Franchising Part 1

The Power of the Brand: Franchising and You

Franchising is the engine that drives much of the world’s entrepreneurial train, but it’s more than just fast food. Today, you can’t drive down any major street anywhere in the world and not pass by some business that is part of a franchise network, and those businesses can be in any of more than 120 distinct lines of businesses today. This chapter begins your exploration of franchising, not by looking at any particular franchise but by looking at how well you will fit in as a franchisee or maybe as a franchisor. We explore with you what franchising is and what the franchise relationship is all about.

The Birth of Franchising

Franchising has a long history dating back to ancient China and has been used by European crowns to control their lands and expand their empires.
Benjamin Franklin, one of the founding fathers of the United States, was not only an inventor and scientist but also created the first franchise system on pre-United States shores.
Franklin's first franchise was created in 1731, 45 years before the United States was founded. It was a copartnership with Thomas Whitmarsh for the printing business in South Carolina.
The franchise system created by Franklin allowed him to expand his printing business into different colonies before the American Revolution.
Without the income generated from his franchise, Franklin may not have been able to support himself while living in France and without his contribution to the revolution, the French may not have entered the war.
The history of franchising is an interesting subject to study and includes various notable figures and events that have contributed to its evolution.
The first franchise was established by Benjamin Franklin and Thomas Whitmarsh on September 13, 1731, in Charlestown, South Carolina, which was 45 years before the US became a nation.
The franchise was called a "Copartnership for the carrying on of the Business of Printing in Charlestown in South Carolina."
The franchise's primary product was The South Carolina Gazette, which was also the local printer for many of Franklin's writings.
Benjamin Franklin established other franchises in the colonies before the American Revolution.
Without the income he earned as a franchisor, Franklin may not have been able to support himself while living in France, and the French may not have supported the US in the War of Independence against the British.
The first franchise created by Franklin was significant in contributing to the birth of the nation.
It is important to celebrate September 13 in honor of the first franchise and the contributions of Benjamin Franklin to the development of the US.

So What Is a Franchise, Anyway (And What’s the Big Deal)?

Definition of Franchising: Franchising is a business system that allows a company (franchisor) to expand its reach and distribute its goods or services by licensing its brand name and operating methods to another person or group (franchisee).
Relationship between franchisor and franchisee: A franchise is a relationship between a franchisor and a franchisee where the franchisee is allowed to operate a business under a recognized brand name. The franchisor provides support and exercises some control over the way the franchisee operates under the brand.
Business system franchised, not products: In franchising, it's the business system that's franchised, not just the products. For example, Wendy's doesn't franchise hamburgers, but rather its business system that provides hamburgers to customers with consistent delivery of products, services, and customer experience.
Licensing of trade name and operating methods: The franchisor licenses its trade name (the brand, such as Wendy’s or Midas) and operating methods (its system of doing business) to the franchisee who agrees to operate according to the terms of a contract (the franchise agreement).
Franchise fees and royalties: In exchange for the use of the franchisor's trade name and operating methods, the franchisee usually pays the franchisor an initial fee called a franchise fee and a continuing fee known as a royalty.
Benefits of franchising: Franchising provides benefits to both the franchisor and franchisee. The franchisor can expand its business quickly with less capital investment, while the franchisee benefits from the established brand recognition, operating methods, and support provided by the franchisor.
Types of franchise agreements: There are several types of franchise agreements, including product distribution franchises, business format franchises, management franchises, and conversion franchises.
Franchising history: Franchising has a long history, with roots in ancient China and Europe, where crowns used it to control their lands and explore the globe. Benjamin Franklin established the first franchise system in the pre-United States, and franchising has since become a significant part of the global economy.

The effects of franchising on modern business

Franchising offers consistency in goods and services for consumers.
The number of industries using franchising to distribute their goods and services is increasing.
Franchising provides opportunities for business ownership and personal wealth.
Franchising has a significant impact on the economy in the United States.
According to a 2001 economic impact study by Price Waterhouse Coopers (PWC) for the IFA Education Foundation (IFAEF), franchising generated over 18 million jobs in the United States, which is almost 14% of the private sector employment.
In Nevada, which is known as the gambling capital of the world, 20% of the private sector workforce is employed due to franchising.

Franchising is becoming an increasingly significant force in the overall

Main points:

This text discusses the economic impact of franchised businesses on the US economy shortly after the turn of the millennium.
More than 760,000 franchised businesses exist in the United States, generating a total economic output of more than $1.53 trillion, or nearly 10 percent of the US private sector economy.
The study by PWC for the IFAEF will examine 120 distinct lines of business that are currently using franchising.
Although industry facts and statistics are somewhat useful, the only meaningful statistic when examining a franchise opportunity is how well the franchisees in that system are doing.

