Advantages of Franchising

Over 50% of retail sales in the U.S. are generated from franchises. Many franchises are successful for a number of reasons, including the ability of the franchise to grow rapidly. Franchisees provide the employees and other capital investments so the franchisor can invest elsewhere. Historically, companies that do not franchise grow more slowly than franchises. Additionally, the franchisor is able to choose proficient managers for potential franchisees; they do not have to provide the franchising rights to people they consider unqualified.

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Franchisees can also benefit from a franchise. A franchisee is more likely to be successful than a business started from the ground up because the franchise has already been proven to be prosperous (and profitable). Additionally, franchisees will usually have an easier time borrowing money because lenders know that the franchisee is backed by the franchisor. Franchisees can benefit from a positive image created by the franchisor (franchisors often advertise on a national level, and can help franchisees create local advertising campaigns). For instance, Chipotle has a strong national image as a healthy and environmentally responsible alternative in fast-casual dining. Chipotle franchisees are largely successful because consumers know that a healthier, yet delicious meal is available at any franchise location. Lastly, franchisees are able to rely upon the efficient method of operation established by the franchisor, which has had experience in the market.

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6 thoughts on “Advantages of Franchising

  1. While there are many advantages to franchising there are also many risks to think about as both a franchisor and franchisee. In particular as a franchisee there is the worry that the franchisor will over expand their locations. If a Subway, for example, has two different franchised locations on the same street the franchisor will most likely benefit as they will sell the same amount or slightly more sandwiches however the franchisee will have trouble as their profits will likely be cut in half. On the other side, while a franchisor is able to chose who they give franchising rights too there is still the risk of the free rider problem. A franchisee can degrade the reputation of all Subways by skimping on maintenance or if their customer service is poor.

  2. I agree that the free rider problem can be an issue. Many franchisors will perform annual check-ups on their franchisees to ensure that each franchisee is up to standard. In most states, the franchisor is able to terminate a contract if there is good cause (e.g. poor sanitation), so franchisees run some risk by free riding off of a franchise name. Over-expansion of a franchise is an interesting concern. I would assume that many towns and cities restrict side-by-side placement of the same franchise. Large urban areas like Manhattan would be the exception, where it is not uncommon to see dozens of the same franchise chain in a square mile. Nonetheless, there are more people in these areas to meet the supply of producers.

    • Actually, most places have standard zoning rules … if you fulfill the rules, it doesn’t matter if you’re next to another one of the same franchise. That’s your problem…the city will voice no opinion, comments by the health inspector about “stupid owner” have to be voiced quietly, and aren’t policy.

  3. Further, other problems with franchising stems from regulation and the subsequent lack of product differentiation and freedom of local management. For entrepreneurs looking to make a personal impact on their business, owners might find themselves cuffed by the franchisor, effectively creating a glass ceiling for franchisees and growth of their establishments. In addition, the costs of franchising should not be ignored. Additional fees in the form of litigation protection for the fanchisor (protecting potentially negligent franchisees) are pricey, and additional advertising fees placed on franchisees might often be larger than resulting profits from advertising as might be more common in areas with fewer dining options.

  4. I’m not sure if one franchised store ruins a company’s reputation. There have surely been times when you were in a horrible McDonalds that was dirty and had terrible service. But you have surely been back to a McDonalds since then. If you are going to eat at a Burger King or McDonalds you are not expecting high class service and a clean environment. I think people consider it a LUXERY when they encounter a nice experience at a McDonalds. Their expectation is so low that when they see a clean store they are pleased. This allows the store to actually benefit from having an uncleaned store.

  5. Franchises come in many forms … the reputation of a Panera Bread (and customer expectations) are not those of a McD’s customer/franchisee.
     
    Remember franchisors are in it for the money, too. A really good franchise (Chipotle) is both picky about who gets a store, and makes the franchisees pay for the privilege. Lower risk carries a price, and franchisors are happy to charge for it.
     
    One student I knew sought to buy a Subway franchise immediately after graduation. They wanted the hands-on experience, were confident they were better than the average manager and wanted to use it as a starting point for more profitable but more challenging franchises and then (ultimately) their own solo business. So yes, upside risk is smaller, not just downside, but at the start of your career you may be more concerned about the downside because you have no wealth to fall back upon, and the upside is the career and not the initial store.

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