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Module 1:
INTRODUCTION TO
FRANCHISING
Learning Outcomes:
At the end of this module, the student should be able to:
Define and describe franchising
Understand franchising concept
Learn historical development of franchising
Distinguish between various types of franchises
Identify top 20 franchises of 2020
What is Franchising?
Franchising is basically a right which manufacturers or
businesses give to others. This right allows the
beneficiaries to sell the products or services of these
manufacturers or parent businesses. These rights could
even be in terms of access to intellectual property rights.
Franchising Conceptual Framework
Franchising is an arrangement where franchisor (one party)
grants or licenses some rights and authorities to franchisee
(another party).
A contractual agreement takes place between Franchisor and
Franchisee. Franchisor authorizes franchisees to sell their
products, goods, services and give rights to use their trademark
and brand name.
In return, the franchisee pays a one-time fee or commission to
franchisor and some share of revenue.
The individual or business that grants the right to the franchise is called
the franchisor, while the beneficiary of the right is called the franchisee.
Franchising is a business marketing strategy to cover maximum market
share.
Franchising is a business relationship between two entities wherein
one party allows another to sell its products and intellectual property.
Franchising is a business relationship between two entities wherein
one party allows another to sell its products and intellectual property.
Franchising is one of three business strategies a company may use in
capturing market share. The others are company owned units or a
combination of company owned and franchised units.
Franchising is a business strategy for getting and keeping customers. It
is a marketing system for creating an image in the minds of current and
future customers about how the company's products and services can
help them. It is a method for distributing products and services that
satisfy customer needs.
Franchising is a network of interdependent business relationships that
allows a number of people to share:
A brand identification
A successful method of doing business
A proven marketing and distribution system
In short, franchising is a strategic alliance between
groups of people who have specific relationships
and responsibilities with a common goal to
dominate markets, i.e., to get and keep more
customers than their competitors.
There are many misconceptions about franchising, but
probably the most widely held is that you as a franchisee are
"buying a franchise.
Other franchisees and company operated units are not your
competition. You are working as a team with others in the
system. Other franchisees share with you the
responsibility for quality, consistency, convenience, and
other factors that define your franchise and insures
repeat business for everyone..
An "ownership mentality" destroys the reason franchised and
company-operated units are successful.
Your desire to become a franchisee must be grounded in your belief
that you can be more successful using someone else's brand and
operating according to their systems and methods
Historical Background
The right or license granted to an individual or group to market a
company’s goods or services in a particular territory; also a business
granted such a right or license.
A franchise is a unique kind of business with a very interesting history.
The Middle Ages
The Middle Ages is where the business
model of franchising started to appear.
One positive thing that occurred amid all
the suffering that was taking place on a
daily basis is franchising.
In those days, some of the local governments granted high
church officials a license to maintain order and assess taxes.
Medieval courts (or lords) gave these individuals the right to
hold markets, and perform business-related activities.
These first franchisees paid a royalty to the lords in exchange
for, among other things, “protection” that was essentially
considered to be a monopoly on commercial ventures.
The Colonial Period
It involved what were called “Franchise
Kings”. The local sovereign/lord would
authorize individuals to hold markets, run
local ferries, hold fairs, or to even hunt on
his land. This concept extended to the
Kings, who would grant a franchise for
different types of business activities.
European monarchs even bestowed franchises
upon local citizens who take on the risk of
establishing colonies. The founder was able to
gain the protection of the “Crown” in exchange for
taxes or royalties.
The 1840’s
During the 1840’s, there was a beer brewer in Germany who granted certain
rights to several local taverns to sell their beer. What’s interesting about this is
the fact that the tavern owners had to use the beer brewer’s trade name,
SPATEN.
The tavern owners were franchisees of
sorts, because they had to pay for the right
to use the trade name (a.k.a., the brand
name).
The 1880’s
The modern franchise business model can be traced back to Mr. Isaac Merrit
Singer, an entrepreneur of the highest order. Isaac Singer was the founder of I.M.
Singer & Company. He was the first person to patent a practical, widely-used
sewing machine.
