Retail Franchising

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 Retail Franchising
• A contractual agreement between a franchisor
(a manufacturer, wholesaler, or service
sponsor) and a retail franchise, allowing the
franchisee to conduct a certain form of
business under an establishment name and
according to a specific set of rules.
• The franchisee typically pays an initial fee and
a monthly percentage of gross sales in
exchange for the exclusive rights to sell goods
and services in an area.
 Types of franchising
The basic objective of franchising is the
expansion of a business by furthering the
distribution of products or services.
Franchising at a very broad level can be
divided into two formats:
Product/Trade Name Franchising
Business Format Franchising
 Product/Trade Name Franchising
• Product and trade name franchising is the
licensing of a franchisee or dealer to sell or
distribute a specific product using the
franchisor’s trademark, trade name, and logo
• For example; Toyota and Chevrolet
dealerships, or Pepsi and Coca-Cola soft drink
bottlers, are products or trade names in which
the product itself is what the franchisor is
selling.
 Business Format Franchising
• Business format franchising refers to an arrangement
where a franchisor teaches to the franchisee the entire
businesses format. The business format taught by the
franchisor includes marketing, selling, inventory,
accounting and personnel procedures.
• Famous examples of Business Format Franchise are
McDonalds, KFC, Famous Amos, Starbucks Coffee and
Dunkin' Donuts. It is a form of service agreement whereby
the franchisee provides the management expertise,
format and/or procedure for conducting the business.
 Advantages of Franchising
Franchisees receive several benefits by investing in successful
franchise operations:
They own a retail enterprise with a relatively small capital
investment.
They acquire well known names and goods / service lines.
Standard operating procedures and management skills may be
taught to them
Cooperative marketing efforts are facilitated
They obtain exclusive selling rights for specified geographical
territories
Their purchases may be less costly per unit due to the volume of
the overall franchise.
 Disadvantages of Franchising
• Oversaturation could occur if too many franchisees are in one
geographical area
• Due to overzealous, selling by franchisors, franchisees, income
potential, required managerial ability, and investment may be
incorrectly stated.
• They may be locked into contracts requiring purchases from
franchisors or certain vendors.
• Cancellation clauses may give franchisors the right to void
agreements if provisions are not satisfied.
• In some industries, franchise agreements are of short duration.
• Royalties are often a percentage of gross sales, regardless of
franchisee profits.