Academic journal article Journal of Financial Management & Analysis

Franchising : Marketing Strategy to Prevent "Investment Cycle Tyre from Puncturing"

Academic journal article Journal of Financial Management & Analysis

Franchising : Marketing Strategy to Prevent "Investment Cycle Tyre from Puncturing"

Article excerpt

Introduction

Franchising is a powerful vehicle for the marketing and distribution of goods and services. In the past 50 years, "business format" f ranching has come to be the predominant type of tranchising in the U.S.A. and in more than 80 countries to which franchising has expanded. In business format franchising, the originator of the business system - the franchisor - provides to the person who invests in the system - the franchisee a complete business plan and assistance that includes training, knowhow, the use of the system's trademark and signs, operation manuals, a standard architectural identity and advertising and marketing support.

Franchising is composed of three elements:

* the franchisor,

* the system, and

* the franchisee

The franchisor owns the trade name in the system; the system can expand rapidly because of the investment by the franchisees. The franchisee is the businessperson or investor who purchases, in effect a prepackaged business concept that is operated under contract with the franchisor. The contract is the franchise agreement. Franchising thus represents an alternative to the other channels of distribution available to a seller of goods and services: sale through its own, company-owned outlets; and sale to independent, unaffiliated retailers for resale.

Within the franchise concept a number of advantages accrue to franchisor and franchisee :

To the franchisor : ease of capital formation, through the initial investment by the franchisee; incremental income, usually in the form of royalty payments; relatively rapid expansion of the network; and a motivated group of retail distributors.

To the franchisee: a degree of entrepreneurial autonomy; a proven concept, often with widespread recognition; and extensive training and ongoing supervision. Because each unit is held to a similar level of quality, there is an additional benefit to every member of the system.

This rather simple set of factors has had a dramatic impact on the economy in countries where franchising has developed.

Franchising in the U.S.A.

* Over one-third of all retailing is franchise-related.

* It is estimated that a new franchise opens every 17 minutes.

* There are more than 3,000 franchise companies in the U.S.A., doing business in more than 60 different business sectors - much more than just fast food - with more than 521,215 outlets.

* U.S. franchise sales for example, in 1992 totalled an estimated US$ 803.2 billion, accounting for just over one-third of all U.S. retail sales.

* One out of eight persons in the US work force either operates a franchise or works in one.

* The most conservative statistics show that the rate of success for a new franchisee during the first five years of doing business is at a minimum twice that of an independently-owned small business.

* The greatly increased likelihood of success explains why banks and other financial institutions favour loans to and investments in franchise companies.

* Over half the US membership of the International Franchise Association can be characterized as small businesses.

Growth of Franchising

Over the last 35 years, franchising has developed in two directions, directions that are closely intertwined but not mirror images of each other: (1) domestic, i.e. US franchising and (2) the growth and reach of franchising into dozens of international markets.

First, franchising has continued to grow, expand and change domestically, within the U.S.A. What do "grow, expand, change" mean in this context?

* Although the public perception of franchising is tied to fast food and half-dozen well-known symbols, franchising encompasses over 60 business sectors, from automative services to health and education systems to business services and home care.

* Franchising systems, which traditionally opened one by one, established units throughout a local market and then a state or a region to become, ultimately, a national chain, today expand both more rapidly and in different ways. …

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