Sewing machines started to appear on the scene in
the mid 1800’s—but not like the one Singer
manufactured. Singer’s sewing machines could
sew 900 stitches per minute, a lot more than any
other sewing machines in existence at the time.
Here’s how Singer’s licensing arrangement worked:
Singer and his partners would find businesspeople who were
interested in owning the rights to sell Singer’s sewing machines
in specific geographical areas. Once they found parties that
wanted to become licensees, they would charge them an up-
front fee—a licensing fee, for the right to sell the machines.
In addition, Singer required licensees to teach
consumers how to use the machines that they
purchased. The partners had money coming in
from the licensing fees which enabled them to
fund more manufacturing.
The Turn of the Century
The creation—and ultimately, the
mass-production—of automobiles
changed everything in America.
There was finally a way for people
to get from location to location
quickly… or at least faster than
with a horse and buggy.
Henry Ford, who had just pioneered mass production by
way of the assembly line, needed to find a good way to
distribute the product. For a time automobiles were sold
through mail-order catalogs! Some were even sold by
salesmen who traveled around the USA trying to find
buyers.
One of new distribution methods Ford worked on was the
automobile dealership.
In 1896, William Metzger built and opened the first
independent automobile dealership in Detroit, Michigan.
The second businessman to get involved was H.O. Kohller. He
opened the first automobile dealership in Pennsylvania. He sold
Winton automobiles.
These men were actually the first auto franchise owners. Henry
Ford and the other businessmen who were producing automobiles
now had a distribution system. They had an automobile franchise
network. And soon, automobile franchises were appearing
everywhere.
The 1960’s
Raymond Albert Kroc, born in 1902, was a franchise hero. Ray Kroc
was a sales guy with an incredible vision. He started out selling
milkshake-mixing equipment. He believed in the product (the Multi-
Mixer) so much, he mortgaged his home to become a distributor of
this machine which could make five milk shakes at the same time.
Kroc traveled all over the country selling Multi-Mixers to people in
the food industry.
During his travels, had heard about two brothers from California
named Dick and Mac McDonald who owned a busy hamburger
stand and were using eight of Kroc’s milkshake-mixing machines—
simultaneously. Coincidentally, the McDonald brothers happened to
be looking for a “franchising agent” to sell franchises across the
country—and as someone who’d been a salesman for the past 30
years, Ray Kroc was the right guy for the job.
Kroc became the exclusive agent and started selling
franchises. He also opened the first duplicate of the
McDonald brothers’ California restaurant in Des Plains,
Illinois. Ray tried to convince the brothers that they
should start thinking bigger also. A few years later, the
three owned multiple restaurants.
Kroc ended up buying out the McDonald brothers for $2.7 million
after learning that they weren’t as motivated as he was in
building a restaurant empire.
By 1963, McDonald’s had 500 restaurants up and running.
Today, there are approximately 34,000 McDonald’s restaurants
open. 80 percent of them are franchises. 1.8 million People are
employed by McDonald’s in 118 different countries.
Types of Franchising
Business Format Franchises
The most common type of
franchising. A company expands by
supplying independent business
owners with an established
business, including its name and
trademark
The franchisor generally assists the independent owners in
launching and running their businesses. In return, the business
owners pay fees and royalties. In most cases, the franchisee
also buys supplies from the franchisor. Fast food restaurants
are good examples of this type of franchise, including
McDonalds, Burger King, and Pizza Hut.
Product Franchises
With product franchises, manufacturers control how retail stores
distribute their products. Through this kind of agreement,
manufacturers allow retailers to distribute their products and to
use their names and trademarks. To obtain these rights, store
owners must pay fees or buy a minimum amount of products.
Tire stores, for example, operate under this kind of franchise
agreement.
Manufacturing Franchises
A franchisor grants a manufacturer the right to produce and sell
goods using its name and trademark. This is common among food
and beverage companies. For example, soft drink bottlers often
obtain franchise rights from soft drink companies to produce, bottle,
and distribute soft drinks. The major soft drink companies also sell
the supplies to the regional manufacturing franchises. In the case of
Coca Cola, for example, Coca Cola sells the syrup concentrate to a
bottling company, who mixes these ingredients with water and
bottles the product, and sells it on.
