Franchises

Question 1

Explain what is meant by a franchise.

Answer 1

A franchise is a joint venture between a franchisor and a franchisee.

The franchisor (original business) has gone through the process of establishing the brand, gained customer loyalty and, through experience, learned how to scale up the business.

Franchising sells the right to someone else (the franchisee) to copy the business format, using the same name and brand. The franchisor will provide the knowledge and expertise so that the franchisee is able to replicate that success in a different location.

Question 2

Give some examples of well-known franchises in UK towns and cities.

Answer 2

Domino’s Pizza
Subway
Clarks Shoes
Thorntons
O2
Toni & Guy
McDonald’s
Ben and Jerry

Question 3

Highlight advantages of a franchise.

Answer 3

Advantages of a franchise

• Faster growth - for small business owners, franchising is a way to expand more quickly and cost-effectively than opening further company outlets.
• Lower risk - opening a franchise is usually less risky than setting up as an independent retailer. The franchisee is adopting a proven business model and selling a well-known product in a new local branch.
• Lower capital outlay - once the model is established, expansion comes mainly through the investment of franchisees, meaning it costs much less to grow.
• Lower operating costs - franchisees employ each outlet’s staff and pay the operating costs.
• Better performance - because they have a vested interest in the business, franchisees will do what it takes to succeed, as opposed to a manager who is largely rewarded the same regardless.
• Strength in numbers – franchises can benefit from harnessing the considerable power of shared know-how, experience and ideas from a group pulling in the same direction.

Question 4

Describe any disadvantages of franchising.

Answer 4

Disadvantages of a franchise

• The more franchises opened, the less control the franchisor has over the quality and consistency of the brand. Most franchisors put legal safeguards in place to maintain brand control, consistency and protection.
• Poor performance by some franchisees could give the brand a bad reputation.
• Costs may be higher for the franchisee. As well as the initial costs of buying the franchise, they have to pay continuing management service fees to the franchisor.
• Profits (a percentage of sales) are usually shared with the franchisor.
• The franchise agreement usually includes restrictions on how the franchisee can run the business. They might not be able to make changes to suit their local market.
• The franchisor might go out of business.