By Jackie,
Researcher
Topic:
Business (Franchising)
The
objectives of this research are to find out what are the major advantages and
disadvantages of buying a franchise from the franchisee’s perspective. Basically,
franchise is the practice of using another firm’s successful business model.
The benefits and drawbacks of buying a franchise
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Franchise is a method of
marketing and distributing based on a two parties relationship;
that is the
franchisor (the owner and granter of right) and the franchisee (recipient of
right) relationship.
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Franchise or ‘business cloning’
is becoming more popular currently and it looks like a rapid growing trend of
setting up a business nowadays as well as a strategic method for
entrepreneurship as it usually carries lesser risks compared to conventional
business start ups. Friendly speaking, franchising maybe a particularly good
choice for ‘uncreative people’ who wants to start a business but has no prior
business experience. It is advised that potential franchise owners should be
aware and analyse all
its benefits and drawbacks in detail before they decide to purchase a
franchise.
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Big Mac is a proven product of
McDonald’s.
|
Firstly,
the most compelling advantage is the franchise offers a proven idea, product or
service within an established market. This will definitely cut down research,
experiment and survey costs as the potential franchise owners need not have to
worry about the acceptability of a particular product or service by the general
public. They also can save a lot of money, time and effort as they do not need to
do market analysis like PESTEL analysis (Political, Economic, Social,
Technology, Environment and Legal) nor SWOT analysis (Strengths, Weaknesses,
Opportunities and Threats) as these types of analyses have already been done by
the franchisor.
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Starbucks’ logo is an image of a
"twin-tailed mermaid, or siren as she's known in Greek mythology.
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Secondly, the purchase of a
franchise with an established trademark or recognized brand name provides
franchisees with considerable market power and reputation. For instance, the
purchaser of a Starbucks’ franchise has a trademark with proven market power.
The good thing about this is the owners no need to struggle for years in order
to build up a good brand name or image which we commonly see in new
entrepreneurs who have just stepped into the business world and wished to form
their own products and company. Seriously, it is not easy to build a new brand
name by our own efforts nowadays as there are too many brands out there whereby
the competition is extremely high.
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Full training is provided for
each step by the McDonald’s training team.
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Thirdly,
another attractive benefit of purchasing a franchise rather than owning a store
outright is the notion that the franchisor provides the franchisee ongoing
support in terms of training, technical expertise, product updates and
management assistance. These benefits are not available if a person plan to run
a business on his or her own, thus making the process of operating a business
other than franchise seems to be more difficult as the owners have to be more
independent. A popular slogan in franchising is that people buying franchises
to “be in business for themselves but not by themselves”. In short, the beauty
of franchising is the availability of guide or “mentoring”.
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Campaign allows KFC to communicate its message and brand to wider audience
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Fourthly, an established
marketing network is usually provided. In other words, the franchisees do not
need to do marketing on their own as the franchisor will do it as a whole. Just
imagine if a person venture into a business which is not franchise, he or she
has to struggle to attract customers by advertising. The point is if a person
runs a business on his or her own rather than franchising, then most likely the
advertising will be ineffective and not as successful as franchise. This is
because franchise has its own marketing network plus the summation of all
collectable advertising fees from all the franchisees creates a large pool of
money where they can use a more expensive modern approach of advertising such
as advertise in television, radio and billboards.
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Pizza Hut’s truck.
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Fifthly, relationship with
suppliers has already been established once a franchise is bought. The owners
do not have to worry about getting reliable, trustable and good suppliers on
their own. Besides, the prices of goods are usually cheaper due to economy of
scale too. Even if the inflation sets in, the franchisee will be less affected
as compared to other form of business because goods are ordered in a very large
amount by the franchisor before distributing it to the franchisee and this
enables the trade discount to take place too.
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| Total estimated initial investment for Freddy’s Frozen Custard & Steakburgers. |
This is however, there are
certain major drawbacks of which the potential franchise owners must take into
consideration before they make up their mind especially the initial cost of
purchasing and setting up a franchise operation as they could be quite high.
Therefore, usually franchise owners will suffer a huge amount of cash outflows
at the beginning before they can enjoy profits. This is because, a large sum of
money has to be paid for the trademark, necessary renovation to make the franchise
looks identical with the others, purchase of furniture, stocks, machinery,
payment of salaries and so on.
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Royalty fee reduces profits
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Besides, the distribution of
profit will be smaller as the franchisee is required to pay ongoing royalty fee
usually monthly and is typically calculated as a percentage of gross sales, not
net profit. This is to avoid franchisee from manipulating his or her franchise
expenses in order to reduce net profit and this will directly reduce the
royalty payment. The point is when royalty is computed based on sales, as long
as there is a revenue even the franchise is making losses in a particular
period, the franchise owner is still required to pay the royalty fee. When this
situation arise, it is like “add salt to the wound”.
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Restrictions on creativity
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Furthermore, there is a
restriction on creativity. Many franchise systems are very rigid and leave
little opportunity for individual franchisees to exercise their creativity.
This is an often-cited frustration of franchisees. This is because most
franchisors impose appearance and design standards, thus limiting the ways a
franchisee can operates his or her franchise. Although, these standards can
help in promoting uniformity, they can also limit franchisees’ new ideas and
ability to cater to local tastes or needs.
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KFC apologises to i-City outlet assault victim
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In addition, if some of the
franchisees in a franchise system starts performing poorly and makes an
ineffective impression to the public, this can somehow affect the reputation
and eventually the sales of a well-run franchise in the same system. In short,
although all the franchises operate independently, but they are still
inter-related and connected. For example, there is a recent case in Malaysia
where a man was assaulted by a KFC’s kitchen crew member at its i-city branch
in Shah Alam. A video recording of the assault went viral on YouTube. KFC’s
reputation was damaged because of this incident and the fast food chain’s
deputy president had met and apologized to the victim.
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Sometimes a franchise agreement can
be too strict and seems to be unfavourable
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Moreover, there are also some
issues relating to the duration, nature of the commitment and problems of
termination or transfer. For a variety of reasons, many franchise agreements
are difficult and expensive to terminate or transfer. Furthermore, virtually
every franchise agreement contains a non-compete clause. These clauses vary in
term of severity, but a typical clause prevents a former franchisee from
competing with the franchisor for a period of two years or more. Often, a
franchise cannot terminate a franchise agreement without paying the franchisor
substantial monetary damages.
In conclusion, the future of franchising is still bright.
As franchising continues to become a more pervasive form of business,
regulators and franchise associations are likely to intervene in ways that
strengthen the viability of the franchise concept.
Additional readings, related links and references:
The Benefits of Franchising
Should You Buy A Franchise?
The
Advantages and Disadvantages of Franchising
Purchasing a Start-Up
Franchise? Here are some Advantages and Disadvantages
What Are the Benefits &
Drawbacks of a Franchise?
http://www.ehow.com/list_6811866_benefits-drawbacks-franchise_.html
http://www.ehow.com/list_6811866_benefits-drawbacks-franchise_.html
