Ch. 16 Franchising as a Marketing Channel

Major Topics 0. Basics I.Why? II.Before you sign up as a franchisee III.A Franchise Contract* IV.The Plural Form** V.Concerns and Challenges*

A system of marketing and distribution where an independent businessperson (the franchisee) is granted the right to market the goods and services of another (the franchisor) ©McGraw-Hill Companies, Inc. 2002

Major Challenges in Most Service Businesses 1. Intangibility of Services: Differentiation through customer contact, decor, atmosphere, and other tangible cues. 2. Discretionary nature of service purchases: Convenience by location and hours of operation 3. Labor Intensity: Interaction with customers 4. Quality control is harder 5. Focus on operational issues 6. Small Size of many service firms

1. Easy capital generation and higher motivation 2. Expand to Multiple locations Easily 3. Standardized systems and procedures 4. Training improves labor and management skills 5. Marketing is centralized and promotion is system-wide 6. Service tangibility is increased.

 Product/trade name franchising ◦ Ex)  Business format franchising* ◦ Ex) ©McGraw-Hill Companies, Inc. 2002

Combination of Three Relationships: Legal Operations Marketing ©McGraw-Hill Companies, Inc. 2002

©McGraw-Hill Companies, Inc I.Getting Help through the Start-Up Package I.Site Selection II.Facility Design III.Lease Negotiation IV.Operational Manuals V.Management Training VI.Employee Training II.Getting Ongoing Supports from the Chain I.Field Supervision II.Management Reports III.Merchandising and Promotional Materials IV.National Advertising V.Auditing and Record Keeping

 Local market conditions  Self-evaluation  Investigate the franchise  Study the disclosure document  Check out the disclosures  Question earnings claims  Obtain professional advice  Know your legal rights ©McGraw-Hill Companies, Inc. 2002

Nail the Numbers. Franchisors should give franchisees a detailed statement of financial conditions and expectations no later than two weeks before any money is scheduled to change hands. Measure Management. Franchisees should seek and scrutinize disclosure forms that describe at least the last 10 years of work history of each of the franchisor’s officers and key managers. Cross-Examine Current Franchisees. Prospective franchisees should obtain a list of all franchisees, including those who have recently left. Randomly calling and visiting several will keep prospects from being steered toward franchisor favorites. Serving several days as an apprentice in one or two stores will yield tremendous insights. Comb the Contract. Franchise agreements establish control over most aspects of the business. Attorneys with franchising experience should look for inequities in the agreements and help franchisees secure a better deal. ©McGraw-Hill Companies, Inc. 2002

©McGraw-Hill Companies, Inc I. Define Rights and Responsibilities  Giving and Taking Hostages II.The Payment System: Two-part system (Initial Investment + Royalty*) III. Who will be the Landlord? IV. Termination Clause

©McGraw-Hill Companies, Inc Modeling: Chain  Franchisees 2.Socialization: Chain  Franchisees 3. Interfirm Ratcheting: Chain and Franchisee 4. Mutual Learning: Chain and Franchisee

 Franchisees: ◦ Belief in guaranteed profit ◦ Loss of franchise ◦ Encroachment ◦ Loss of independence ◦ Conditions in franchise agreement ◦ Spending promotional dollars ◦ Pricing structures  Franchisors: ◦ Profits ◦ Franchisees that “sit on a market” ◦ Accurate reports of gross sales ◦ Franchisees that reveal trade secrets, strategies, etc ©McGraw-Hill Companies, Inc. 2002

1. Survival 2. Gaining and Keeping Cooperative Atmosphere 3. Inherent Goal Conflict: Sales Focus versus Profit Focus*

TYPICAL SALES-TO-PROFIT RELATIONSHIPS FOR FRANCHISORS AND FRANCHISEES Adapted from Carmen and Klein (1986)