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In 1954 Ray Kroc acquired the rights allowing him to replicate
the McDonald brother’s restaurant concept. Today, McDonalds
crosses international borders and cultures with over 24,500 restaurants
in 115 countries. Approximately 80 percent of these are franchised.
Franchising is increasingly being used by New Zealand businesses
as they realise the benefits that can be harnessed from the arrangement.
Franchising award winners Stirling Sports and Green Acres are good
homegrown examples who have established extensive operations throughout
the country. Others, such as Fastway Couriers have also excelled
abroad.
To growth oriented businesses such as these, the main benefits
of franchising include access to franchisee capital to fuel expansion
and, local managers who are more motivated to perform because of
their investment tied to the local business. Additionally, fast
growth enables some franchised chains to gain cost savings in areas
such as purchasing and advertising, due to greater size. Yet, while
many franchised chains have grown considerably, plenty have either
stalled or stagnated, decreased in size, or failed - some in quite
spectacular fashion. Even those who have found success, including
McDonalds, have often gone through periods of intense hardship at
some stage during their development.
Creating a franchise system of quality is a complex, time consuming
and expensive task. Franchisors need to excel in not just one market,
but two. First is the market for franchises; second is the market
for end-users of the products and services. Therefore, the franchisor
must develop a business concept that is attractive to customers
and profitable enough to generate sufficient returns to franchisor
and franchisees over the long-term. Also, the franchisor must develop
a franchise format that is attractive to prospective franchisees,
effective in replicating the original business concept, and provides
franchisees with the ongoing support and skills necessary to meet
the changing needs of customers and the wider market environment.
Hardly surprising then, research tells us that to consider franchising
a business should be distinctive in its image and/or operating procedures,
have high gross margins and a simple easily-implemented business
concept. Before franchising, it should also be proven in a number
of locations to ensure the bugs are ironed out and that it is successful
because of the concept and not other reasons, such as a great location,
or exceptional staff. This process also helps in building brand
recognition and a trading history, important for attracting franchisees.
Three critical documents need developing for the franchise. These
include the franchise agreement, detailing the rights and responsibilities
of the franchisor and franchisees; operations manuals, specifying
how the franchise should be run; and, the franchising prospectus,
detailing the franchise opportunity for interested parties. Mistakes
in the franchise agreement, in particular, are very difficult to
change and can make or break a franchise. Thus, obtaining specialist
legal advice is essential, and specialist-franchising consultants
can also be of great benefit.
The tasks of managing a franchise system are challenging and quite
different from managing a centrally owned chain of businesses. The
challenges are wide and numerous. Here are some examples of problem
areas: establishing and maintaining a support structure to assist
franchisees, attracting and selecting suitable and sufficient franchisees,
maintaining relationships with franchisees, adapting the business
concept and franchise format to changing market conditions, monitoring
standards and supporting struggling franchisees.
Thus, franchising is not an arrangement to be taken on lightly.
While there are rewards for those with a successful business concept,
dreams of success must be tempered with the cold hard reality of
planning, establishing and managing a business concept, a franchise
format and a network of franchisees.
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FRANCHISING
AN ESTABLISHED BUSINESS
