What is Franchising?
Franchising can be defined as a form of business where a franchisor (an individual or a company who own a franchise system) allows a franchisee by granting a license, the right to use the brand name and operating system of franchisers for the payment of an initial franchise fee. In return, the franchisor receives a share of the income of franchisee which is also known as royalty. The license to use the brand name is contractual and for a fixed period. Franchisee provides a well-established brand name and resources to use without making any efforts related to the marketing of the product. It is different from an independent business in term of both, negative and positive manner (Adezia, Azizi & Marissa, 2017). This report describes the main problems, which can be associated while shifting from an independent business to the franchise. It would also explain the legal and financial challenges and obligations along with the impact of future developments on a franchise. All information has been collected from the authenticated sources and website of a well-known franchisor Dominos, for which a franchise has been proposed to purchase. In the end, a conclusion has been drawn to provide an overview to the report and to summarize the main findings of the entire study.
As food industry is one of the fastest growing industry in all over the world, any investment made in this industry can never fail if it is done after analyzing the customers and the market conditions. This report shows the difference between an independent business and running a franchisee outlet along with the advantages and disadvantages for the person who is going to invest in it.
A franchise is surely an appealing option in form of a business structure. It is a better choice for those looking for a good business without taking risks on their own.
An established business: A franchise provides the benefits of operating under the name of a well-established business. The brand, ideas and operating functions and techniques are already tested and tried and are in a state to be implemented repeatedly at new locations.
A known brand: Operating under the control of a franchise allows a franchise to take benefit of the already established brand of the company. This indicates that there would be far less cost and work involved in trying to build and establish on the brand of the business. It will already be trusted and known by the customers and therefore it is required to be produced a steady stream for the customers loyal to the brand. It also involves advantage of the registered trademark, which ultimately affects the cost invested by the owner (Alpeza, Erceg & Oberman, 2015).
Advantages of Franchising
Simpler Business Financing: One more advantage of a franchise is the fact that acquiring the fiancé for business becomes generally easier. Investors prefer to invest in a business with secure brand name, established network and efficient support structure. In some occurrences, finance can be acquired for the franchisor to make the more simple life of the new business (Baresa, Ivanovic & Bogdan, 2017).
Business Relationships: The franchise can also enjoy the advantages and benefits of the various business relationships established by the franchisor. The person who is taking franchise would not need to incur any extra cost of advertisers and marketing teams. Managing suppliers would also become easy because of already established terms and conditions (Buljubasic & Boric, 2014).
Support and Security: Resource Acquisition theory of franchising states that, Franchises offers the benefits of a security and support system. Franchisors tend to offer support services like training schemes, management of accounts, advertising and campaign, sales, marketing and more. The cost of this service is often included in the franchise fee (Varotto & Neto , 2013).
High Profit: If the franchise is taken from a successful and well-known brand, then it tends to attract a large number of customers in comparison to a local shop. Especially in the food industry, customers prefer to choose the best and hygienic food for themselves. Dominos is providing its services in form of hygienic food products from a very long time and thus, there are more chances to attract the customers (Dada & Watson, 2013).
Similar to any other business model, the franchise business model also has some major disadvantages which are required to be considered before making an investment in a franchise. These disadvantages can be understood as follows:
No Control: As per the agency theory of franchising, the very first and most important disadvantage of a franchise is that the franchise has less or no control over the business operations and activities. The rules for operating the business are already mentioned in the franchise agreement. Therefore, it is not easy for the new franchisee to operate outside the established borders (Dada, Watson & Kirby, 2012).
Tied to suppliers: While operating a business, no one would like to keep the cost high. Thus, it is required to find the cheapest suppliers to maximize the profits by minimizing overheads. Being a part the of the franchise network, the new franchisee will be required to use the supplier network of the franchise. The franchisee will be tied to the suppliers uttered to it by the franchise agreement (Dant, Grunhagen & Windsperger, 2011).
Disadvantages of Franchising
Encroachment of franchisee: As Dominos is a very popular brand in the fast food industry, a large number of franchisees operate within a small area which may reduce the chances of profitability. It is known as encroachment and it is the main reason for diminishing revenue and increasing competition (Diaz-Bernardo, 2013).
The risk from others: This is one of the major and serious disadvantages that any act performed by the other franchises would affect the reputation of the whole brand and other franchises as well. This impact may also have the potential to damage the overall profits and sales to the franchise (Frazer & Merriles, 2007).
