which a franchisee
opens more than one unit in a
broad territory within a specified
time period

Trends
International
Opportunities
China-1,900
franchises, 82,000
outlets
McDonalds-119
countries, 10,000
outlets

Trends
Smaller, nontraditional locations-
intercept marketing: the principle of
putting a franchisee’s products or
services directly in the paths of
potential customers, wherever they
may be
ex. Dunkin Donuts

Trends
Conversion Franchising-a
franchising trend in which owners
of independent businesses
become franchisees to gain the
advantage of name recognition
ex. Century 21

Trends
Master Franchising-a franchise that
gives a franchisee the right to
create a semi-independent
organization in a particular
territory to recruit, sell, and
support other franchisees

Trends
Piggybacking-a method
of franchising in which
two or more
franchises team up to
sell complementary
products or services
under one roof
ex. Taco Bell, KFC, Pizza
Hut, A&W-Yum! Brands

Trends
Serving Dual-Career Couples

And Aging Baby Boomers
THANKYOU 

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CHAPTER 6

Franchising and the

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Design Provides prototype design Pays for and implements design

Employees Makes general recommendations and Hires, manages, and fires

Prices Can only recommend prices Sets final prices

 1898 - Automobile Manufacturers

 1886 : coca-cola invented

promised to open a bottling plant

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

 1930’s - Depression Era Franchising

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

 Brand name appeal

 Proven products and

 Strict adherence to standardized

 Limited product line

5. All franchises are the same.

8. Franchising is the cheapest way to get into

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

ex. Dunkin Donuts

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Serving Dual-Career Couples

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