Advantages and disadvantages of franchising: looking from three sides
Franchising was developing rather fast during the last decades. Why does this happen? As most tendencies in the global economy this one is not exclusion: somebody gets benefits from it. Today I decided to write a shot summary of benefits and potential losses faced by franchisor, franchisee and their clients.
Benefits for a franchisor:
1. Opportunity of fast expansion of target market, growth of sales;
2. Entering new territories and regions (or even countries);
3. Opportunity to decrease or even eliminate some types of costs: costs for vertical administration, hidden costs caused by difficulties in large company management;
4. Lower capital investment;
5. Government control over the franchise agreement;
6. Promotion of a company itself, its trademark and brand; growth of company’s recognizability among clients; increase of confidence in company’s quality and range of goods and services;
7. Getting money from selling licenses and receiving royalties;
8. Profit from leasing real estate and equipment to franchisee;
9. Profit from giving credits to franchisee;
10. Decreasing costs while operating on whole-sale basis and decreasing turnover period.
Potential loses of a franchisor:
1. Getting less profit from franchisee’s enterprise in comparison with own enterprise;
2. Franchisee can influence the franchisor’s reputation. This is a risk factor;
3. In many cases it’s difficult to control the accuracy and reliability of financial reports of franchisee;
4. It’s difficult to find a reliable franchisee with good business and financial background;
5. While providing training for the franchisee, franchisor creates a potential competitor for himself.
Benefits for a franchisee:
1. Opportunity to start his own business with the minimum initial capital and with the professional support from an experienced franchisor;
2. According to franchisor’s program franchisee can have access to credit resources;
3. Getting all possible benefits from franchisor’s brand, trademark and reputation; the same about marketing campaigns and PR activity (it’s very important that you get these benefits immediately after sighing the franchise agreement);
4. Opportunity to get access to the results of different surveys, research and development activity of franchisor for a minimum fee;
5. Opportunity to start business without any professional background because of well-prepared and already tested training program provided by franchisor (but it’s rather risky as such franchisee can loose in competition with more qualified businessman);
6. Guarantee of stable relations with suppliers;
7. Opportunity to purchase some equipment from franchisor on a leasing basis or for a depreciated cost.
Potential loses of a franchisee:
1. Franchisee has less independence; he can’t be “his own boss” as franchisor controls many spheres of the business;
2. Franchisee depends on the reputation of franchisor; problems in the main company will influence the whole chain;
3. As franchisee pays royalty and other fees to franchisor the costs increase and franchisee can become uncompetitive in comparison to independent small and medium-size companies;
4. Franchisor can sell his business and a new owner can be less professional, the total policy of the company may change and so on; it’s a risk factor;
5. Franchisor can miss some essential changes and improvements in technique, market conditions and others factors that influence general activity of the company; it will influence the whole chain: every franchisee can loose his competitiveness.
Benefits for a consumer:
1. In most cases goods and services sold by every company in a franchise chain have the same quality and provide the same infrastructure; it’s rather convenient (especially when you need to travel a lot) as you don’t need to adopt your life style to new city or even country;
2. If the particular franchisee closes his business consumer can easily turn to the main company; franchisor usually provides the list of the other closest offices;
3. The franchisee’s quality is usually higher comparing to independent companies; this happens because of strict control from the franchisor’s side.
Potential loses of a consumer:
1. Franchising in general can decrease the competition in the market; this leads to higher prices and lower range of goods or services;
2. The professional education and experience of the particular franchisee can be less than necessary but it’s impossible to know this as every company in the chain uses the same trademark, marketing strategy and etc.