Lack of Variety: While running a franchise, a person cannot provide a variety of products to the customers or the products which are not provided by the parent company. Thus, the chances to attract more customers are eliminated in this business. For example, at a Dominos franchisee, the owner cannot sell sweets as these are not listed in the menu of Dominos. This prohibits the owner to make extra profits. And if the owner performs any kind of action then, the parent company has rights to file charges against franchisee (Hodge, Oppewal & Terawatanavong, 2013).
To run a franchise, the high degree of conformity is required. A franchise is required to follow the directions of the home office related to marketing, pricing, and product specificity. Franchisee agreement does not provide the franchiser the power to change the procedures and product line at any time (Perrigot, Hussain & Windsperger, 2015).
Franchisees often tend to be their own boss. The aim of franchisers is to control the business but these businesses reproduce a proven model. Franchisees agree to comply with the same rule as a parent company and are committed to the same mission. In Dominos, the rates, norms of delivery, infrastructure, dress code of the employees, billing system and other operational level activities are same at each branch of the company (Ramirez-Hurtado et al, 2011).
Franchisees are required to be opened on the national as well on international holidays which prohibits the owner to take any type of leave from the work. On the other hand, in an independent business, an owner is free to open and close his shop as per his will. There are no rules and regulation related to timings and holidays. Along with this, the owner can provide the variety of food as per the changing taste of local customers.
What is Independent Business?
On the other hand, an independent entrepreneur is the king of his business and can run the business as per the desired rules and regulations without the interference of any third person. He has rights to decide the selling price, suppliers and terms, and conditions related to customer service. Along with this, he can change the product line at any time if the existing products are not providing profitability to the business (Salar & Salar, 2014).
However, independent business requires more time and money to make an investment in marketing and establishment process of the business. Employees are hired by the owner itself and their salaries are also provided by the owner which contribute a larger part to the total expenses of the business. Along with this, chances to get the success of a new establishment is also less as compared to the franchise as brand loyal customers prefers to go with their favorite brand irrespective of the other options available in the market at lower prices. While buying a franchise, the amount paid as royalty is generally very high but it includes all the expenses related to marketing, infrastructure etc. Apart from the royalty, franchiser needs to pay a fixed percentage of profit or a fixed amount irrespective of profit (as per the contract) after deducting charges like the salary of employees, electricity expenses etc. This monthly fee is also a big amount to pay which ultimately affects the net profit of the franchiser (Varotto & Parente, 2016).
Along with this, it often becomes hard to leave a franchise due to the hidden charges and obligations mentioned in the contract. Thus, it is required to check all the clauses and obligations at the time of finalizing the contract. But in the case of independent business, the owner can anytime quit his business as per the market conditions and circumstances appeared to him. He does not need to pay any kind of charges to anyone and also he is not bound to the minimum tenure of running a business as in the case of the franchise (Verbieren, Cools & Abbeele, 2008).
Thus, being a franchiser may provide relief from the unnecessary burden of success and failure of business and there is no need to frame rules and obligations to run the business. It is not possible in independent business.
At the time of buying a franchise, some common and critical mistakes can be occurred due to the lack of knowledge and negligence of franchiser. Some mot important mistakes can be described as follows:
Advantages of Independent Business
Paying too much
Transaction cost analysis theory of franchising states that most of the times the franchise contracts include hidden fees and charges and after adding those charges, the franchise seems to generate less profit as compared to the first thought. Thus, it is required to find out and discuss all the charges like equipment fees, a periodic fee, advertising material and any other or which the franchiser would be responsible on regular basis. It can help to make a wiser decision and negligence of this cost can lead to the quick and wrong decision to which may be proved unprofitable to the franchiser (Welsh, Desplaces & Davis, 2011).
Misleading figures
Sometimes, the franchisors show a profit of the franchise running in the top-selling area. This may mislead to the franchiser to finalize the contract. As customer rush is different from place to place and this would have a direct impact on the profitability of the franchise. If the franchiser agrees to take franchisee on the basis of robust figures then it would be difficult him to pay the monthly fee as the sales for that area is not necessarily required to be the same as compared to the top-selling area (Wright & Grace, 2011).
Restrictive Contracts
Some franchise contracts are set up in such a way which makes it difficult to leave the franchise by the franchiser. Such a contract may also include clauses like preventing the franchiser to start their own business or working with rival firms within a certain area and for a period of time. These types of clauses are generally written in the contract at such places which are not noticeable. Thus, it is required to review all the contracts and clauses by the lawyer before finalizing a franchise deal (Adeiza, Azizi & Marissa, 2017).
