Hospitality Today An Introduction

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Hospitality TodayAn Introduction

• RHM 175

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Chapter 16 Franchising Is Big
Business

• Competencies
• Explain what a franchise is, describe types of
  franchises, summarize the history of franchising,
  and explain how franchising works.
• State common reasons individuals give for wanting
  to buy a franchise, outline the advantages and
  disadvantages of owning a franchise, list
  advantages and disadvantages for franchisors, and
  summarize other franchising issues.

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Definitions to Know

• Franchise the authorization given by a company
  to an individual or another company to sell its
  unique products and services.
• Franchisor the franchise company that owns the
  trademark, products, and/or business format that
  is being franchised.
• Franchisee the individual or company granted a
  franchise.
• Franchising a continuing relationship in which
  the franchisor provides a licensed privilege to
  do business, plus assistance in organizing,
  training, merchandising, and managing, in return
  for a financial consideration from a franchisee.

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What is a Franchise?

• Franchise refers to the authorization given by a
  company to another company or an individual to
  sell its unique products and services.

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Types of Franchising

• Product or trade-name is a supplier-dealer
  arrangement whereby the dealer (franchisee) sells
  a product line provided by the supplier
  (franchisor) and, to some degree, takes on the
  identity of the supplier. (automobile, gasoline,
  soft drinks)
• Business format which includes quick-service
  restaurants and lodging chains, are characterized
  by an ongoing business relationship. (non-food
  retailers, real estate services, food service
  industry, and hotels)

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The History of Franchising

• Product or Trade-Name Franchising
• In 1851, Singer made franchising to develop a
  network of sewing machines dealers throughout the
  U.S.
• In the 1900s, automobiles and soft drink
  manufacturing started franchising
• The first Coca-Cola franchise was granted in
  1899.
• The new products sewing machines, cars, and
  soft drinks required the seller to provide
  services as well as the product itself, making
  franchising necessary and practical.

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The History of Franchising

• Business Format Franchising
• The first person to franchise business format was
  Howard Dearing Johnson, founder of Howard Johnson
  Company.
• He started his business by converting a drug
  store into an ice cream parlor.
• He request a friend build his third facility, and
  Howard would provide design and supervision of
  the restaurant.
• It was a success!!!!!!
• He continued to encourage individuals to build
  HJ.
• Franchising did not catch on in the West until
  the 1950s.
• Read Page 470 regarding McDonalds

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How Franchising Works

• In order to obtain a license from a franchisor, a
  franchisee must pay a fee for the privilege of
  using the franchisors name, identity, business
  systems, operating procedures, marketing
  techniques, and reservation systems.
• The typical franchise fee arrangement has two
  parts
• An initial franchise fee, payable upon signing
  the franchise agreement
• Ongoing fees
• See Page 472 - On the next page

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Here are some examples of initial franchise
fees KFC 25,000 Arbys 37,500 McDon
alds 45,000 Comfort Inn 300 per room
or 50,000 minimum Marriott
Hotels, Resorts Suites 10,000, plus
300 per room Hawthorne Suites 40,000 or
400 per room
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• Here are some examples of ongoing franchise fees
• Franchisor Percent of Gross Revenues
• Comfort Inn 5.25
• Marriott Hotels, Resorts Suites 6
• McDonalds 12 14.5
• KFC 4 or 600 per month,
• whichever is greater
• Arbys 4
• The calculation of this fee varies. It is
  usually..
• a percentage of rooms revenue
• an amount per available room per month
• an amount per reservation.

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How Franchising Works

• Initial Investment
• Can be substantial
• Can include cost of real estate, construction and
  property taxes.
• Usually, franchisees have to have a minimum
  personal net worth.
• Franchise Regulations
• Franchising is regulated by the Federal Trade
  Commission.
• 38 of new franchises fail within 4-5 years of
  starting.
• Experienced franchise companies with successful
  track records are more likely to provide the
  kind of advice and support that translates into
  profitability.

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• The Development Group, a consulting firm that
  sells franchises for its clients, asked
• Why do prospective franchisees want to buy into a
  franchise?
• Self management 73 of applicants want to be
  their own boss.
• Financial independence 69 of applicants want
  to have financial stability.
• Career advancement 53 of applicants want to
  own their own franchise and not wait to be
  promoted.
• New skills/training 49 of applicants want to
  own their own restaurant or hotel, but dont know
  what to do.
• Long-term investment 32 of applicants consider
  this a long-term investment that will only
  appreciate in value over time.

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Owning a Franchise

• Advantages
• Site selection assistance
• Credit
• Construction expertise
• Fixtures and equipment assistance
• Training
• Opening support
• Promotional assistance
• Economics of scale
• Ongoing support

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Owning a Franchise

• Disadvantages -
• Restrictions
• Unwanted products or procedures
• Unwanted advertising
• Unprotected territories
• Cancellations
• Inadequate training

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Advantages and Disadvantages for Franchisors

• Advantages
• Little to capital is required for expansion,
  because the franchises provide the funding.
• Expansion can occur quickly
• Disadvantages
• The franchisor gives up the profits generated by
  its units.
• The franchisor surrenders a certain amount of
  control to the franchisees.

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Franchising Issues

• Strained relationships between the
  Franchisee/Franchisor
• Financial violations such as unpaid royalty
  charges
• Encroachment
• Contract violations