Ways of Describing Franchising
It can be described as a "hybrid" model that fills the gap
between working for somebody else (whether a large
corporation or a small business) and working for yourself.
Franchising is not an industry in itself. Rather, it is a way of
doing business that can be applied in almost any sector
Franchising has two main forms. In product/trade name
franchising, a franchisor owns the right to a name or trademark
and sells or licenses the right to use that name or trademark.
Business format franchising, the type discussed in this guide,
involves a more complex relationship in which the franchisor
provides franchisees with a full range of services and support, and
franchisees sign an agreement to conduct operations in conformity
with specific rules laid out by the franchisor.
According to the International Franchise Association,
"Franchising is a method of distributing products or services. At
least two levels of people are involved in a franchise system: 1)
the franchisor, who lends his trademark or trade name and a
business system; and 2) the franchisee, who pays a royalty and
often an initial fee for the right to do business under the
franchisor's name and system."
Franchising is a team effort. For any franchisor to succeed, the
vast majority of its franchisees (all, ideally) must operate
profitable individual franchise units over the long term. A
brand's success depends on an ongoing partnership between
franchisor and franchisee. One of the most common sayings in
franchising is: "Franchising means working for yourself, but not
by yourself."
For many, franchising's greatest appeal is the
opportunity for an individual to control their destiny and
secure their future. In its earlier days, franchising was a
way for an independent-minded business person to
"buy a job" — a sandwich shop or a home repair
service, for example, and showing up every day as a
hands-on operator
In recent years, the franchise model has caught on as an attractive
business opportunity for wealthier individuals and investors who buy
many units at once; or who buy the rights to develop a geographical
area or "territory" and develop a certain number of units within a
specified time frame. These multi-unit owners, area developers, or
area representatives (some of whom also recruit new franchisees
and support them within their territory) are part of a growing trend in
franchising, and account for more than half (53 percent) of all
franchised units in the U.S. today.
Multi-brand Franchisees
These franchisees operate different brands under a single
organization, creating efficiencies, economies of scale, and market
penetration to increase sales and profitability. The two primary
reasons successful franchisees seek additional brands are: 1) they
have "built out" their territory for their current brand; and/or 2) they
are seeking a new, complementary brand to smooth out the ups
and downs of business or seasonal cycles.
Co-branding
A franchisee operates two brands from the same location, is
another ongoing trend. Co-branding saves on real estate or
leasing costs, allowing more profit per square foot and often
balancing out day parts (breakfast, lunch, dinner). An
increasing number of franchisors now offer several different
brands, and often provide incentives to franchisees to co-
brand.
Business Opportunity
An owner (producer or distributor) of a service or
trademarked product grants rights to an individual for local
distribution and/or sale of goods or services, and, in return,
receives a payment
Pattern or Method of Doing Business
A franchisee is granted a right to offer, sell, or distribute
goods or services under a marketing format as designated
by the franchisor.
Franchise Opportunity
Three components-a trademark and/or logo, the use of a
product or service following a marketing plan, and the
payment of a royalty fee-constitute the essence of a
franchised business.
Licensing Relationship
A franchisor of a product, service, or business method
grants distribution rights to affiliated dealers (the
franchisees); these rights often include exclusive access to
a defined geographic area.
Continuing Relationship
A franchisor provides a licensed privilege to do
business and provides management and technical
assistance and training in return for a consideration
from the franchisee
Top 20 Franchises, Local and International
Dunkin Jersey Mike’s Subs ⬡ Smoothie King
Taco Bell Culver’s ⬡ Great Clips
Mc Donald’s Pizza Hut
⬡ Dairy Queen
Sonic Drive-in 7-Eleven
UPS Store Kumon Math & ⬡ Budget Blinds
Ace Hardware Reading Centers ⬡ Tropical Smoothie Cafe
Planet Fitness Baskin-Robbins ⬡ HomeVestors of America
⬡ Palm Beach Tan
Thanks!
Any questions?