Information about the Parent Company
As per the property rights theory of Franchising, one of the major challenges at the time of thinking of buying a franchise is to find out the exact and real information about the parent company. The franchiser must analyse and study about the parent company. Negligence in this area can be harmful to the franchise as it required a huge amount of investment to buy a franchise. All support activities and opportunities provided by the parent company should be conformed to the existing franchisers to know the exact profit margin and regulations of the company in case of less-profit and no-profit situations.
Disadvantages of Independent Business
Making unnecessary profits
The franchiser should carefully read the legal obligations related to making extraordinary profits from the business. It would certainly create a huge penalty in both monetary and non-monetary terms to the franchise (Baig & Saeed, 2012).
Approval from the government
In case of franchisee of an international brand, it is necessary to take approval from the government in which the franchise would be located. So, the franchise would have to take care of the low of the parent company as well as the laws of the working country. Therefore, it can create a huge challenge to take approval and to run a business by the person who is taking the franchise.
As Dominos is one of the main market players in the fast food industry, any change in the food and health habits would directly impact the sales of the brand. Along with this, entry of any new food company can also impact the sales of the company as customers tend to check out the different tastes of the same food. However, Dominos has become an international brand which is almost unbeatable at its place but still changing market conditions can affect its business including legal charges imposed by the government of different countries. The impact of different future trends can impact the business in a below-described manner:
Healthy options
Most of the young and old generation is trying to improve their health by improving their food and lifestyle. In near future, it is expected that they would like to have organic food instead of fast food such as pizza, burgers and cold drinks. This would have a direct and huge impact on the sales of the franchise. As Dominos does not offer the robust menu to the customers like salad, sandwiches, and juices, to earn the profit by only selling pizza will be difficult and this would lead to the minimization of profits (Wingrove & Urban, 2017).
High Prices of Land and Shops
The prices of land and shops are continuously increasing day by day which would automatically increase the rent for the shops. The increased rent would directly affect the profitability of the franchise, as it would be deducted from the gross profits.
Running Street Restaurants
The trend of walking restaurants tends to have a bright future as it does not need to pay any rent to anyone and can reach to a large number of customers. The cost of food provided by such type of restaurants is also low as compared to Dominos and other reputed brands. This can impact the sales of franchisee up to a great extent as customers would prefer to get the food at their place instead of going away for food. So, the sales and the profit would get impacted as per the emerging rate of walking restaurants (Chirico, Ireland & Sirmon, 2011).
Franchising vs. Independent Business: Which is Right for You?
High Prices
The food products provided by Dominos are generally provided at higher prices as compared to the local market restaurants. As per the increasing rate of material and services, the prices tend to rise in future which would not be affordable for all the customers. So, the trend of rising in prices is one of the most important issues that can harm the franchise and prevent it to operate successfully in long run (Aliouche & Schlentrich, 2009).
Online booking facility
Most of the customers prefer to order their food online as it saves time and problem of going to the restaurant. Dominos is providing online booking services and home delivery services from a very long time. In near future, this trend would help the franchises a lot in attracting the customers. The delivery time is also one of the main considerations for the brand, which makes it easy to attract the customers and to keep them associated with the brand (Alon, 2004).
Conclusion
On the basis of above discussion, it can be concluded that making an investment in a franchisee can surely be proved a right decision but it should be taken after considering all the positive and negative aspects. The food industry is a fast-growing industry in which, operating own business and buying a franchise, anyone can be the good option. This report concludes the main advantages and disadvantages of a franchise system, which can help in understanding the future complications with the business. Further, the benefits of franchisee over independent ownership business have been discussed to clear the shortcomings of the franchise system. Along with this, the main legal and financial considerations that can be faced by the franchiser are discussed from the point of view of an international business and Dominos is an international brand. The situations that can go wrong at the time of purchasing the franchisee have been discussed to define the concept clearly. All the information has been collected from the journal articles written by authors on franchising. As the food habits and market conditions are regularly changing day by day which would have a sure impact on the franchisee outlet. Such impact of future emerging trends has been discussed on the basis of the study of market conditions and the changing needs of customers. This report is a short summary to measure the profitability and loss in the business through franchising as compared to own business. This report can provide an overview to a person that whether he should go for his personal business should buy franchisee.
References
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