Notes:

Franchising has a significant impact on the US economy, with over 760,000 franchised businesses contributing nearly 10% of the US private sector economy.
PWC is conducting a study to examine 120 distinct lines of business currently using franchising.
When considering a franchise opportunity, it's important to look at the success of existing franchisees rather than relying solely on industry statistics.

The success of franchising for business owners

Main points:

The International Franchise Association (IFA) used to keep statistics on the success of franchising, but many of those studies were found to be inaccurate and misleading.
The commonly cited statistic that franchisees have a 95% success rate versus an 85% failure rate for non-franchised start-ups in their first five years in business is no longer published by the IFA and should not be used by franchisors.

Notes:

The IFA used to publish statistics on the success of franchising, but these statistics were found to be based on flawed studies.
The commonly cited statistic that franchisees have a 95% success rate versus an 85% failure rate for non-franchised start-ups in their first five years in business was found to be inaccurate and misleading.
The IFA no longer publishes these statistics and has asked its member companies to not use them either.
Franchisees should be wary of franchisors who still use these statistics to promote their franchise opportunity.

What’s the Big Deal about Brand?

Key Points:

Brand is the most valuable asset for a franchise system.
Consumers make decisions based on what they know or think they know about a brand.
Consumers generally do not give any thought to who owns the business unless they have a relationship with the local franchisee.
Franchisors spend a lot of time, energy, and money developing their brands to ensure consumers know what to expect.
The experience of visiting a franchise location is supported by the message in its advertising, which communicates to the public what the brand is.
The text mentions two iconic characters in Wendy's advertising: Dave and Clara Peller.
The "Where's the Beef?" ad featuring Clara Peller registered the highest consumer awareness levels in the advertising industry's history and was voted the most popular commercial in America in 1984 Cilio Awards.
The experience of visiting a Wendy's restaurant is supported by the message in its advertising, which helps communicate to the public what Wendy's is and creates a visual and sensory experience in the consumer's mind.

Notes:

Advertising is a powerful tool for creating brand awareness and shaping consumers' perception of a brand.
The use of iconic characters in advertising can help create a memorable and recognizable brand image.
Wendy's advertising not only promotes its products but also creates a specific brand image that emphasizes the quality, freshness, and fast service of its restaurants.
Effective advertising can create a sense of familiarity and trust with a brand, which can influence consumers' purchasing decisions.

Main points:

Brand recognition is a crucial asset for franchises. Consumers make decisions about where to shop or eat based on their perception of a brand.
Franchisors invest a lot of time, energy, and money in developing their brands to ensure that consumers know what to expect even before they enter the business.
A strong brand communicates a message to the customer and creates an experience that is immediately familiar in the consumer’s mind.
A well-known brand provides a major advantage for franchisees, as it eliminates the need to build brand awareness in the market.
Larger and well-established franchise systems have an advantage over smaller systems with limited brand recognition.
Ongoing advertising and marketing programs help maintain the strength and growth of a brand.
The success of a brand in making it mean something positive to the consumer can lead to increased sales for franchisees.

Details:

Consumers base their decisions on what they know or think they know about the brand.
Consumers may not give any thought to who owns the business unless they have a relationship with the local franchisee.
The experience of visiting a business, supported by the message in its advertising, communicates to the public what the brand is.
A good brand communicates a message to the customer and creates an experience that is immediately familiar in the consumer’s mind.
A larger and well-established franchise system has an advantage over smaller systems with limited brand recognition because they don’t need to build brand awareness in the market.
Ongoing advertising and marketing programs help maintain the strength and growth of a brand.
A successful brand that means something positive to the consumer can lead to increased sales for franchisees.

Key points:

Brands are not instantly recognizable; they need to be grown and developed.
Start-up franchisors often have limited brand recognition outside of their home market.
Franchisees in markets with little or no consumer recognition use franchisor-provided advertising and promotions to build brand recognition.
Franchisees in markets with limited brand recognition need to spend more on advertising and promotion.
Franchisees in different markets may require a different message depending on the level of brand recognition.

Notes:

Brands need to be developed over time and can't be established overnight.
Start-up franchisors often have limited brand recognition outside of their home market, making it difficult for franchisees to attract customers.
Franchisees in markets with little or no consumer recognition can use franchisor-provided advertising and promotions to build brand recognition in their local area.
Franchisees in markets with limited brand recognition may need to spend more on advertising and promotion to raise brand awareness.
Franchisees may need to tailor their marketing messages to different markets depending on the level of brand recognition in each area.