1. Franchising Franchise is license to use a specific trademark or business format –Franchise is the license itself, not the physical outlet –Franchisee is one who agrees to operate under the terms of the agreement –Franchisor is the one who grants the license specifying operating terms

2. Types of Franchises Product and Trade Name –Traditional sales-type arrangement (ex. gasoline, autos) –30 % of businesses; 70% of sales dollars Business Format –Continuous business relationship, including product, marketing and operations

3. Miscellaneous Franchise Concepts Multi-unit - operation of multiple units in geographic region Master license - responsibility for franchising within a region Piggyback - Franchise in host store (ex. McDonald’s in Walmart) Shared location –Minimize rent costs; different peaks –Often shared parent

4. Performance Measures Size –$600 billion in sales –1/3 of U.S. retail trade Performance –90% in business after 5 years –Earn 20% more than other small businesses –Why?

5. Franchise Franchise Establish.Sales Retail Trade 63.5% 85.1% Auto Dealers 5.2% 50.6% Gas stations 21.0 16.1 Restaurants 19.2 10.7 Conv. stores 3.3 2.0 Nonfood Retail 10.2 4.0 Food retail 4.8 1.7 Other sectors 36.5 14.9 Business serv. 12.6 2.7

6. Franchise Discussion Questions Are franchises more or less successful than non-franchise start-ups?

7. Franchise Success More Successful Better capitalized Better management Name helps create market However, see Inc. article Why might franchises be less successful?

8. Franchises Less Successful? Bates article in Inc. Franchises are in saturated, competitive retail industries Published statistics are often put out by the franchise industry

9. What franchise do you consider to be most desirable? Let’s say you open a McDonald’s franchise. What is your #1 competitor?

10. Advantages and Disadvantages Advantages Disadvantages Name recognition Franchise fees Training/Mgmt asst. Less independence Pooled marketing Supplier restrictions Group purchasing Growth restrictions Financial assistance Territory Infring. & capital Term. and transfer Quicker startup restriction Lower failure rate

11. Territory Infringement Franchisor’s objective is to maximize royalties, not franchisee profits –Franchisor wants franchisees to be profitable enough to stay in business –A lot of the competition may come from company-owned stores See Starbucks article on territory infringement

12. Infringement Example Competitor Unit B Unit 1 Unit 1 Unit B Total Sales 500 400 300 700 Costs 460 375 280 655 Profit 40 25 20 45 Royalty 25 20 15 35 (5% of sales)

13. Franchise Costs Initial franchise fee –$1000 to $30,000, depending on size and experience of franchisor Ongoing franchise fee royalties –.5 to 15% of sales Advertising fees

14. Evaluating the Franchise Franchisor market and reputation Return on investment Transfer and termination Territory protection Important to talk to existing franchisees about experience

15. Franchisor Perspective Evaluate Situation 1 on p. 70 of text - combination laundromat and snack bar Does this seem like a good candidate for franchising?

16. Franchisor Perspective Facilitates rapid expansion Provides for motivated management To be able to franchise, need multiple successful locations with documented operating systems